N.Y. Labor Law §220: The Burden of the Prevailing Wage on Closely-Held Business Entities

Many construction contractors throughout the State of New York derive a substantial portion of their revenue from public construction projects. Contractors on these jobs need to be wary of what is known as N.Y. Labor Law §220(3)(a) (a/k/a the “Prevailing Wage”). The Prevailing Wage was enacted to ensure that workers on public works projects are properly classified and receive what the State determines to be the “prevailing wage” from their employers; however, what happens when one of these workers is also the owner of their own company? Must the Prevailing Wage still be paid and all of the associated taxes and expenses incurred?

Here, we will be discussing the impact that the Prevailing Wage has on the principal of a contractor who is also the sole-owner (“principal”) of his own corporation or limited liability company (“LLC”) and is performing work on a public works project. However, before addressing this rather unique issue, it is first necessary to explain some background information.

The Prevailing Wage

An employer that fails to pay a worker the Prevailing Wage could face extensive criminal and civil liability, including debarment from being awarded future work on public works projects. Of course, with such serious repercussions for failure to comply with Prevailing Wave requirements, the paperwork necessary for contractors to prove that all of their employees (and, in some cases, the employees of their subcontractors) are in compliance is time-consuming, and the associated costs are expensive; for example, some expenses include, but aren’t limited to: a) taxes; b) payroll expenses; c) increased insurance premiums; and d) administrative expenses.

Closely-Held Business Entities

Corporations and LLC’s are separate legal entities that shield individuals from personal liability while they are operating their respective business. There are countless ways for a contractor to be sued within the State of New York, which is why contractors often form corporations or LLCs. Without the protections afforded by a business entity, doing business might not be worth the risk. When a business entity is only owned by a small number of members, or even one member, it is known as a closely-held corporation or LLC. So, in the eyes of the law, even if a business entity is owned and operated by a single principal, that business entity is still entirely separate-and-apart from the principal, even though the entire business runs through him or her. These closely-held business entities are often smaller construction contractors with a principal that is self-employed and is performing labor him or herself.

The Issue

When a principal performs work on a public works project without paying him or herself a wage, it would seem entirely fair because the principal owns and operates the company.Why should that principal have to pay him or herself a wage, and incur the correlating taxes and expenses, when the principal will be the party receiving the profits at the end of the day?

For example, if the closely-held business entity is an excavation subcontractor on a public works project, a heavy equipment operator will likely be needed. Since a heavy equipment operator receives a higher average wage rate than a laborer, it would make perfect sense that the principal would want to operate the heavy machinery him or herself - thereby reducing labor expenses and all taxes and expenses associated with the Prevailing Wage. Of course, any other worker employed by the excavation subcontractor on the public works project would be receiving the Prevailing Wage. In theory, this business strategy makes perfect sense and does not cut against the legislative intent of the Prevailing Wage whatsoever. After all, the money is coming from the principal’s profits, and simultaneously going back to the principal as wages. However, while this is fair in theory, the reality is quite different.

When the principal, on behalf of the excavation subcontractor, submits payment applications for approval to the general contractor on a public works project, it is currently a requirement that the principal pay the Prevailing Wage to him or herself. If the principal does not have the proper paperwork to present to the general contractor, it is likely that processing of the payment applications will be delayed, and there will be a risk of non-payment and potential exposure to liability for failure to pay the Prevailing Wage.

Many contractors on public works projects are unaware of the numerous pitfalls that arise when dealing with the Prevailing Wage. This is especially true here, where the principal’s conduct is not necessarily morally wrong, but still constitutes a violation of the Prevailing Wave requirements. Contractors on public works projects should be cognizant of both contractual and statutory requirements as the failure to understand the Prevailing Wage can subject contractors to extensive civil and criminal liability.  Reliable legal advice from experienced construction litigators can help contractors avoid these potential pitfalls and the avoid exposure to liability.

If you would like more information regarding this topic please contact Austin S. Brown at abrown@wbgllp.com or call (914) 607-6435