Is the New “Responsible Contractor” Bill Irresponsible?

Category | Briefing Papers

Overview

In order to be awarded any public project, the contractor or proposer must be found to be “responsible.” Sometimes, the term “responsible” is defined in the solicitation and part of determining the successful best value proposal, but frequently the definition is left to the discretion of the awarding authority. Typically, a “responsible” contractor is one who is considered capable of performing the contract according to its terms, and traditionally, any contractor that could provide a payment and performance surety bond was considered “responsible” because that contractor had satisfied the rigorous underwriting standards required before it could get surety credit. The State Legislature has recently constrained the flexible nature of a responsibility determination, however, by passing a new statute imposing certain minimum criteria that must be met before a contractor can be found to be “responsible”. This month’s Briefing Paper examines how the new bill works and the pitfalls and risks it creates.

The Responsible Contractor Bill¹ adds a new statute to Chapter 16C of the Minnesota Statutes, which governs state procurement. Minn. Stat. § 16C.28 currently governs public contracts and awards, and the Responsible Contractor Bill adds a new section, Minn. Stat. § 16C.285, which requires contractors bidding or proposing for public projects estimated to be more than $50,000 to be “responsible contractors.” The bill was ostensibly enacted for the purpose of increasing honesty, accountability, and transparency in the area of public contracting, but it was promoted heavily by the unions who, judging by the content of the new law, were primarily concerned in ensuring payment to their members. It provides that in order to be considered a responsible contractor, a contractor must meet certain minimum criteria. More specifically, contractors must not have violated a number of national, state, and local labor laws and regulations in the three years prior to responding to a bid solicitation. As part of its bid, a contractor must verify that it meets the requirements set forth in the bill and any contractor who fails to verify that it meets the requirements is ineligible to be awarded the contract.

Minimum Criteria

Subdivision 3 of the bill provides that “responsible contractor” means a contractor that conforms to the responsibility requirements in the solicitation document and verifies that it meets the minimum criteria set forth in the subdivision. The bill specifies that a “contractor” includes both prime contractors and subcontractors, but not material suppliers. The statutory minimum criteria are:

1. Workers’ Compensation and Unemployment Insurance

To be eligible for a public contract, a contractor must be in compliance with workers’ compensation and unemployment insurance requirements. Furthermore, if the contractor has employees, it must be registered with the Department of Revenue and the Department of Employment and Economic Development (“DEED”). The contractor must have a valid federal tax identification number (or a valid Social Security number if it is an individual). Finally, if the contractor is a foreign corporation or cooperative, it must have filed a certificate of authority to transaction business in Minnesota with the secretary of state.

2. Wages and Misrepresentation of Employment Relationship

A contractor must be in compliance with, and during the three year period before submitting its verification of compliance, must not have violated various federal and state labor laws. Specifically, the contractor must be in compliance with the Minnesota statutes on minimum wage,² overtime pay,³ prevailing wages,⁴ and prompt payment of wages to discharged employees.⁵ Further, the contractor must not misrepresent the nature of its employment relationship with any of its employees. Finally, the contractor must be in compliance with the federal Fair Labor Standards Act regarding wages and hours and the Davis-Bacon Act regarding prevailing wages.

A violation will be deemed to occur if the contractor (i) repeatedly fails to pay statutory required wages or penalties on one or more projects for a total underpayment of $25,000 within the three year period prior to the bid; (ii) has been issued an order to comply by the commissioner of the Minnesota Department of Labor and Industry (“DOLI”) that has become final; (iii) has been issued at least two determination letters from MnDOT finding an underpayment by the contractor or related entity to its own employees; (iv) has been found by the commissioner of DOLI to have repeatedly or willfully violated the statutes referenced above pursuant to Minn. Stat. §177.27; (v) been issued a ruling or finding of underpayment by the administrator of the Wage and Hour Division of the U.S. DOL that have become final or have been upheld by and administrative law judge or a review board; or (vi) have been found liable for underpayment of wages or penalties or misrepresenting a construction worker as an independent contractor in an action brought in court having jurisdiction.

3. Registration and Licensing

Contractors who are not exempt must register with DOLI through the Construction Contractor Registration Pilot Program. The program replaced the independent contractor exemption certificate program and is meant to assist DOLI, DEED, and the Department of Revenue in enforcing laws related to the misclassification of employees. Furthermore, in order to be deemed responsible, contractors must be in compliance with, and have not violated within the previous three years, applicable construction codes and licensing requirements.⁶ A violation will be deemed to occur when a contractor or related entity has been issued a final administrative or licensing order.

4. Affirmative Action Plan

A contractor who has received a certificate of compliance for implementing an approved affirmative action plan on projects where such a plan is required, must not have had a certificate of compliance revoked or suspended more than twice in the previous three years. A violation will be deemed to occur if the revocation or suspension was upheld by the Office of Administrative Hearings or was not appealed to that office.

5. Targeted Group, Disadvantaged, and Veteran-Owned Businesses

To be considered responsible, a contractor must not have received a final determination assessing a monetary sanction from DOA or MnDOT for failure to meet targeted group business,⁷ disadvantaged business enterprise,⁸ or veteran-owned business⁹ goals due to lack of good faith effort more than once in the previous three year period.

6. Suspension or Debarment

A contractor must not currently be suspended or debarred by the federal government or by the state of Minnesota or its political subdivisions in order to be eligible for a public contract.

7. Subcontractor Compliance

Finally, subdivision 3 provides that all subcontractors that the contractor intends to use on a project must verify to the contractor in a signed statement under oath by an owner or officer of the subcontractor that they are also in compliance with all the requirements provided in subdivision 3.

Although the effective date of the legislation is January 1, 2015 and will apply to all contracts entered into after that date, any violations of the above minimum criteria occurring prior to July 1, 2014 will not be considered in the look back period used to judge compliance. Thus, the legislation will effectively accumulate years of compliance history starting and going forward from July 1, 2014, and a full three year look back will only be applicable starting on July 1, 2017.

Verification of Compliance

The bill requires a contractor responding to a solicitation document to provide a signed statement under oath by an owner or officer of the company that the contractor complies with each of the minimum criteria in subdivision 3. A contracting authority, meaning a public entity that enters into a construction contract, may accept a sworn statement as sufficient to demonstrate that the contractor is a responsible contractor, and the contracting authority cannot be held liable for awarding a contract based on reasonable reliance on the sworn statement. If the contractor fails to verify compliance with any one of the minimum criteria or makes a false statement regarding verification of compliance, that contractor is ineligible to be awarded the contract. It is not clear, however, if the contractor must undertake to verify the accuracy of its sworn statement, or if it only has to do so after it is requested by the contracting authority to do so. Further, if the contract has already been awarded, the contracting authority may terminate the construction contract that has already been awarded to a prime contractor or subcontractor that has made a false statement regarding its compliance with the minimum criteria. The contracting authority cannot be held liable for declining to award a contract or terminating an existing contract so long as its decision was based on a reasonable determination that the contractor failed to verify compliance with the minimum criteria or falsely stated that it did meet the criteria.

The bill requires that a prime contractor or subcontractor include with its verification of compliance a list of all of its intended first-tier subcontractors for the project. If a prime contractor or any subcontractor later retains additional subcontractors after submitting its verification of compliance, the prime contractor or subcontractor must obtain verifications of compliance from each of the additional subcontractors with which it has a direct contractual relationship within 14 days of signing the new subcontract. A prime contractor and subcontractors are deemed responsible for false statements by their first-tier subcontractors with which they have a direct contractual relationship only if they accept the verification of compliance with actual knowledge that it contains a false statement. Furthermore, a prime contractor or subcontractor will not be responsible for false statements of any subcontractor with which they do not have a direct contractual relationship. Nevertheless, the prime contractor will be responsible, upon request, to provide copies of the signed verifications of compliance from all subcontractors of all tiers.

Areas of Potential Concern

While the Responsible Contractor Bill may have been drafted with good intentions, it may also have some unintended and unnecessarily harsh consequences.

1. Due Process Concerns

Subdivision 3 not only provides the minimum criteria required to be considered a responsible contractor, but it also establishes – vaguely – how violations of the various laws referenced in the bill will be determined. For example, it provides that a contractor will be in violation of the applicable wage statutes if it “repeatedly fails to pay statutorily required wages or penalties on one or more separate projects for a total underpayment of $25,000 or more within the three-year period.” It is unclear who makes the determination that a contractor has “repeatedly” failed to pay the wages or penalties. Further, it is unclear how a contractor who believes it has not repeatedly failed to pay wages in an amount of $25,000 can challenge a determination that it has. It is also not clear whether an unintended mistake will be a violation that effectively debars a contractor from award of public contracts for whatever look back period applies to that mistake.

However, the bill does offer some protection for contractors. For example, subdivision 3 provides that a violation occurs if the commissioner of labor and industry has issued an order to comply, which has become final, to the contractor. A contractor who has received an order to comply has fifteen calendar days to file a written notice of objection and then the contractor has the opportunity to be heard at a contested case proceeding.¹⁰ A compliance order only becomes final after such a hearing or after the fifteen calendar days if the contractor declines to object. Similarly, the bill provides that a contractor is in violation if it has been issued a ruling and/or findings of underpayment by the Administrator of the Wage and Hour Division of the United States Department of Labor, but only after the ruling and/or findings have become final or upheld by an Administrative Law Judge or the Administrative Review Board. In addition, under the bill, a contractor is ineligible for a public contract if it has been assessed a sanction for failing to meet DBE goals due to lack of good faith efforts more than once in the three year period. A contractor who is issued such a sanction from MnDOT may request administrative reconsideration pursuant to federal regulation.¹¹ Finally, subdivision 3 provides that if a contractor contests a determination of underpayment by the Department of Transportation in a contested case proceeding, a violation does not occur until the proceeding has concluded with a determination that the contractor underpaid wages or penalties. Therefore, most of the laws referenced in the statute have some levels of due process protections in place, but given the severity of the penalty – i.e. effective debarment from public contracting for up to three years – it is questionable whether an administrative hearing is sufficient protection if the contractor’s continued existence may be at issue.

There are also potential concerns that could arise from a contracting authority’s determination that a contractor did not comply with the minimum criteria or that it made a false statement in its verification statement. The bill provides that the contracting authority cannot be held liable for such a determination so long as its determination was “reasonable.” Therefore, if a contractor sued a contracting authority for making an incorrect determination, it is not clear what would happen if a court decided that the contracting authority was in fact incorrect, but that its determination was “reasonable.” Under the new law, the contracting authority cannot be held liable, but it is unclear what remedy would be left for the contractor challenging the wrong decision.

2. Harsh Punishment for Honest Mistakes

Pursuant to subdivision 3, in order to be considered responsible, it is not enough that a contractor is currently in compliance with the various labor laws referenced in the bill. The contractor must also not have violated any of those laws in the allowable look back period (which will be eventually be a three year period) prior to the submission of the contractor’s verification of compliance. Therefore, if a contractor violates one of the relevant laws, it is effectively debarred and cannot participate in public contracting for the next three years (for projects over $50,000).¹² This may be an appropriate punishment for intentionally bad actors, but it also places a heavy burden on those contractors who commit inadvertent mistakes that violate the letter of the law.

For instance, subdivision 3 requires compliance with various wage laws as well as proper classification of employees. It is conceivable that a contractor could make an honest mistake by miscalculating wages or misclassifying an employee and, as a result, be prohibited from bidding on a public contract for three years. Moreover, if a contractor inadvertently does not comply with code on a small portion of a project, it could face similar debarment. However, there are some safeguards in the bill to address this concern. As previously mentioned, subdivision 3 provides that a contractor is in violation of wage laws if it “repeatedly” fails to pay wages and penalties in an amount of $25,000 or more. At least this requirement makes it less likely that a contractor will be found in violation of the relevant wage laws because of a number of very small mistakes. Similarly, the bill provides that a violation occurs when the contractor has been found by the commissioner of labor and industry to have “repeatedly or willfully” violated any of the Minnesota Statutes referenced, pursuant to Minn. Stat. § 177.27 Again, this could provide some protection to contractors from being determined ineligible due to an innocent mistake, but Section 177.27 technically only applies to wage related violations, and it is not clear whether the element of willfulness or bad intent has to be found in any other violation of the “responsible contractor” criteria.

The bill also provides that a contractor who falsely states that it meets the minimum criteria is ineligible for the contract. However, the bill does not require any level of intent, and therefore does not distinguish between an honest mistake and an outright lie. Being declared ineligible for the contract or having an existing contract terminated can be a harsh consequence for a contractor who made a mistake but had a good faith belief that it complied with the minimum criteria. However, it should be noted that previous versions of the bill provided that a contractor who provided a false statement regarding its compliance with the minimum criteria not only would lose the contract, but would also be ineligible to be awarded a public contract for the next three years. The current version of the bill eliminated the three year debarment provision for providing a false statement, presumably recognizing this concern, but the ability to count any violation during the look back period (which will reach three years in 2017) and subsequent loss of the contract in question appears to create a de facto debarment for the allowable look back period.

3. Administrative Burden

There is some concern that the bill imposes yet another administrative burden on contractors. Further, it can be argued that the extra burden is unnecessary because the contractor is already required to be in compliance with all the laws referenced in the bill and there already exist remedies for their violation. However, the requirements provide an “extra incentive” (if not a penalty) for contractors to be in compliance with the laws and prohibit bad actors from participating in public contracting, so the bill is not simply duplicative of other existing laws. In addition, the true administrative burden may not be that high. The bill simply requires the contractor to submit a statement under oath verifying that it is in compliance with the various criteria set forth in the bill. Contractors may need to do some extra research to ensure that they are, in fact, in compliance with the relevant laws, but they will likely already have access to such information.

4. Potential for Increased Litigation

It is often the case that a contractor accused of underpayment determines that it is in its best interest to simply make back payments rather than fight the determination and incur more costs in litigation. The result is that the contractor avoids getting tangled up in lengthy lawsuits and the employees get paid quickly. However, after the enactment of the Responsible Contractor Bill, contractors may be less inclined to make voluntary back payments. Rather than accept liability and make the payment, a contractor may now choose to litigate the issue in order to avoid a finding of liability and being banned from public contracting for three years.

Conclusion

The Responsible Contractor Bill imposes stiff requirements to comply with certain wage and affirmative action statutes, but the penalties are so severe that they could threaten the existence of public contractors that make innocent mistakes. Contractors bidding on public contracts for over $50,000 must be very diligent in making sure they are in compliance with every single requirement listed in the bill, as failing to comply or making a false statement about compliance can have serious ramifications.

¹ S.F. 1919; H.F. 1984.
² Minn. Stat. § 177.24.
³ Id. § 177.25.
⁴ Id. § 177.41–44.
⁵ Id. § 181.13–14.
⁶ See id. Chapter 326B.
⁷ The commissioner of Transportation has authority to impose sanctions for prime contractors who fail to make good faith efforts to meet targeted group business goals. Minn. Stat. § 161.321.
⁸ MnDOT has established a Disadvantaged Business Enterprise (“DBE”) program for all contracts financed with public funds provided by the U.S. DOT. Under the program, the commissioner of Transportation can impose a sanction for each contractor who does not meet the established DBE goals or demonstrates a good-faith effort to meet such goals. Minn. Stat. § 174.03.
⁹ The commissioner of Transportation has the authority to issue sanctions for prime contractors who have not been granted a waiver and fail to meet veteran-owned business goals. Minn. Stat. § 161.321.
¹⁰ See id. § 177.27.
¹¹ See 49 C.F.R. § 26.53(d). The MnDOT DBE program was established in accordance with federal regulations, 49 C.F.R. § 26.
¹² Note that the law becomes effective January 1, 2015 and that any violations occurring prior to July 1, 2014 are not to be considered in determining whether a contractor meets the minimum criteria.

Announcements

Dean Thomson will be speaking at the Montana State Bar Construction Law Institute on October 10, 2014 on how to obtain insurance coverage for construction defects. Contact Dean at dthomson@fwhtlaw.com for more information.

Gary Eidson and Rory Duggan will be presenting at The 2014 Real Estate Institute on November 13 and 14, 2014 at the Saint Paul RiverCentre. Gary will be a member of a panel of experienced faculty presenting a discussion of issues arising in commercial leasing transactions, and, on the second afternoon of the Institute, will also be a member of a panel discussing current issues affecting the development of commercial real estate. Rory will be a member of a panel of key participants discussing the JW Marriott mixed-use expansion at the Mall of America. For more information contact Gary at 612.359.7621, geidson@fwhtlaw.com or Rory at 612.359.7675, rduggan@fwhtlaw.com.

Scott Anderson and John Redpath will be speakers for the National Business Institute Live Video Webcast entitled “Business Law Boot Camp” on Wednesday, October 1, 2014. Participants will learn valuable tips and techniques on a variety of matters ranging from LLCs to drafting business contracts to M&A provisions. To learn more about this Live Video Webcast, contact Scott Anderson at slanderson@fwhtlaw.com, John Redpath at jredpath@fwhtlaw.com or visit the NBI webpage.

Fabyanske, Westra, Hart & Thomson, P.A. is pleased to announce the recognition of five attorneys by U.S. News Best Lawyers©, one of the oldest and most respected peer-review publications in the legal profession.  Congratulations to these five attorneys for this prestigious recognition.

Mark Westra for Banking and Finance Law and Real Estate Law
Dean Thomson for Litigation-Construction and Litigation-Real Estate
Gary Eidson for Real Estate Law
Kyle Hart for Litigation-Construction
Marv Fabyanske for Litigation-Construction

Kristine Kroenke will be sworn in to be admitted to practice law in the State of Montana on September 30, 2014.

Fabyanske, Westra, Hart & Thomson, P.A. is pleased to welcome Kiel McElveen as an associate in the Corporate group. Kiel will assist the Corporate Group in its representation of closely held businesses and their owners in business, M&A, estate and tax planning and implementation. Kiel earned his J.D. from the University of Minnesota Law School in May 2013 and his B.S. from the University of Wisconsin in May 2010. Kiel was admitted to the Minnesota Bar in October 2013.

This discussion is generalized in nature and should not be considered a substitute for professional advice. © 2014 FWH&T.