• The Fallacy of Union Benefit Trust Fund Lawsuits against Nevada Owners: A Call for Change
  • October 13, 2014
  • Law Firm: Snell & Wilmer L.L.P. - Reno Office
  • One consequence of the Great Recession in Nevada is the unfortunate demise of many contractors and subcontractors. Both union and non-union contractors have gone out of business due to the lack of available projects. Unfortunately, a contractor going out of business will occasionally leave some unpaid employees. Nevada law does provide these employees a saving mechanism. Under NRS 608.150, an “original contractor” is liable for the debts incurred by a subcontractor for labor on a construction project, which necessarily includes unpaid wages to those who toil but don’t get paid. While this may seem like a “good law” to protect workers from unscrupulous employers, its broad application by union benefit trust funds against general contractors and innocent property owners calls out for change.

    A simple Google search on “union benefit trust fund mismanagement” will produce a plethora of news reports, studies, cases and articles covering every position about the topic. Regardless of the truth in these reports, there is no doubt that union benefit trust funds (UBTF) use NRS 608.150 regularly to recover unpaid benefits to their coffers. NRS 608.150(1) provides in pertinent part:

    Every original contractor making or taking any contract in this State for the erection, construction, alteration or repair of any building or structure, or other work, shall assume and is liable for the indebtedness for labor incurred by any subcontractor or any contractors acting under, by or for the original contractor in performing any labor, construction or other work included in the subject of the original contract...

    Cutting through the “legalese,” the “original contractor” who enters into a contract in Nevada to construct a project assumes and is liable for his subcontractor’s labor obligations incurred on that project. Armed with this obligation, UBTFs have asserted many types of claims on a construction project—from mechanics’ liens to bond claims. Moreover, there are hiccups—laws designed to help unpaid and likely unsophisticated workers are often used by UBTFs armed with lawyers (and the trust fund money to pay them). A few common examples are warranted.

    The “Original Contractor”

    The first problem that arises is who is included in the definition of “original contractor.” There is no definition of “original contractor” in Chapter 608 of the Nevada Revised Statutes. Elsewhere, the Nevada legislature has provided definitions of “general building contractor,”[1] “general engineering contractor,”[2] “specialty contractor,”[3] “prime contractor,”[4] “higher-tier contractor,”[5] and “lower-tier contractor;”[6] but no definition of “original contractor.” In 1974, a Nevada U.S. District Court held that a property owner who retained all the financial responsibility and control over a construction project but did not have a contractors’ license, was in fact acting within the capacity as a contractor under Nevada law.[7] Since that time, UBTF’s have tried to use MGM to claim that property owners are “original contractors” under NRS 608.150. Only one such attempt, however, has resulted in a reported decision—and it was a loss for the UBTF.[8] Nevertheless, many owners who have faced such claims have not taken the cases beyond the complaint stage, because the economics of fighting the cases do not justify the expenditure of attorney’s fees and costs to do so. Therefore, claims under NRS 608.150 have been on the rise, many times because the UBTF’s think owners in these positions would rather settle than pay lawyers to litigate their merits.[9]

    The Mechanics’ Lien

    Where these claims become more difficult for the property owner (or the actual general contractor) is when a mechanics’ lien becomes involved. Nevada law allows contractors, subcontractors and suppliers of materials and equipment used on a construction project to lien the project itself to secure payment, a process generally known by the term “mechanics’ lien.” A general contractor who is paid by the project owner is obligated to make sure that payment flows down to those subcontractors and suppliers whose work resulted in the payment, regardless of how many different companies are in between them. To make sure the general contractor knows who the subcontractors and suppliers are (unless they already actually know), Nevada law requires such entities to serve both the project owner and the general contractor with a Notice of Right to Lien - but the UBTF is not required to do so. NRS 108.2214(2) includes a UBTF within the definition of a “laborer,” who performs only labor on a project in exchange for wages. These persons are generally deemed exempt from the obligation to provide a Notice of Right to Lien under NRS 108.245. As a result, the property owner and general contractor generally have little to tip them off that there is a potential claim from a UBTF on their project.

    This lack of notice is made more complicated because an UBTF will generally refuse to provide a typical progress or final waiver and release of lien right in exchange for a specific payment on a project. Many times, the UBTF will only provide a release “subject to audit,” which means at some point later after the project is complete the UBTF will audit its signatory subcontractor to confirm that it has properly accounted for and paid its union laborer’s defined plan benefits for the project. And UBTF’s generally only audit a signatory contractor every two to three years, unless they specifically begin to miss benefit payments. While the statute of limitations to record a mechanics lien is 90 days after actual completion of the Project, the UBTF’s limitation on a claim arising under NRS 608.150 is four years. The need to close out a project usually will not allow the owner or general contractor time to wait for a final audit, and so by the time many UBTF claims for unpaid benefits arise they catch the owner or contractor by complete surprise; but more importantly, without recourse to withhold money from the subcontractor on the actual project involved. Instead, many times UBTF claims must be paid out of current operating funds.

    Similarly, subsequent case law has held that the “original contractor” is liable to the UBTF for the non-paying signatory contractor’s obligation to pay interest, attorney’s fees and liquidated damages under the non-paying signatory’s contract with the Union. This has emboldened UBTF’s on many occasions to make claims against unsuspecting property owners. It is time for a change.

    Solutions will need to be Legislative

    But that change will not come simply. Having handled dozens of UBTF claims under NRS 608.150 over the years, it is obvious to me that change is needed to bring some fairness to the process. UBTFs should not be allowed to harass property owners with allegations that they are “original contractors” simply because they hired a contractor to perform work on their projects. Likewise, general contractors need to be afforded some tangible means to ensure that UBTF claims will not arise years after a project has been closed out. But the economics of civil litigation and the perceptional bias that the UBTF is “merely protecting the unsophisticated worker” limit the ability to mount a systematic defense. But a balance can be found.

    Clarifying the definition of “original contractor” to NOT include property owners, except when the UBTF can plead and prove that the owner is in fact operating as a “contractor,” would help. Making the UBTF liable for the attorney’s fees and costs of the property owner if they do not prevail on their claims would be better. In addition, a UBTF’s mechanics’ lien rights should be the same as any other supplier or subcontractor. Finally, shortening the statute of limitations, and protecting the unsuspecting owner and general contractor from the liabilities of recalcitrant signatory contractors who don’t pay their defined benefit plans would be most fair of all. But, being that this is a protectionist labor statute similar to prevailing wage laws, there will undoubtedly be little stomach for change. The legislature will need to stand up and demand change for anything meaningful to happen to NRS 608.150. For now, the best protection a developer or general contractor can have is a solidly planned scheme for administrative payment processing that takes the existence and liability under NRS 608.150 into account.


    Notes:

    [1] NRS 624.215(3).

    [2] NRS 624.215(2).

    [3] NRS 624.215(4).

    [4] NRS 624.6086 & NRS 108.22164.

    [5] NRS 624.607.

    [6] NRS 624.608.

    [7] MGM Grand Hotel, Inc. v. Imperial Glass Co., 65 F.R.D. 624 (D. Nev. 1974).

    [8] In Carpenters Southwest Administrative Corp. v. Thomas & Associates Manufacturing, 799 F.Supp.2d 1166 (D. Nev. 2010), a UBTF sought to recover unpaid contributions under NRS 608.150 from a property owner. The Court found that the property owner did not qualify as the “original contractor” because the owner did not retain financial and overall control of the project. Specifically, the owner had hired a licensed general contractor in this case, who had hired the union signatory subcontractor that failed to make proper benefit contributions. Therefore, the property owner was not liable to the UBTF for unpaid contributions under NRS 608.150. Id., 799 F.Supp.2d at 1172.

    [9] In one particularly egregious case, a residential property owner paid a contractor $1,500 to install tile in his personal home. Unknown to the homeowner, the tile contractor was a union signatory and the UBTF made a demand on him for $126 in unpaid benefits claiming he was the “original contractor.” Given the dollars involved, the homeowner had little economic choice but to pay the UBTF as demanded.