Important Legal Trends for 2011

So much has changed in just a few short years for component manufacturers supplying single and multi-family residential construction projects. It’s no surprise that the legal landscape we face while operating our businesses in this volatile market has changed as well. As you refocus to take advantage of opportunities as the housing market recovers, I encourage you to consider these legal trends.

More Construction Defect Lawsuits Headed Your Way—Adding Insult to Injury.

In my opinion the construction boom of the early to mid-2000s will be followed by increased construction defect lawsuits. Poor construction is a primary reason. During the boom everyone and everything was building homes, apartments and condominiums—repeat after me: Inexperience = Poor Construction = Lawsuits. Cycle time rather than quality served as the mantra of builders and contractors. Increased cycle time will turn out to be a primary contributor of poor quality. The boom has also been a factor in the decrease of property values and homeowners are more inclined to sue for defects when their largest asset is now worth less than what they paid and quite possibly less than what they owe. Expect to see the lawsuits filed within 10 years of the date of substantial completion as many states, including California and Florida, have a 10-year statute of limitations for latent construction defects. Look for tips coming your way if your company is faced with a construction defect suit in SBC Magazine Industry News Top Headlines.

Coming Lumber Price Volatility—How to Minimize Your Risks When Pricing Trusses & Components to Your Customers.

What is wrong with this image? You are finally bidding again on a regular basis, sales are closing, and margins are improving. Anxious to maintain your momentum, you bid an upcoming subdivision or apartment project and the customer promptly accepts by issuing a purchase order. The purchase order inconspicuously states your price is good for the duration of the project. Or the customer sits on your bid for awhile and months later sends you a purchase order with the same caveat. In both situations, as you either are making deliveries or waiting for the project to proceed to the point of taking delivery of trusses, there is a drastic run-up in your cost of lumber. The customer is not amused when you ask for a truss price increase, and points to the fixed price language in the purchase order. You thought things were bad when there was no business—what if your raw material costs double during the course of a particularly large project?

There are many language alternatives to consider that can mitigate this type of risk. This language can be included in your bid form and terms and conditions of sale or can be used when negotiating your customer’s purchase order or material supply agreement. For examples, check out Module 11 in the Bidding and Terms and Conditions of Sale track of ORisk. 

Partnering with a Former Lumberyard Competitor—a Risk Management Perspective.

For the past few years you may have bit your lip each time you thought about the large lumberyard competitor around the corner selling framing packages including trusses and components. Well, the competitor landscape has changed! Now many lumberyards no longer produce trusses and may again serve as a strong customer base for independent component manufacturers. While the profits may not be as good selling a lumberyard, the risks may be far more manageable. For example, the risk of not getting paid is generally far less with a lumberyard (although we have seen a number of lumberyards file Chapter 11 in the past few years). And while they may ask for a prompt payment discount, they will never ask for you to accept retainage. Lumberyards furthermore generally do not impose one-sided terms and conditions of sale on truss suppliers as you can expect from large single family builders and commercial contractors.

Contractor or Employee?

It is risky to hire an individual as a contractor as opposed to an employee, especially when that contractor is solely dependent on your company’s business for their livelihood. True independent contractors typically have multiple clients, determine if they will do the work themselves, or use one their employees or subcontractors to complete the job. They pay income taxes on income paid to them and payroll taxes on the compensation paid to their employees. In short, there is significant risk for any “independent contractor” working full-time at your business or using your company’s equipment or supplies, and doing the same work as your W-2 employees.

What are the risks? This will depend on which federal or state agency is investigating and potentially trying to reclassify your independent contractors as employees. If the U.S. Department of Labor becomes involved, you may become responsible for payment of minimum wages and overtime. In other words, an independent contractor found to be an employee who worked more than 40 hours a week must be paid overtime as well as any penalties assessed. Your state workers’ compensation agency, upon an investigation, may render the contractor an employee requiring payment of additional premiums and possibly penalties. The IRS through some kind of audit might very well fine you for failing to withhold income taxes and matching FICA.

The federal government and effectively every state is currently looking for additional tax revenues as they watch their expenses rise and tax revenues fall. Thus, through legislation¹ and regulation if they can render an independent contractor an employee, this is an attractive alternative to generate new tax revenue as they can capture income taxes that the contractor is not otherwise paying. To give you an example of this trend, the U.S. Senate recently introduced a bill that puts independent contractor misclassification back in the forefront of the national labor and tax agenda. Undeterred that two misclassification bills introduced in 2010 never made it out of committee, the sponsors are trying to drum up bipartisan support for their bill by characterizing this type of misclassification as a form of “payroll fraud.” While these bills have not yet become law, it’s something to watch.

Know What Your Liability Insurance Policies Cover When Renewing.

Insurance can be an invaluable resource for a component manufacturer facing a construction defect lawsuit or arbitration claim. While it is essential to properly notify your insurance companies of a newly filed lawsuit or arbitration claim (consult with your legal counsel and broker to make sure this is done properly), properly identifying your policies and giving notice SHOULD NOT be the end of the story. It is quite common for insurance companies to respond to construction defect lawsuits by either outright denying coverage or by reserving rights to deny a particular claim while they hire the lawyers to defend you and restrict the hourly rates paid to these lawyers and also require that they comply with strict billing guidelines designed to minimize the cost of defense to be paid by the insurance companies.

As indicated above, look for future tips on dealing with insurance companies both at the pre- and post-loss stages in future publications of SBC Magazine Industry News Top Headlines.

If Your Company Has Been Sued in Arbitration—Let Us Know about Your Experience.

It seems like every week I hear about a new horror story regarding arbitration—e.g., the arbitration process from A to Z took was “far too long”; the process was “extremely expensive”; the arbitrator(s) failed to follow the law; “I’ve learned the hard way that arbitration is not subject to any kind of appeal”; and “insurance companies seem less inclined to pay what they owe when defending an arbitration claim.” I want to keep each of you informed of developments concerning arbitration and how to minimize negative outcomes—but I need your help! Let me know about your experiences.

¹ See Bill Would Target Independent Contractor Misclassification, September 16, 2010, www.dcemploymentlawupdate.com