Construction contractor liability for wages not received by the employees of a subcontractor

2022 - 12 - 16
Article by: Karina Paatsi, Johanna-Britt Mikk

The amendments to the Employment Contracts Act that entered into force on 15 October 2022 stipulate for the first time that the person hiring a subcontractor for construction work can be liable for the wages payable to the subcontractor’s employees. This means that employees performing construction work for a subcontractor can claim wages not only from the subcontractor as their employer but also from the person who hired the subcontractor – though only to a limited extent.

The person who hires a subcontractor is now liable for paying the wages of the subcontractor’s employees if:

  • the employees perform construction work related to the construction, repair, maintenance, reconstruction or demolition of buildings;
  • the employer (subcontractor) does not pay their wages; and
  • the employer fails to pay the wages within four months after an enforcement procedure was initiated.

The person who hired the subcontractor can be cleared of the liability to pay wages to the subcontractor’s employees if they can prove that they have followed the due diligence of an entrepreneur in their transactions with the subcontractor in their daily economic activities. According to the law, the person who hired the subcontractor has followed the due diligence of an entrepreneur if they have checked the background of the subcontractor and confirmed their reliability, which is primarily indicated by the absence of payment irregularities and the payment of employee social tax. The law does not lay down a specific process for performing a background check on a transaction party, and neither does it specify at what point a background check should be performed. We recommend performing an initial check on the subcontractor before signing the contract and additional periodical checks during the execution of the works. Performing only the initial background check may not guarantee due diligence if the subcontractor is hired for a longer period.

Considering the above, we recommend taking the following steps to avoid liability:

  • require the subcontractor to provide proof of tax records or documentation of financial status;
  • make inquiries about the subcontractor in official registers and databases, including the e-Business Register, Official Announcements and e-MTA, as well as private sector databases if necessary;
  • verify the absence of payment irregularities and the payment of employee social tax; and
  • check the background of the company through an online search (such as Google), paying attention to information that may indicate tax evasion, hidden transactions, etc.

Please note, however, that there is no exhaustive list of checks an entrepreneur should carry out to fulfil their due diligence requirement. The necessary focus and thoroughness of the checks must be decided case by case. It is important that the contractor shows a proactive approach in performing background checks and gathering information. The background check as a whole should create confidence that the subcontractor is paying their workers.

In the event of a dispute, the contractor must be able to demonstrate that it has acted with due diligence. In order to avoid liability, it is therefore important to document all database queries and their results, proof provided by the subcontractor, correspondences, and other relevant data and documents.

The liability of the person who hired the subcontractor to compensate payment under the relevant conditions is limited to the minimum monthly salary per calendar month. In 2023, the minimum wage will be 725 euros. Therefore, the employees’ right to request payment from the person who hired their employer as a subcontractor is more limited than their right to request payment from their employer.

As the law leaves room for interpretation regarding the fulfilment of due diligence, construction companies should consult with a legal advisor to mitigate risks. In addition to conducting checks (and asking the subcontractor for relevant proof), it is worth considering obtaining written confirmation from the subcontractor regarding the absence of payment irregularities and the payment of employee social tax, as well as imposing various notification obligations on the subcontractors in the contracts signed with them.