In the latest issue of The Wright Toolbox:
- Sorry, I Think You Have the Wrong Number – Social Security No-Match Letters – read now
- Pay-if-Paid vs Pay-When-Paid Clauses – read now
Sorry, I Think You Have the Wrong Number – Social Security No-Match Letters
Earlier this year, the Social Security Administration (“the SSA”) resumed issuing “Employer Correction Request” letters to employers, informally known as Social Security “no-match” letters. Initially developed under the first Bush administration and expanded under the second Bush administration as a way to deter unauthorized employment, these letters inform employers that they reported one or more employee names and social security numbers that do not match the SSA’s records. Upon receiving the notice, the employer is directed to log in to the SSA’s Business Services Online site to view the names and numbers that do not match and provide corrections on forms W2-C for each employee within 60 days.
While the concept seems simple, employers need to be careful in how they address the “no-match” letter with their employees. Overreacting to the letter and immediately terminating employees who are suspected of providing false documents can result in discrimination claims. Ignoring the letter can create liability for knowingly or willfully retaining an unauthorized worker. Entirely re-doing the I-9 forms for affected employees or requesting all new employment authorization documentation beyond correction of the social security number is similarly forbidden.
If there is a discrepancy, employees should be given an opportunity to provide corrected information or otherwise address the mismatch. The SSA provides instructions on how an employee can contact the SSA to resolve an issue if the error is the result of something more than a clerical error. What happens, though, if an employee comes back with entirely new identification documents? Or what happens if an employee simply produces a new, valid social security card with a completely different number? These are sensitive issues that need to be handled carefully.
If you’ve received a no-match letter on behalf of one or more of your employees, it is imperative that you handle your response carefully. If you have questions about how to respond or how to address employees returning with new documentation or a new identity, please contact our Employment & Labor Law practice group.
Pay-if-Paid vs Pay-When-Paid Clauses
In a typical construction scenario an owner contracts with a general contractor and the general contractor then contracts with various subcontractors and so on down the chain to lower tiers. In the absence of any contract language or statutory provisions to the contrary, the general contractor bears the risk of non-payment from the owner. So, for example, if the owner fails to pay through no fault of the subcontractor, the general contractor still remains liable to its subcontractor to pay for the work performed.
Contingent payment clauses like “pay-when-paid” and “pay-if-paid” typically provide that the contractor is not required to make payments to the subcontractor unless or until the contractor has received payment from the owner. Such clauses are utilized in subcontracts to change the traditional allocation of the risk of non-payment by the owner from the general contractor down to the subcontractors and/or lower tiers. Numerous jurisdictions have addressed such clauses as to their enforceability between the contracting parties with varying results. Some uphold such clauses, other reject them, still others have enacted laws addressing such clauses.
A “pay-when-paid” clause governs the timing of a contractor’s payment obligation to the subcontractor, usually by indicating that the subcontractor will be paid within some fixed time period after the contractor itself is paid by the owner. Thus, generally, if a contingent payment provision simply requires the contractor to pay the subcontractor “upon receipt of payment from the owner” (or similar language), the clause will be considered to be a “pay-when-paid” clause that merely acts as a timing mechanism. “Pay-when-paid” provisions have been construed by the courts on numerous occasions to simply provide the contractor with a “reasonable” time within which to obtain payment from the owner and to make payment to the subcontractor. The question invariably becomes what is a “reasonable” time in which to make payment. The measure of a reasonable time for a contractor to withhold payment to its subcontractor while it is seeking payment from the owner will vary from case to case. Because pay-when-paid clauses do not entirely preclude payment from the general contractor to the subcontractor, such clauses are generally held to be enforceable as between the general contractor and the subcontractor.
In contrast, a “pay-if-paid” clause, as the name suggests, provides that a subcontractor will be paid only if the contractor is paid. The intent of this type of clause is to shift the risk of the owner’s non-payment to the subcontractors. A typical clause of this type might read: “Contractor’s receipt of payment from the owner is a condition precedent to contractor’s obligation to make payment to the subcontractor; the subcontractor expressly assumes the risk of the owner’s nonpayment and the subcontract price includes the risk.” Thus, the key distinction between “pay-when-paid” and “pay-if-paid” provisions is the use of unequivocal language showing that payment from the owner is a “condition precedent” to the general contractor’s obligation to pay the subcontractor and that the risk of the owner’s non-payment has been shifted down from the general contractor to the subcontractor.
The question whether a stipulation in a contract constitutes a condition precedent is one of interpretation dependent on the intent of the parties to be gathered from the words they have employed. Although no particular form of words is necessary in order to create an express condition precedent, such words and phrases as “if,” “provided that,” “when,” “after,” “as soon as,” or “subject to,” have been held to commonly indicate that performance has expressly been made conditional. However, the general rule is that if there is any ambiguity, a contingent payment clause will be construed as a timing provision rather than a condition precedent to payment.
While the Maryland courts have upheld pay-when-paid and pay-if-paid clauses, the Maryland legislature has barred the enforceability of pay-if-paid clauses in certain circumstances. See Md. Code Ann., Real Prop. § 9-113(b) & (c). Section 9-113 (b) provides that a provision in an executory contract between a contractor and a subcontractor that is related to construction, alteration, or repair of a building, structure, or improvement and that conditions payment to the subcontractor on receipt by the contractor of payment from the owner or any other third party may not abrogate or waive the right of the subcontractor to: (1) Claim a mechanics’ lien; or (2) Sue on a contractor’s bond. Any provision made in violation of this statute is void as against the public policy of the State. See also Md. Code Ann., State Fin. & Proc. § 17-108(d)(2) & (3).
Even if the contingent payment clause is enforceable as a general matter, there still may be factual defenses to its application. Courts have recognized that the “credit risk” that an owner will be unable to pay is different from the risk of nonpayment arising because of defenses to payment that the owner may possess, such as untimely performance or poor workmanship. The general contractor is responsible for coordinating the work of its subcontractors and the overall performance of the project. Accordingly, many states recognize that if the general contractor or another contractor for whom the general contractor is responsible is the reason that the owner is refusing to pay, and the claiming subcontractor is without fault, the contingent payment clause may not be enforceable. If you need help with your pay-if-paid or pay-when-paid issues contact Michael Stover.
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