IMPORTANT LEGAL UPDATE: New Laws Affecting Construction Contractors

The 2023 legislative session ended on May 22, 2023, and legislators were active in passing laws that impact the construction industry.  Some of these laws should prompt contractors to review and update their subcontractor agreements and other policies and practices.

1. Geral Contractors Responsible for Subcontractor Wage Claims: General contractors will now be responsible for a subcontractor’s failure to pay its employees.

The law is intended to protect subcontractor employees and ensure they are paid, and a general contractor may not avoid the law through a waiver or indemnification clause in the subcontract.  The general contractor may only seek indemnity from the subcontractor if the general contractor has actually paid wages to the subcontractor’s employees.

The following are exceptions to a general contractor’s liability under this new law:

  1. If the general contractor and subcontractor are union contractors subject to a collective bargaining agreement.
  2. If the project involves prevailing wages.
  3. If the project involves residential remodeling or home improvements for one or two-family dwellings.
  4. If the work involves residential new construction of ten or fewer one or two-family dwellings on one project site annually.

Subcontractors must provide proof that employees have been paid within 15 days after a request.  We advise general contractors to update their subcontractor agreements to require provide proof of employee payments.

2. Duty to Defend: Lobbyists and trade associations worked for years on this law change, which was finally passed in 2023 through with unanimous and bipartisan support.

In 2013, Minn. Stat. § 337.05 was amended to limit the scope of indemnity agreements.  The amended law clarified that a party may only be held responsible to the extent of its own fault.  Therefore, any clause in an agreement stating that a party can be liable for damages caused by another party is unenforceable.

However, the 2013 amendment did not explicitly address the “duty to defend,” meaning the duty of one party to pay for the defense of another other party in a legal action.  As a result, while subcontractors were only liable to the extent of their own fault, a general contractor could still demand that a subcontractor pay for all legal fees related to an action regardless of the subcontractor’s fault.  The 2023 legislative session addressed this issue, and the definition of an “indemnification agreement” was amended to be an agreement to “indemnify, defend, or hold harmless the promisee against liability or claims of liability for damages arising out of bodily injury to persons or out of physical damage to tangible or real property.”  By adding the word “defend,” the law now states that a party may only be held liable to the extent that the underlying injury or damage is attributable to party’s negligent or otherwise wrongful act or omission, including regarding defense costs.

3. Non-Compete Agreements Banned:      Gov. Walz signed a law on May 24, 2023 banning non-compete agreements that are entered into on or after July 1, 2023.  Non-compete agreements signed before July 1, 2023 are still enforceable.  The new law does not affect non-solicitation agreements, meaning companies may still prohibit employees or independent contractors from soliciting their customers or employees.  Another exception is that non-compete agreements in the context of a business sale will still be allowed.

4. Earned Sick and Safe Time: Beginning on January 1, 2024, all Minnesota employees will be eligible for sick and safe time equal to one hour for every 30 hours worked, up to 48 hours per year with a cap of up to 80 hours over multiple years.  Employees may use this time to recover from illness, domestic abuse, or other issues.  An employee’s sick and safe time begins accruing on the first date of employment.  These requirements can be waived for union employees subject to a collective bargaining agreement or if an employer separately maintains paid leave policies that meet or exceed the statutory minimums. If employers provide an employee handbook, they must include notice of the sick and safe time benefit.

5. Paid Family Medical Leave: Beginning on January 1, 2026, a state-run insurance program (similar to unemployment insurance) will allow employees to apply for up to twelve paid weeks for medical leave and twelve paid weeks for family leave with a total cap of 20 weeks.  These benefits will be paid by the State of Minnesota. The program will initially be funded with state surplus funds and later funded by a shareable employer/employee tax of .07%.  Employers must pay a minimum of fifty percent (50%) of the .07% tax but may elect to pay more.  If employers provide an employee handbook, they must include notice of the paid family medical leave program by November 1, 2025.

Employees will earn a percentage of their wages while on leave based on the amount of their normal pay.  The law will not apply to employees who have worked fewer than 80 hours or ninety 90 days, or to short-term workers who work fewer than five months a year.

6. Adult Use Recreational Cannabis: Effective as of August 1, 2023, recreational use of cannabis has been legalized for persons 21 years and older.  Testing is prohibited as a condition of employment except in connection with federal licenses (for example a commercial driver’s license) and for “safety sensitive positions.”  As with other substances, if employees arrive for work and appear to be impaired or unable to perform their duties, employers may use their current disciplinary policies to address those situations.  For construction contractors it is advisable to train one or more employees to determine whether an employee is impaired.

If you have questions about the laws and how they impact your business, please contact construction attorney Blake Nelson at 952-746-2131 or [email protected].