Prompt payment laws: Explaining your right to get paid fast
Thursday, May 21, 2015
Many are engaged in a global debate about an apparent problem with capitalism. Specifically, that as business organizations get large and powerful, they use their leverage and influence unfairly. This debate is seen across many issues.
Many retail companies are being pressured to pay employees a "livable wage." Some big businesses are forcing their unskilled workers to sign noncompete agreements. And, last year, in the face of big businesses stretching out payment terms on their smaller suppliers, the White House backed an initiative called "SupplierPay," which aims to increase the speed at which businesses pay their invoices.
Since the construction industry frequently sees big, well-funded organizations contracting with smaller, capital-needy companies, the industry is already extremely experienced in these issues.
"Prevailing wage" requirements, for example, force many projects to guarantee a "livable wage" to the laborers. To avoid contracts from having unfair provisions (i.e. pay-if-paid clauses or prework lien waivers), every state's statutory framework includes construction-industry-specific laws regulating what can and cannot go into the construction contract.
And let's not forget the mechanics lien and bond claim laws, which were invented by Thomas Jefferson and James Madison long ago to protect laborers, trade contractors, suppliers and others from getting contractually bullied by better-capitalized parties.
This is a long introduction to one specific right already possessed by those performing services or work on a construction project: The right to get paid fast.
While President Barack Obama's SupplierPay attempts to convince big companies to voluntarily pay their suppliers faster, there's a collection of laws throughout the United States that already force companies in the construction industry to pay their invoice and payment applications quickly.
These laws are frequently referred to as "prompt payment laws."
The construction industry's prompt payment laws vary by state. Nevertheless, they all follow a pretty similar format: They all mandate cash be paid down the construction contracting chain within certain time frames.
After a party furnishes labor or materials to a construction project, they typically send an invoice or payment application to some other party requesting payment. Since many construction projects involve many tiers of parties, that invoice or payment application is typically delivered "up the chain" to others, from which the cash will ultimately come.
Prompt payment laws require everyone in the contracting chain to pay the parties below them within a certain period of time from when they receive a payment.
Practically speaking, once a property owner pays a general contractor, the general contractor will have a specific amount of time to pay its subcontractors. In most cases, the timeframe is quite short, requiring payment within 7-14 days from when payment is received.
These prompt payment laws assess significant penalties when they are violated. Paying an invoice or payment application just a day late could expose the paying party to sizable penalties (i.e., 10-15 percent of the payment) and other consequences (i.e., attorney fees).
The biggest challenge with prompt payment laws is that they vary significantly by state, project type and party role. View a free state-by-state guide to the construction industry's prompt payment laws here.
All across the United States, prompt payment laws exist, requiring contractors be paid in a timely fashion. These laws establish a public policy right for contractors to get paid fast. Violation of these payment timeframes will subject paying parties to interest, penalties and other consequences. Contractors and suppliers should be familiar with these laws to ensure they are being paid fairly and timely.
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