Laborers and the preliminary 20-day notice

As a major player in Arizona construction, you know that a supplier of services or materials to a construction project can protect its payment rights by filing a lien on the property (A.R.S. § 33-981).

To enforce their lien, they must be able to prove that they properly issued a written preliminary 20-day notice to the owner, the contractor, the construction lender, and the party with whom they contracted. The notice must be served within 20 days after the first day on which they provided services or materials. (A.R.S. §§ 33-981[D] and 33-992.01 ) It is this preliminary 20-day notice requirement that, in our experience, most frequently trips up potential lien claimants.

All of that should seem quite familiar, but what you may not know is this: Only one class of “suppliers” is exempt from the preliminary notice requirement: actual laborers on the job. In the words of the statute, “Except for a person performing actual labor for wages, every person ... shall … serve ... a written preliminary twenty day notice as prescribed by this section.” (A.R.S. § 33-992.01[B])

WHO CAN CLAIM TO BE A LABORER?

A recent Arizona Court of Appeals case has clarified who can claim to be a person performing actual labor for wages.

In Performance Funding, LLC, v. Arizona Pipe Trade Trust Funds, a company, Industrial Mechanical, Inc., provided services and equipment to a 1998 construction project at a Motorola site in Mesa. Industrial Mechanical’s employees were union workers, and the company contracted with Phoenix-area pipe trades and metal workers unions to make monthly contributions to the unions’ trust funds for employee benefits.

In November 1998, Industrial Mechanical became insolvent and was unable to complete its contract due to foreclosure by a creditor. The company had paid its employees all of the wages owed up to the point of foreclosure. However, before the foreclosure Industrial Mechanical had stopped making fringe benefit contributions to the union trust funds. The company had posted bonds to secure those contributions, but the amounts owed to the funds exceeded the bonds’ limits.

In January 1999, the union trust funds recorded liens against Motorola’s property for fringe benefit contributions. However, they did not serve preliminary 20-day notices. In the ensuing trial, the union trust funds successfully argued that because they provided laborers for wages, they had the right to file the liens and were exempt from the preliminary 20-day notice requirement.

On appeal, the Court of Appeals agreed that, within the meaning of A.R.S. § 33-981, the trust funds were “persons who labor”– that is, they had a right to file their liens. Arizona has a long tradition of liberally construing the lien statutes to ensure that laborers receive their bargained-for benefits, and the court recognized that the monies owed to the trust funds were part of the compensation owed to individual union members.

NOT IMMUNE TO 20-DAY NOTICE

However, the Court of Appeals ruled that the trust funds were not exempt from the preliminary 20-day notice requirement and that their failure to serve those notices was fatal to their claims.

The court noted the statutory requirement that every person who furnishes labor must issue a written preliminary 20-day notice, “except for a person performing actual labor for wages.” The ruling drew a sharp distinction between a party that merely furnishes labor and a person who actual performs the work.

The court observed that an individual laborer working at a site might not know that a preliminary notice is required or have access to the information required in the notice. By contrast, a trust fund – managed by sophisticated trustees who are expected to be experienced in matters related to construction contracts – can readily obtain the information it needs to protect the interests of the fund and its beneficiaries.

In other words, the trustees should have the knowledge and expertise to protect the fund’s interest, while laborers at a site cannot be expected to have the same knowledge and expertise.

FAR-REACHING IMPLICATIONS

We believe that the Performance Funding ruling – that a laborer’s exemption from the preliminary 20-day notice requirement does not extend to his union trust fund – extends beyond organized labor and may also apply to employee leasing companies and other third-party providers of workers. Actual laborers – the men and women with the strong backs and calloused hands – can lien for wages without first giving preliminary notice but, under our interpretation of this decision, the company that furnishes those laborers cannot.

It’s a subtle bit of information that may prove extremely valuable the next time a company with whom you contract to furnish labor fails to provide a preliminary 20-day notice.