Monday
Apr112016

OSHA to Hold Advisory Committee on Construction Safety and Health to Discuss Safety and Health Program Management Guidelines for the Construction Industry

The Occupational Safety and Health Administration (OSHA) will hold a special meeting of the Advisory Committee on Construction Safety and Health to discuss a draft construction version of OSHA’s Safety and Health Program Management Guidelines.  This meeting will be held April 25-26, 2016, in Washington, DC.

This meeting is intended to result in the crafting of a separate set of safety and health program management guidelines for the construction industry.  OSHA provides guidelines and incentive programs for compliance with its safety and health regulations.  Due to the unique challenges faced by members of the construction industry, OSHA's bulletin regarding the upcoming meeting indicated the Advisory Committee intends to provide additional guidance for the construction industry on compliance with industry-specific regulations.

What is in OSHA’s Safety and Health Program Management Guidelines?

Under the Occupational Safety and Health Act of 1970, each employer is required to comply with the occupational safety and health standards and furnish a place of employment free from recognized hazards likely to cause death or serious physical harm to employees.  The Act further allows the Secretary of Labor to establish occupational safety and health standards, rules, regulations, and orders, and requires employers to comply with them.

OSHA's regulations were created to ensure that employers comply with the safety and health standards, and provide safe workplaces for their employees.  Everyone must comply with the Occupational Safety and Health Act of 1970, and in turn, must comply with the Safety and Health Regulations.  The means by which employers comply may differ, as the needs of one employer may not be the same as the needs of another – based on trade, employee count, or other specific characteristics of the business.

The current Safety and Health Regulations for Construction apply to members of the construction industry, and address particular issues within the construction industry.  The regulations establish that no construction contract shall require the performance of work in conditions that are “unsanitary, hazardous, or dangerous” to the health or safety of the worker(s).  Additionally, they establish duties owed to employees, such as personal protective equipment and training, and accident prevention responsibilities such as regular inspections, use of properly working equipment, training on equipment and machinery, and the initiation of programs and policies that comply with these regulations.  The safety and health provisions for the construction industry also include address training and education, reporting of injuries, first aid, fire protection, housekeeping, sanitation, and personal protective equipment.

To assist employers in complying with the required OSHA Safety and Health Regulations, Safety and Health Program Management Guidelines were created. These guidelines are not mandatory, but are voluntary, and really provide guidance to employers as they implement policies and procedures to comply with OSHA Safety and Health Regulations. While it was mentioned above that everyone must comply with the Act and the Safety and Health Regulations, the means by which an employer complies may be different than another employer. Due to this potential difference in compliance, OSHA provides a set of Safety and Health Program Management Guidelines to assist employers in their compliance endeavors.

What exactly is the Advisory Committee on Construction Safety and Health?

The Advisory Committee on Construction Safety and Health is an advisory body established by statute that gives advice and provides assistance in interpreting and complying with construction standards to the Assistant Secretary.  The purpose of this Advisory Committee is to advise the Assistant Secretary for Occupational Safety and Health with setting construction standards and policy matters affecting construction and federally funded construction projects.  Statutes require that OSHA consult with the Advisory Committee before setting or changing construction standards under the Act. 

The upcoming meeting will be important to the construction industry as the guidelines proposed by the Advisory Committee and the OSHA standards apply to the vast majority of the construction industry, including contractors who enter into construction contracts, subcontractors who agree to perform labor or furnish materials for a construction contract; and suppliers who furnish materials for work performed on or near a construction site.  Comments are due by April 15, 2016 at www.regulations.gov for Docket No. OSHA-2016-0009 or by email or facsimile. 

If you have questions about your company’s safety and health policies or would like assistance in developing such policies for your business, please call us at (919) 828-1396.

Wednesday
Apr062016

OSHA Issues Final Rule on Silica Dust for the Construction Industry

On March 25, OSHA issued a final rule requiring construction-industry employers to limit their employees’ exposure to silica dust and take other steps to protect workers.  The rule applies to all construction employers with more then 10 employees.

Silica dust, also known as crystalline silica, is a natural mineral commonly found on construction sites, such as in concrete and gravel.  Silica dust is produced by construction operations like cutting, grinding, and drilling stone, rock, concrete, brick, cinder block, and mortar.  Dust is also generated through blasting and ripping rock.  Inhaling small silica particles, or silica dust, over prolonged periods of time can cause many diseases including silicosis, lung cancer, chronic obstructive pulmonary disease (COPD), and kidney disease.

In response to the health risks associated with construction activities that produce silica dust, OSHA issued the final rule reducing the permissible exposure limit from 250 micrograms per cubic meter of air (μg/m3) to 50 μg/m3, averaged over an eight-hour shift; the rule cuts the permissible exposure to 1/5 of the previous exposure limit.  In addition to reducing the exposure limit, employers are required to establish procedures to limit employees’ exposure to silica dust.  Such procedures may include engineering controls, such as water or ventilation; providing respirators; establishing an exposure control plan, including restricting access to high-exposure areas; offering medical exams, such as chest x-rays and lung function tests, to employees required to wear respirators for more than 30 days a year; training workers how to limit silica exposure; and keeping records of workers’ exposure and medical exams. 

The compliance deadline for the final rule is June 23, 2017.  Because North Carolina has a state-sponsored OSHA plan, the State has six months to adopt standards that at least match the federal OSHA standards.  However, construction industry groups have already begun challenging the final rule.  On April 4, 2016, the Louisiana Chapter of The Associated General Contractors of America filed suit in the U.S. Court of Appeals for the Fifth Circuit, and other trade groups have and/or are expected to join the action.

We will continue to follow this issue as it develops and post updates periodically.  If you have questions regarding OSHA’s final rule, please call us at (919) 828-1396 to make an appointment.

Thursday
Mar102016

North Carolina’s Economic Loss Rule May Protect Contractors from Negligence Claims by Property Owners

There are many potential claims that may arise during a construction project.  While it is impossible to account for every “what-if” scenario, a contractor’s rights and remedies should be addressed in the parties’ contract.  An exclusive remedies clause, combined with North Carolina’s “Economic Loss Rule,” may prevent a contractor from being liable to a property owner for a negligence claim.

The “Economic Loss Rule” prevents a party from recovering losses that are purely economic in nature through tort claims, such as negligence, when those losses are actually addressed through contract law.  The rule encourages parties to allocate their risk of loss when entering into contracts because that is the best opportunity to bargain for coverage of risk, such as faulty workmanship.  For that reason, contracting parties are not subject to tort actions when they fail to properly perform under the terms of the contract if the resulting injury is damage to the subject matter of the contract. This rule applies even if a contractor’s failure and the resulting damage was due to the contractor’s own negligence. 

On March 1, 2016, the N.C. Court of Appeals upheld the application of the Economic Loss Rule in favor of a contractor after a property owner claimed the contractor was negligent.  Beaufort Builders was contracted by White Plains Church Ministries (“White Plains”) to construct a church.  Because the property was located in a flood plain, the foundation had to be built at least 7 feet above sea level to comply with Federal Emergency Management Agency (“FEMA”) regulations.  After construction, a survey was performed which revealed the final elevation of the foundation was about 8 inches below the required 7 feet base elevation.  Due to the foundation’s height, the church was unable to obtain a Certificate of Occupancy, so White Plains refused to pay the outstanding balance owed under the contract. 

Beaufort Builders filed suit claiming breach of contract for non-payment. White Plains counterclaimed for breach of contract against Beaufort Builders and negligence against Beaufort Builders’ owner, individually.  A jury returned a verdict finding that White Plains breached its contract for failure to pay, but also that Beaufort Builders’ owner was individually negligent and White Plains was damaged by his negligence.  The jury awarded Beaufort Builders $70,090.00 and awarded White Plains $57,500.00.

After judgment was entered, the judge granted Beaufort Builders’ motion for Judgment Notwithstanding the Verdict (JNOV), which allows a judge to overrule the jury under certain circumstances and amend the jury’s verdict.  The judge amended the judgment based on the Economic Loss Rule, stating that Beaufort Builders’ owner was not liable to White Plains for negligence. The case against the owner was dismissed with prejudice.  White Plains appealed the amended judgment, but the Court of Appeals affirmed the trial court’s grant of JNOV and the amended judgment.

North Carolina law is clear that “no negligence claim exists where all rights and remedies have been set forth in [a] contractual relationship.”  Williams v. Houses of Distinction, Inc., 213 N.C. App. 1, 4 (2011).  This is the basis for North Carolina’s “Economic Loss Rule.”  As explained earlier, when risk of loss is allocated through a contract, a breach of contract claim is the proper avenue for redress even when the breach is due to negligence or lack of skill.  However, there are four exceptions to this rule:

  1. The injury caused by the negligent act is to a person or property other than the contracting party;
  2. The injury is to property that is not the subject matter of the contract, or was a personal injury to the contracting party;
  3. The negligent party had a duty imposed by public policy to safeguard the damaged property from harm, such as in the case of a common carrier; or
  4. The injury was willful or amounted to conversion of the property.

In addition to the four listed exceptions, the Economic Loss Rule will not shield a contractor from a negligence claim when a contract or contractual relationship between the parties does not exist.  Because White Plains had a contractual relationship with Beaufort Builders and the facts surrounding the negligence claim did not fit into any of the exceptions to the Economic Loss Rule, Beaufort Builders’ owner was not liable for negligence related to the construction of the foundation of the church.

It is important to note that although White Plains’ negligence claim was against Beaufort Builders’ owner individually, the Court found that he was acting on behalf of the company at all relevant times.  Because of this, the Court determined that the owner’s actions were subject to the contractual privity that existed between the two companies.  However, it is possible for an individual member of an LLC or corporation to be liable for negligence if their actions are not on behalf of the company or are outside the scope of the contract. 

For more information about negligence claims, exclusive remedies clauses, or successful contract drafting please call us at (919) 828-1396 to set up an appointment.

Wednesday
Feb242016

NC Iran Divestment Act becomes effective on Feb. 26

The Iran Divestment Act of 2015 was passed with little fanfare last year, and signed into law by the Governor on June 29, 2015.  The Act, codified at N.C. Gen. Stat. 143C-6A-1 et seq., prohibits the North Carolina Retirement Systems and the NC Treasurer from investing funds with individuals or companies engaging in certain defined investment activities in Iran.  The Act also prohibits state agencies, local government units, and other political subdivisions of the State from contracting with individuals or companies on the Treasurer's Final Divestment List.

The Act has an effective date of February 26, 2016, which means that these prohibitions kick in on Friday.  Also on Friday, the Treasurer is expected to publish the Final Divestment List, which is likely to trigger some rapid investigations on the part of state and local agencies before entering into contracts.

Events have also overtaken the passage of the Act, which has made for more significance to the roll-out of the Divestment List.  Last year's multi-national agreement resulted in the January 2016 relaxing of sanctions by the United States and other countries against Iran means that more U.S. companies may be lawfully able to transact business in Iran.  However, by doing so, those companies risk being barred from contracting with public agencies in North Carolina.

For more answers regarding how the NC Iran Divestment Act may affect your business, please call us at 919-828-1396.

Monday
Feb222016

New NC Sales Tax on Services Goes Into Effect March 1

On March 1, 2016, changes to North Carolina’s sales tax laws go into effect, including an expanded application of sales taxes to include “service contracts” and “repair, installation and maintenance services” (“RMI services”).  The following is a summary of the changes, and how they may affect companies in the construction industry:

What is a “service contract?”  A “service contract” is defined as a “contract where the obligor under the contract agrees to maintain or repair tangible personal property, regardless of whether the property becomes a part of or is affixed to real property, or a motor vehicle.”  (N.C. Gen. Stat. § 105-164.3(38b).)  Examples of service contracts include warranty agreements other than a manufacturer’s warranty or dealer’s warranty provided at no charge to the purchaser, an extended warranty agreement, a maintenance agreement, a repair contract, or a similar agreement or contract.”  (Id.)  Prior to the March 1 change, service contracts for tangible personal property that is or will become a part of real property was not subject to sales tax, unless the service contract was sold by the obligor or by a third party or facilitator at the same time as the item of tangible personal property covered by the service contract.  (former N.C. Gen. Stat. § 105-164.4l(c).)

What are “repair, maintenance, and installation services?”  RMI services are activities defined in the 2015 Appropriations Act (HB 97) as those services to: (1) keep or attempt to keep tangible personal property or a vehicle in proper working order so as to avoid the property from breaking down or needing repair; (2) calibrate, restore, or attempt to calibrate or restore tangible personal property or a vehicle to proper working order or to a good condition including replacing or putting back together broken parts; (3) troubleshoot, identify, or attempt to identify the source of a problem in order to determine what must be done to restore the tangible personal property or the vehicle to its proper working condition or a good condition; and (4) install or apply tangible personal property, except for tangible personal property installed or applied by a real property contractor pursuant to a real property contract.  (N.C. Gen. Stat. § 105-164.3(33d).)

In addition to defining RMI services, the bill expands the definition of a “retailer” to include a person who “is engaged in business of delivering, erecting, installing, or applying tangible personal property fur use in this State, regardless of whether the property is permanently affixed to real property or other tangible personal property,” unless this person solely operates as a real property manager or if the person is one whose only business activity is providing repair, maintenance, and installation services where the person’s activities do not otherwise meet the definition of a “retail trade.”  (N.C. Gen. Stat. § 105-164.3(35)(b).)  A “retail trade” is defined in the amendments as a trade where a majority of revenue comes from retailing tangible personal property, digital property, or services to consumers.  The term also includes maintaining an inventory and may include the provision of repair, maintenance, and installation services.  (N.C. Gen. Stat. § 105-164.3(35b).)

Where have the changes occurred?  The privilege tax imposed upon retailers engaged in business in the state has been expanded to apply the 4.75% rate to the sales price of or the gross receipts derived from repair, maintenance, and installation services.  (N.C. Gen. Stat. 105-164.4(a)(15).)  The retail sales tax statute was also amended to exclude from taxation “[r]epair, maintenance, and installation services provided for an item for which a service contract of the item is exempt from tax under G.S. 105-164.4I,” and “[r]epair, maintenance, and installation services purchased for resale.”  (N.C. Gen. Stat. § 105-164.13(61a), (61b).)   In addition, “repair, maintenance, and installation services used to maintain or repair tangible personal property or motor vehicle pursuant to a service contract taxable under this Article if the purchaser of the contract is not charged or the item” are also exempt from the retail sales tax.  (N.C. Gen. Stat. § 105-164.13(62).)

How do the changes affect construction firms?  To figure out whether a construction firm is required to collect sales tax for RMI services requires parsing the various new definitions and how they apply to the company’s business.  There are four different categories of business operations which could conceivably apply to a particular construction business.  Those are:

(1) “Real property contractor” – This is defined as “a person that contracts to perform construction, reconstruction, installation, repair, or any other service with respect to real property and to furnish tangible personal property to be installed or applied to real property in connection with the contract and the labor to install or apply the tangible personal property that becomes part of real property. The term includes a general contractor, a subcontractor, or a builder for purposes of G.S. 105‑164.4H. The term does not include a person engaged in retail trade.”  (N.C. Gen. Stat. § 105-164.3(33a).

(2) “Retailer” – This is defined as a person engaged in business of making, offer, or soliciting sales at retail “of tangible personal property, digital property, or services for storage, use, or consumption in this State.”  (N.C. Gen. Stat. § 105-164.3(35)(a).)  It also covers a person “engaged in business of delivering, erecting, installing, or applying tangible personal property for use in this State, regardless of whether the property is permanently affixed to real property or other tangible personal property unless” the person is a person that solely operates as a real property contractor, or a person whose only business activity is providing repair, maintenance, and installation services where the person's activities do not otherwise meet the definition of a retail trade.  (N.C. Gen. Stat. § 105-164.3(35)(b).)

(3) “Retailer-contractor” – This is defined as a person that acts as a retailer when it sells tangible personal property at retail and as a real property contractor when it performs real property contracts.  (N.C. Gen. Stat. § 105-164.3(35a).)

(4) “Retail trade” – This is defined as “a trade in which the majority of revenue is from retailing tangible personal property, digital property, or services to consumers. The term includes activities of a person properly classified in NAICS sector 44‑45, buying goods for resale, and rendering services incidental to the sale of merchandise. The term typically includes maintaining an inventory and may include the provision of repair, maintenance, and installation services. Not all activities provided in this subdivision are required for a trade to be considered retail trade.”

The easiest category to figure out for application of the new sales tax is the real property contractor.  A company that only performs “construction, reconstruction, installation, repair, or any other service with respect to real property” is effectively exempted from having to charge and collect the new sales tax for its construction-related services, because those businesses do not fit the definition of a “retailer.”  However, the converse is also true – a business engaged in a retail trade cannot be treated as a real property contractor under the sales tax statutes.  The statute specifically cites to the NAICS (North American Industry Classification System) retail trade sector codes 44 and 45, which apply to companies “engaged in retailing merchandise, generally without transformation, and rendering services incidental to the sale of merchandise.”  Construction companies typically are classified under NAICS sector 23.

The greatest points of confusion affect the two categories of services:  service contracts, and RMI services.  According to the NC Department of Revenue, the sale of service contracts is taxable, even if sold by a real property contractor.  (See N.C. DOR Notice regarding sale or renewal of service contracts dated Feb. 2, 2016.)  The Department detailed examples including an HVAC company selling a service contract, and a garage door retailer selling a service contract.  For the garage door example, the Department wrote:

On March 1, 2016, a retailer engaged in business in North Carolina makes a retail sale of a service contract on a garage door installed in a customer’s home in North Carolina.  The retailer collects sales tax on the sales price of the service contract.  On March 31, 2016, the customer’s garage door requires service covered by the service contract.  The obligor arranges for repair services and is charged $250.00 for parts and installation by a garage door retailer.  The obligor provides Form E-595E to the garage door retailer to purchase the parts and installation exempt from sales and use tax and does not charge the purchaser of the service contract for the parts and installation.

(Id., p. 2.)  In relation to that or similar situations, the Department notes that purchases of items or RMI services to maintain or repair tangible personal property pursuant to service contract subject to the new sales tax should be exempted from those taxes (so as to avoid double taxation) by giving a properly completed Form E-595E exemption certificate to the seller.  (See id.)

Finally, there is the determination of whether a construction company qualifies as a “retailer-contractor,” in which case the retailing operations are subject to the sales tax provisions, and the real property contracting operations are not.  The test used there is the “majority of revenues” standard from the definition of “retail trade” under Section 105-164.3(35b).  According to the Department of Revenue, a business who is not in the retail trade sector can meet the definition of “retail trade” if a majority of its revenue is from retailing tangible personal property, digital property, or services to consumers in the State.  (See N.C. DOR Directive SD-16-1, pg. 4.)  According to Directive SD-16-1, a kitchen remodeling company with $2 million in cumulative revenue, with $1.5 million from kitchen remodeling contracts and $500,000 from retail sales of kitchen cabinets, is deemed to have received 75% of its revenue from the “real property contracting” activities, and 25% of its revenue from the retail sales, and could therefore be a “retailer-contractor.”  (See id., p. 5.)

What do construction companies do now?  This article is not intended to give legal advice or tax advice to any reader regarding how much a construction company is required to charge or withhold in sales tax beyond what it presently does.  Any company doing business in North Carolina should retain experienced counsel who can review the new laws and advise the company on how its particular business will be affected by the changes.

That said, there are some general conclusions that can be drawn for all contractors:

1.     Any business that sells or furnishes service contracts other than a manufacturer’s or dealer’s warranty, will need to account for those contracts and charge sales tax to customers.

2.     A company engaging solely as a real property contractor is largely unaffected by the changes, because the “repair, maintenance, and installation services” definition excludes the installation or application of tangible personal property by a real property contractor pursuant to a real property contract.  (See N.C. Gen. Stat. § 105-164.3(33d)(d).)  This applies to both installation and repair services, so long as the property being serviced is affixed to the real property.  (See N.C. Gen. Stat. § 105-164.3(33a).)

3.     Any business that both sells materials to be installed by its own workers, and sells materials that may be utilized or installed by the customers or others, needs to keep extra care with its records, especially if the split between the sales and the installation work gets close to the 50% threshold.  Once the majority of revenue comes from retail sales, the company may automatically tip into being defined into the “retail trade.”

For further questions regarding how House Bill 97 may affect your business, please call us at (919) 828-1396 to set up an appointment.