Application of the subsidiary liability of the contractor in the construction sector, when the employer is a subcontractor

Consultation on the application of the subsidiary liability of the contractor in the construction sector, when the employer is a subcontractor.
Please be informed that on 1 November 2021, amendments to Articles 108, 109, 139 and 213 of the Labour Code of the Republic of Lithuania (hereinafter, LC) came into force regarding the application of the subsidiary liability of the contractor in the construction sector, when the employer is a subcontractor. Article 139(5) LC provides that if the employer is a subcontractor the contractor is liable for the payment of wages, including increased remuneration for overtime, night, rest day and public holiday work, to the employee performing the work, as provided for in the Law on Construction of the Republic of Lithuania.

It should be noted that the employer is responsible for the fulfilment of the wage payment obligation to the employee, including increased pay for overtime, night work, rest day and public holiday work (hereinafter, wages). Where the employer (subcontractor) fails to pay all or part of the wages due to the worker, the contractor is subject to subsidiary liability. This means that the obligation to pay the worker the unpaid wages falls on the contractor. The subsidiary liability of the contractor applies in cases where the subcontractor fails to pay an employee wages for performing the operations specified in the Law on Construction of the Republic of Lithuania (e.g. excavation, bricklaying, concrete work, installation work, foundations and roof installation, joinery work, exterior and interior finishing, commissioning and adjustment of equipment).

The subsidiary liability of the contractor when the employer is a subcontractor, under Article 139(5) LC, is limited to the employee’s rights to wages, including increased pay for overtime, night, rest day and public holiday work, acquired in the performance of a construction work contract between the contractor and the subcontractor (Article 139(6) LC). Thus, the subsidiary liability of the contractor when the employer is a subcontractor, established in Article 139(5) LC, is limited to cases where: 1. the contractor and the subcontractor (employer) are bound by the contractual legal relationship of a construction work contract (i.e. the parties have entered into a construction work contract), which is governed by the provisions of Chapter XXXIII of the Civil Code of the Republic of Lithuania; and 2. the employee has acquired the right to remuneration for the performance of their duties under the construction work contract (i.e. the duties of the employee are related to the performance of the construction work contract). It should be pointed out that the concept of a construction work contract is laid down in Article 6.681 of the Civil Code. Article 6.681(1) provides that under a construction work contract, the contractor is obliged, within the time limit set out in the contract, to build a structure or to carry out any other construction work in accordance with the client's specifications, and the client undertakes to provide the contractor with the conditions necessary for the performance of the construction work, to accept the result of the work, and to pay the price stipulated in the contract. Pursuant to Article 6.681(2) of the Civil Code, a construction work contract is concluded for the construction or rebuilding of enterprises, buildings, dwellings and other structures, as well as for installation work, commissioning or other operations. Chapter XXXIII, Section Three of the Civil Code also applies to major repairs of buildings or installations, unless the contract provides otherwise. In order to determine whether the relationship between the parties constitutes a contractual relationship under a construction work contract, the whole set of circumstances is assessed. In order to distinguish between a construction work contract and other agreements of a civil nature (e.g. service contracts, sale and purchase contracts), the subject matter of the contract should be considered. The main purpose of a construction work contract is to obtain a certain result from the construction work (e.g. to build a structure, to carry out excavation, bricklaying, concrete work, installation work, foundations and roof installation, joinery, exterior and interior finishing, commissioning and adjustment of equipment, etc.), and in this type of contract the contractor acts independently and bears the risk of the result of the construction work.

Note that Article 139(5) LC applies where the subcontractor and the sub-subcontractor conclude a construction work subcontract. Thus, if the employer is a subcontractor, the subcontractor is liable in a subsidiary manner for the payment of wages to the employee performing the work specified in the Law on Construction of the Republic of Lithuania.

In addition, it should be noted that the subsidiary liability of the contractor if the employer is a subcontractor applies irrespective of whether the foreign employer’s employee is seconded to the Republic of Lithuania or is a Lithuanian employee performing a construction work contract entered into after 1 November 2021. Construction work contracts concluded before 1 November 2021 will be governed by the pre-amendment rule on the subsidiary liability of the contractor only in respect of employees posted by a foreign service provider.
In order to reduce the likelihood of the contractor incurring liability for the non-compliance of the subcontractor's wage payment obligations, it is advisable for contractors to provide for additional rights for contractors in the construction work contract, such as controlling the payment of remuneration payable by the subcontractor to its employees, and obligations for subcontractors, such as providing information to the contractor on the completion of proper settlements with the subcontractor's employees.

If an employer that is a subcontractor under a construction work contract fails to properly fulfil their obligation to pay the employee's wages, the employee will be able to demand payment and, when applying to the Labour Disputes Commission for resolution of the labour dispute, will be able to name not only the employer (the subcontractor) as a defendant, but also the contractor, who will be an independent party to the labour dispute. Thus, if the employer (subcontractor) fails to fulfil all or part of the requirement to pay the wages due to the employee, the obligation to fulfil that requirement lies with the contractor.