By Rebecca Rogers, SLN Attorney
The morning after President Obama’s State of the Union
speech, I arrived at the office in the middle of a spirited discussion at our
morning meeting. President Obama had
pledged to issue an Executive Order that would require government contractors
to pay their employees a minimum wage of $10.10 per hour. We handle a fair number of employment cases,
including cases under the Massachusetts Wage Act and claims for violation of
state and federal minimum wage laws, and were all wondering how such a provision
would actually be enforced if a company was unscrupulous enough to represent to
the federal government that it would pay $10.10 per hour but still pay its
employees less.
Here is why that is a question without an easy answer: there
are state and federal statutes protecting a worker’s right to be paid minimum
wage that provide for awards of multiple damages and attorneys’ fees if an
employer does not meet that obligation.
But “minimum wage” is established by statute, not executive order. There are also state statutes providing
similar remedies if an employer does not pay agreed upon wages in a timely
manner, whether minimum wage or otherwise.
But this federal subcontractor minimum wage is arguably neither: it is a
creature of executive order, not the minimum wage statutes, and it is really an
agreement between the subcontractor and the federal government, not between the
subcontractor and its employees. Clearly
an employer could lose its status as a federal government contractor for
violating this requirement, but would there be any remedy for the aggrieved
employee?
After a few minutes we settled on the possibility of
bringing a suit as a third party beneficiary to the contract between the
employer and the federal government. It
turns out that the world of third party beneficiaries to government contracts
is a fascinating place with plenty of twists and turns. Most statements of the law appear deceptively
simple at first, and most courts maintain that they are following the
Restatement (Second) of Contracts, §302, which divides the world into intended
beneficiaries of contracts, who are third party beneficiaries who can sue to
enforce a promise, and incidental beneficiaries of contracts, who are not and
cannot maintain such a lawsuit. The
Restatement explains that:
“Unless otherwise agreed
between promisor and promisee, a beneficiary of a promise is an intended
beneficiary if recognition of a right to performance in the beneficiary is
appropriate to effectuate the intention of the parties and either (a) the
performance of the promise will satisfy an obligation of the promisee to pay
money to the beneficiary; or (b) the circumstances indicate that the promisee
intends to give the beneficiary the benefit of the promised performance.... An
incidental beneficiary is a beneficiary who is not an intended beneficiary.”
Or, put more simply, “[i]n order to recover as a third-party
beneficiary, the plaintiffs must show that they were intended beneficiaries of
the contract.” Cumins Society Inc. v. BJ’s Wholesale Club, Inc., 455 Mass. 458,
464 (2009). Any third party right to sue
is further limited by § 313 of the Restatement, which limits the situations
under which a company that has contracted to provide goods or services to the public
can be held contractually liability to a third party beneficiary. Some courts have interpreted this provision
to foreclose third party beneficiary status unless the contract contains
specific language providing plaintiffs with the right to enforce its
terms. Jama v. United States Immigration and Naturalization Service, 334
F.Supp.2d 662, 687 (N.J. 2004).
And indeed there is an impressive amount of variation in the
case law on the subject. This variation
is probably due the wide variety of situations in which the question of third
party liability can arise in a contract with the federal government. For example, there is a large body of case
law devoted to construction workers building large public works projects. In those cases allowing any member of the
public as an intended beneficiary of the contract could open up a construction
company to all manner of contractual liability that might be contrary to the
public good and decisions in favor of third party status are rare. But on the other hand, consider an
organization that has a contract to provide homeless services to veterans in a
particular city. Allowing those veterans
to sue to enforce the promises made in the contract regarding the services that
would be provided appears to be entirely consistent with the public policy
goals of the contractual arrangement. More
recently, courts have considered whether home owners are third party
beneficiaries to the contracts between banks and Fannie Mae signed as part of
the HAMP program that tried to encourage mortgage modification and reduce
foreclosures.
The common refrain from these cases is that if there is
language in the contract clarifying the intent of the parties to exclude people
as third party beneficiaries then individuals who did not sign the contract are
unlikely to be found to be intended beneficiaries.
A good illustration of this is a line of Massachusetts cases
deciding the contractual liability of housing authorities to the residents of
the buildings they manage. In the
housing authority cases the Massachusetts Supreme Judicial Court first held, in
1989, that a resident could be a third party beneficiary to a contract between
a housing authority and the federal government.
Ayala v. Boston Housing Authority,
404 Mass. 689 (1989). In reaching this
conclusion, the court observed that “[t]o rule that these plaintiffs were not
intended beneficiaries would mock the very goals which Congress and HUD set out
to achieve through the Section 8 program…to afford children of families of
meager means a decent, safe, and sanitary place to live.” Id.
at 700-701. But shortly after this
decision language was added the contracts between the housing authority and the
federal agency that said that residents were not intended third party
beneficiaries. Eight years later, when
faced with nearly identical claims but working with the new contract with the
exclusionary clause for third party status, the SJC held that, despite its
earlier ruling, residents under the new contracts no longer had third party
status and could not bring breach of contract claims. Barnes v. Metropolitan Housing Assistance
Program, 425 Mass. 79, 84 (1997).
Courts have deferred to similar
language even when it is not in the contract itself but is incorporated into
the contract by reference. Thus, in Markle, which dealt with question of
whether a home owner/borrower was a third party beneficiary to the contract
between a mortgage lender and the federal government as part of the Home
Affordable Modification Program (“HAMP”), the court relied on exclusionary
language in Fannie Mae’s “Selling and Servicing Guides,” which were
incorporated into the contract by reference.
Markle v. HSBC Mortgage Corp. (USA), 844 F.
Supp. 2d 172, 181 (D. Mass. 2011). That
exclusionary language provided that “no borrower or other third party is
intended to be a legal beneficiary of the MSSC or the Selling Guide or
Servicing Guide or to obtain any rights or entitlements through Fannie Mae’s
lender communications or contracts.” Id. at 181. The court deferred to that characterization
of the contract and held that the homeowner did not have standing to sue based
on a breach of contract.
It is a puzzle to many of us
that courts have so consistently concluded that distressed homeowners are not
“intended beneficiaries” of a comprehensive program enacted by the federal
government to help distressed homeowners.
It seems unlikely that President Obama intended to leave borrowers with
such limited recourse when their loan servicers failed to follow the
requirements of HAMP, but the language of the contracts have led to exactly
that result. The moral of the story
seems to be that, if the Obama administration wants to empower employees to
enforce the new $10.10 minimum wage, care should be taken to ensure that the
language of the agreements with subcontractors reflects that intent.