Important Construction Issues for Contractors and Subcontractors Performing Work in Tennessee

by Nancy Fouad, MSCE, JD, Burr & Forman LLP

Tennessee has specific laws and regulations by which contractors and subcontractors who are performing work in the state must comply. The following is a summary of several legal issues that contractors and subcontractors should consider prior to performing work in the state. This list does not cover every law or regulation applicable to contractors and subcontractors in Tennessee, but provides a general background of many issues that are frequently encountered.

Obtain a Proper License to Perform Work in Tennessee
Tennessee has strict licensing requirements for parties that fall within the statutory definition of a “contractor.”  Licensing requirements depend on the total dollar amount of the project, and for professionals performing work totaling less than $25,000, the county where the work is performed will determine whether to obtain a state license.  For contractors, there are various types of licenses, and a license is required when the total cost or contract amount is $25,000 or more. A contractor’s license is required with the appropriate classification and monetary limit, and in Tennessee, a state license is required before bidding, contracting or offering a price. A contractor who contracts or offers to engage in a project without a license of the proper classification and monetary limit is in violation of Tennessee’s licensing laws.

For a home improvement contractor, a home improvement license is required for remodeling projects totaling $3,000 to $24,999 in several counties including, Bradley, Davidson, Haywood, Hamilton, Knox, Marion, Robertson, Rutherford and Shelby. Tennessee law states that home improvement means the repair, replacement, remodeling, alteration, conversion, modernization, lead-based paint abatement, or addition to any land or building that is used or designed to be used as a residence or dwelling for one to four units.

Tennessee Requires Timely Payment to General Contractors and Subcontractors
Under the Tennessee Prompt Pay Act, the owner is required to pay the contractor in accordance with the payment requirements set forth in the contract between the owner and the contractor. The owner is also required to remit payment within 30 days after application for payment is timely submitted by the contractor to the owner as required by the contract. Similarly, the contractor is then required to make payment to the subcontractor in accordance with the payment requirements of the contract between the contractor and subcontractor and within 30 days after application for payment is timely submitted by the subcontractor in accordance with the contract.

Payments not in accordance with these requirements will accrue interest from the date due until the date paid at the interest rate for delinquent payments provided in the written contract. If no interest rate is specified in a written contract, payments will accrue interest at the rate specified in Tennessee Code section 47-14-121. Reasonable attorney’s fees are only awarded against the losing party if the losing party has acted in bad faith.

Tennessee Has Implemented an Immigration Law Which Is Applicable To Contractors and Subcontractors Performing Work in Tennessee

Effective Jan. 1, 2012, all private employers with 500 or more employees, as well as all government employers, must choose one of these two options to verify the work authorization of all new hires:

  • Enroll in the E-Verify system, use it on all new hires, and keep detailed documentation of every case confirmation, tentative non-confirmation, and/or final non-confirmation; or
  • Otain from a new hire and maintain a copy of one document that establishes U.S. citizenship or legal immigration registration in the United States.

The statute provides a list of acceptable documents the new hire can provide before he/she begins work. Employers also must obtain and maintain a copy of one document that establishes U.S. citizenship or legal immigration registration in the United States for all “non-employees,” which the law defines as “any individual other than an employee paid directly by the employer in exchange for the individual’s labor or services.”

As of Jan. 1, 2012, these requirements also apply as a precondition for all employers (regardless of size) to receive economic development incentives, such as grants, loans, or performance-based incentives from a state or local government entity. Upcoming compliance deadlines are July 1, 2012, for businesses employing 200-499 employees; and Jan. 1, 2013, for businesses employing 6-199 employees.

Tennessee has Strict Requirements for Perfecting a Lien against a Construction Project
Any contractor who performs work or furnishes materials by contract with the owner acquires a lien.  The lien remains effective for one year after the date the improvement is complete or is abandoned, or until any suit brought within that time for its enforcement is concluded. Before entering into a contract with the owner, the contractor must give the owner of the property notice of the contractor’s right to a lien. The contractor must then perfect the lien within 90 days after the date the improvement is complete or is abandoned by either:

  • Acknowledging the written contract with the owner and recording it in the lien book of the register’s office in the county where the property is situated; or
  • Providing a sworn statement of the amount due for work, labor, and materials along with a reasonably certain description of the property and filing it with the register’s office in the county where the property is situated.

While the statute of limitations on the lien acquired by a contractor who contracts directly with the owner is one year, the mechanic’s lien that is acquired by a subcontractor who contracts with the contractor or someone other than the owner lasts for only 90 days after the completion of the work or the furnishing of the materials. The subcontractor is required to notify the owner of the claim of lien within 90 days of completion of the work or expiration of the contract. In addition to the claim of lien required at the conclusion of the work, the subcontractor must mail a notice of nonpayment to the owner and the general contractor within 90 days of the last day of the month within which the work was completed or the materials furnished. A suit to enforce this type of lien must be brought within 90 days from the date of the notice of the claim of lien. The lien expires 90 days from the date of the notice in favor of such subcontractor or upon the final termination of any suit for enforcement brought within that period.

Qualify To Do Business With The Tennessee Secretary Of State
Any foreign corporation performing work in Tennessee is required to obtain a Certificate of Authority from the Tennessee secretary of state. Such certificate must be obtained prior to entering into the contract to perform the work. Under Tennessee law, contracts and transactions of non-qualifying foreign corporations are unenforceable in state court actions initiated by the offending corporation.

In Conclusion
It is important to be familiar with the specific laws and regulations in Tennessee that contractors and subcontractors must comply with, especially when it comes to obtaining a proper license, timely payment and other legal issues. While this list is not all-inclusive, it is a good starting point on some of the more frequent issues that contractors and subcontractors in Tennessee encounter.

This article appeared in the February 2012 issue of Dixie Contractor.

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