More thoughts on PEOs and Mechanics Liens

I reported yesterday on HB2995 that would explicitly authorize Texas PEOs to file mechanics' liens to secure themselves against client non-payment. After some additional thought, I am inclined to think this is a reasonable idea, but one that does have limits. The reason why this change is needed at all is that current Texas law is unclear on the question of whether a PEO can properly file a mechanics lien.

The key case is AMS Staff Leasing v. Warm Springs Rehabilitation, 94 S.W.3d 152 (Tex. App.--Corpus Christi 2004). AMS entered into a PEO arrangement with a construction contractor which was a subcontractor on a construction project. When AMS was not paid by its client, AMS filed a mechanics lien. When it did not get paid, AMS sued to enforce its lien rights. In defense, the owner asserted that AMS had no right to file a lien since AMS had not "furnished labor" to the project, only provided administrative services to the subcontractor who was the one who actually provided the labor and did the work. The Court of Appeals agreed that this was a fair question, but one that could not be decided on appeal, and so sent the case back to the trial court for additional factual determinations. The AMS case thus raises more questions than it answers, other than making clear that there is an issue as to whether a PEO has standing to assert a lien.

In a later case, the same Court of Appeals looked at similar arguments in the context of a lien claim filed by a temporary staffing firm. Advanced Temporaries v. Reliance Surety Company, 2004 WL 1632737 (Tex.App.--Corpus Christi 2004).

Here the Court pointed out that only those who furnish "labor" within the meaning of the lien statute have a right to file a lien. The statute defines labor as "labor used in the direct prosecution of the work." Tex. Prop. Code 53.021(3). Helpfully, the court rejected the idea that the statute requires every lien claimant to "engage in the business of construction" as being "contrary to the legislature's intent to construe the lien statute liberally for the purpose of protecting laborers and materialmen." The Court of Appeals held that "the property code affords protection to those who 'furnish labor' as well as those who actually labor on a construction project in Texas."

But, here is the rub. Simply providing HR or staffing services does not necessarily mean that you have standing to assert a lien. The Court cautioned: "However, we conclude that not every arrangement will establish that a temporary employment agency "furnishes labor" as defined by chapter 53. For instance, a temporary employment agency may contract with a construction company to provide only administrative services for the contractors employees and not labor engaged in direct prosecution of the work."

Despite these concerns, the Court of Appeals did find that the temporary staffing firm had "furnished labor" and thus had a right to file a lien. However, the Court of Appeals relied on the following facts in reaching this conclusion:

• The temp service actually recruited & hired the employees that were provided to its contractor client.
• The temp service "qualified" the workers by verifying legal documentation, driver's licenses, social security cards, and federal employment forms.
• There was no evidence that the client company had done any employee screening, qualifying or hiring of the temporary workers.
• The temp service recruited and hired the workers as its own employees, and provided the workers' compensation, unemployment insurance, and general liability insurance.
• The workers received their paychecks from the temp service, not the contractor, and the temp service made the payroll deductions.
  

On these facts, the Court of Appeals reversed the trial court's holding that the temporary staffing firm had not "furnished labor" and instead held that it had and therefore had standing to assert a lien claim under Chapter 53 of the Texas Property Code.

Keep in mind the limits of a lien claim. Mechanics liens exist only to the extent provided by Chapter 53 of the Texas Property Code - i.e. for "labor furnished" in connection with construction of improvements to real property. No lien is available under the mechanics lien statue where the work is something other than construction of improvements to real property.

This means that the mechanics liens are not available to PEOs whose clients are engaged inanythong other than construction work. For example, no mechanics lien is available under Property Code chapter 53 if the client company is an auto repair shop, a barbershop, a childcare facility, an optometrists office, or a manufacturer. Liens are available only where the labor is furnished in connection with construction projects related to real property.