Florida recently updated the Florida Prompt Payment Law, section 218.735, Fla. Stat., to provide for a much higher interest rate on amounts that are wrongfully withheld from downstream contractors and to put the offending party’s licensure at risk for violating the law.
With the update to the law, a contractor who fails to pay downstream subcontractors and suppliers can be penalized in three ways. First, there is a monetary penalty where the interest rate applicable to wrongfully held funds is now required to be two percent per month for each month the funds are withheld. In the past, interest on such funds was limited to the rate applicable to judgments in Florida as provided by the office of Florida’s Chief Financial Officer, which lately has been as low as 4.25% per annum. Now the rate for withheld funds is a whopping 24% per annum.
More punitively, a contractor engaging in the “knowing,” or “intentional” failure to pay downstream subcontractors and suppliers on amounts that are undisputed and have been paid to the contractor can be charged with the crime of misapplication of construction funds if there is not a good faith dispute over whether payment is due.
Finally, in addition to the criminal prosecution that may result, if a contractor is convicted of misapplying funds due to subcontractors and suppliers, the contractor licensing authority is required to suspend all licenses for a minimum of one year.
These changes apply to all contracts that are signed after July 1, 2021. With this change, Florida is protecting subcontractors and raising the stakes for any decision of a contractor to withhold payments. While this does not fundamentally change the way contractors should do business, it makes it much more important to ensure that any withholding of payment from subcontractors is permitted per your contract provisions and to make sure that any undisputed amounts are paid over in accordance with the Prompt Payment Law.