Is a Release from Employment Security Dept. Required Before Releasing Retainage?

Is a Release from the Employment Security Department (ESD) required before releasing retainage? This is a question that often causes confusion because the law on retainage doesn't mention ESD.

The retainage laws (chapter 60.28 RCW) state that retainage is a trust fund for the Department of Revenue. However, ESD is not specifically mentioned in chapter 60.28 RCW, and the purpose of retainage is not to protect ESD. A public agency could therefore choose to release the retainage if all other required releases were on file except for the ESD release.

However, ESD does have statutory authority in RCW 50.24.110 for making claims on funds held by a government agency for unpaid unemployment compensation taxes. RCW 50.24.110 basically states that if a government agency is holding money that is due to any company owing money to ESD, that ESD can issue a "Notice and Order to Withhold and Deliver Property" to the government agency who is required to pay ESD the funds they are holding within 20 days.

Here's what the law states:

"The commissioner is hereby authorized to issue to any...political subdivision...a notice and order to withhold and deliver property of any kind whatsoever when the commissioner has reason to believe that there is in the possession of such...political subdivision...property which is due, owing, or belonging to any person, firm, or corporation upon whom the department has served a benefit overpayment assessment or a notice and order of assessment for unemployment compensation contributions, interest, or penalties. The effect of a notice to withhold and deliver shall be continuous from the date such notice and order to withhold and deliver is first made until the liability is satisfied or becomes unenforceable because of a lapse of time."

A public agency receiving such a Notice from ESD would be obligated to follow chapter 60.28 RCW which regulates release of retainage. In reading chapter 60.28 RCW as a while, the order of priority, in the event there are more claims than funds retained, is as follows:

1. Workers for payment of prevailing wages
2. State Department of Revenue for unpaid taxes
3. Subcontractors, suppliers, and materialmen
4. Other taxes due
5. The public Owner

A Notice and Order to Withhold and Deliver from ESD, assuming the retainage had not yet been released, would fall under item 4 above, other taxes due.

However, once the public agency releases retainage (upon receipt of all statutory releases - Revenue, and prevailing wage froms, etc., except for the ESD release), they would no longer have funds of the contractor in their possession should ESD file with the public agency a Notice and Order to Withhold and Deliver. And unlike the Department of Revenue which has statutory authority for requiring public agencies not to release retainage until their release is received, there is no such requirement to obtain the ESD release prior to release of retainage.

While I have generally advised public agencies to obtain the ESD release as a matter of policy prior to releasing retainage, I think it is really up to each agency to decide how to proceed in this area, perhaps on a case-by-case basis.

Please contact me know if you have any questions about this subject, or if you would like to schedule me for providing training on the close-out process for public works projects, release of retainage, and managing claims filed against the Payment Bond and retainage.