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November 8, 2017

General Contractors Potentially Liable for Their Subcontractors’ Failure to Pay Wages and Other Fringe Benefits Under Private Works Construction Contracts Entered on or after January 1, 2018


On October 14, 2017, Governor Brown signed Assembly Bill (AB) 1701 into law as California Labor Code § 218.7. This newly enacted law imposes potentially significant liability on general contractors for their subcontractors’ failure to pay wages, fringe, or other benefits to laborers. The following is a brief overview of AB 1701’s application:

  • Applies to construction contracts "for the erection, construction, alteration, or repair of a building, structure, or other private work" entered on or after January 1, 2018; and
  • Makes direct contractors liable for subcontractors’ failure to pay wage, fringe, or other benefit payments or contributions (at any tier); and
  • Liability includes subcontractors’ failure to pay any interest incurred on such wages, fringe, or other benefits, but does not extend to penalties or liquidated damages; and
  • Extends claim rights to unpaid wage, fringe benefit or other benefits for labor performed on the project to third parties on the wage claimants’ behalf (e.g. the Labor Commissioner, joint labor-management cooperation committees or union trust funds; but
  • Claimants have one year from the earlier of the following dates to file actions against the direct contractors, when:
     
    1. A Notice of Completion of the direct contract is recorded;
    2. A Notice of Cessation of the direct contract is recorded; or
    3. The work covered by the direct contract is actually completed; and
       
  • Attorneys’ fees and costs, including expert witness fees, shall be awarded by the court to prevailing third party claimants and joint labor-management cooperation committee claimants in any actions under this section; however, if the contractor prevails in the action, there is no reciprocal attorneys’ fees and costs provision.

What Can General Contractors Do? General contractors can take a number of steps to protect themselves and shift the burden of this liability.

  1. Secure Broad Indemnity Rights. General contractors can include broad indemnity provisions that include claims arising from the subcontractor’s failure to pay wages and fringe benefits to laborers on the project.
  2. Require Payment Bonds from Subcontractors. General contractors may require subcontractors, and their sub-subcontractors, to provide payment bonds. The inability or unwillingness to provide a bond may be a red flag of financial distress.
  3. Select Financially Secure, Trustworthy Subcontractors. Now, more than ever, it is important that general contractors be selective in choosing subcontractors and should engage subcontractors who have a proven track record or demonstrate financial solvency.
  4. Monitor Subcontractors’ Payroll Records throughout the Project. Subcontractors must provide payroll records to general contractors upon request. It is incumbent on general contractors to request these payroll records and review them throughout the project to make sure the subcontractor is paying the wages and fringe benefits to assess compliance and mitigate potential risks. Records similar to certified payroll reports required on prevailing wage projects should be required.

    While a subcontractor’s failure to provide these records will not serve to relieve the general contractor of any potential liability under this section, the failure will serve as grounds for the general contractor to withhold as "disputed," all sums owed until the subcontractor provides the requested records.

    General contractors can also include contract provisions requiring subcontractors to provide the necessary payroll records upon request and failure to provide the records could be grounds for termination.
     
  5. Timely Pay Subcontractors for Undisputed Work. AB 1701 specifically provides that nothing in this section shall alter the general contractor’s obligation to timely pay its subcontractors on the project or
    otherwise face potential prompt payment penalties. Accordingly, unless there is a sufficient reason to withhold sums as "disputed," general contractors should continue to timely pay their subcontractors.

What Can Owners Do? Be cautious in selecting the general contractor and ensure the general contractor is cautious and selective in choosing subcontractors to perform work on the projects. AB 1701 specifically provides that nothing in this section shall alter the owner’s obligation to timely pay the general contractor. Accordingly, owners should continue to timely pay their general contractors or otherwise face potential prompt payment penalties.

What Should Subcontractors Do? Subcontractors at every tier should keep and maintain accurate payroll records in order to: (1) provide such records upon the general contractor’s request, and thereby avoid payment withholds over "disputed" sums; and (2) have accurate documentation to defend against any potential claims.

General contractors, owners, and subcontractors with questions regarding the implications of AB 1701 may direct their inquiries to the authors of this alert or their usual contacts at AALRR and register for the upcoming breakfast briefing on November 30, 2017.

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