SB 727: Direct Contractors’ Liability Expanded to Include Damages and Penalties for Private Works of Improvement

03.31.2022

With the enactment of Senate Bill (“S.B.”) 727 into law, a direct contractor’s liability for unpaid wages, fringe, or other benefit payments or contributions, including interest, owed by a subcontractor on account of the performance of labor is expanded to include penalties and liquidated damages for contracts entered into for private works of improvement on or after January 1, 2022.

S.B. 727 amends Labor Code Section 218.7 and provides that it shall only apply to contracts entered into between January 1, 2018 and December 31, 2021. Contracts entered into on or after January 1, 2022 will be subject to the new Labor Code Section 218.8.

Under Section 218.8, important provisions include:

Contractors are required to monitor payments by the subcontractor of wage, fringe or other benefit payment or contribution to the employees or the labor trust fund by periodically reviewing subcontractor payroll records.
Upon becoming aware of a subcontractor’s failure to pay wages, fringe, or other benefit payments or contributions, the contractor is required to diligently take corrective action to halt or rectify the failure, including, but not limited to, retaining sufficient funds to be paid to the subcontractor for work performed on the private construction project.
Prior to making final payment to the subcontractor for work performed, the contractor must obtain a signed affidavit from the subcontractor that the subcontractor has paid the wages and benefits due the employees or the labor trust fund for all work performed.
The Labor Commissioner may enforce against a direct contractor the liability for unpaid wages, liquidated damages, interest, and penalties created by subdivision (a) pursuant to Section 98 or 1197.1, or through a civil action.

In order for a direct contractor to meet these requirements, Section 218.8 requires subcontractors provide payroll records for its employees upon request and provide information regarding the project name, anticipated start date, duration, and estimated journeymen and apprentice hours, and contact information for its employees on the project. Section 218.8 also provides that direct contractors may withhold as “disputed” all sums owed if a subcontractor does not timely provide the information requested and until that information is provided.

Construction projects often involve many subcontractors and individuals providing a variety of services or equipment. This new law is significant because it will undoubtedly increase costs by requiring contractors to incorporate new processes to periodically surveil subcontractors’ payroll records and develop procedures for taking corrective action to rectify a subcontractor’s malfeasance. Therefore, it is imperative for contractors to evaluate their current business operations and consider how they can adapt to the requirements of this new law.

Contractors are encouraged to closely vet subcontractors when evaluating bids for private construction contracts. It is important for contractors to inquire into the terms of a private works contract and determine whether releases from the laborers are secured. Contractors may also want to demand proof that wages and benefits have been paid to the subcontractor’s employees before issuing payment on a private construction project. Furthermore, Contractors may request extensive documentation pertaining to the subcontractor’s finances on the project, including credit reports, and require a 10% retention (or more) if there are any doubts regarding a subcontractor’s diligence in timely paying all wages and benefits. In extreme circumstances, contractors may even consider securing a payment bond and ensure that final payments are not issued until proof is provided that all employees have been paid by including this language as a requirement in construction contracts.

It will be crucial for contractors to work with trusted subcontractors who are cognizant of this new law and can demonstrate they have integrated procedures for ensuring proper payments of wage, fringe, or other benefit payment or contributions to the employees. Despite the requirements of the new law, contractors can protect themselves from exposure and avoid liability by planning ahead and integrating new processes into their business operations.

Contractors with questions regarding this law may contact the authors or their usual counsel at Atkinson, Andelson, Loya, Ruud & Romo.