General Contractor Payment of Subcontractor Employees

Holiday Season To Do List For General Contractors: 1) Trim The Tree; 2) Buy Gifts for Family; 3) Enter Into All Pending Contracts With Subcontractors Before January 1, 2018

On October 14, 2017, Governor Jerry Brown signed Assembly Bill 1701 into law.  AB 1701 requires general contractors to pay the unpaid wages of their subcontractors’ employees.  The bill will apply to all private construction project contracts entered on or after January 1, 2018. So this year, New Year’s Eve nights may not be the only cause of early 2018 headaches for general contractors in California.  But just because Times Square drops the ball, doesn’t mean general contractors must do so as well.

To the extent possible, general contractors should enter into any contracts with subcontractors before the calendar flips to 2018 in order to avoid the increased liability provided by AB 1701. Where this is not possible, general contractors should begin 2018 by reviewing and revising their subcontracts and their management systems to monitor subcontractor compliance. Incorporating these new changes during the negotiation of new subcontracts in 2018 can decrease a general contractor’s exposure to liability following implementation of the new law.

AB 1701 gives the California Labor Commissioner, labor-management cooperation committees, and unions the right to bring an action against any party with a direct contractual relationship with the owner for the unpaid wages or unpaid benefits of a subcontractor’s employee. The general contractor is strictly liable for the unpaid wages, including fringe benefits and other contributions, even where the direct contractor already paid the subcontractor in full yet the subcontractor still failed to pay wages to its employees. The new law is loaded against general contractors in many aspects. For example, a prevailing plaintiff is entitled to recovery of attorney’s fees, expert fees and costs, while a prevailing contractor is not. Further, an action can be brought under the statute at any time within one year of project completion.

AB 1701 provides that upon request by the general contractor, subcontractors must turn over payroll records and project award information.  AB 1701 also allows the direct contractor to withhold disputed sums until the information requested is provided. However, such withholding may cause nonpayment by the subcontractor to its employees which the general contractor will ultimately liable for under AB 1701 anyway. Further, such withholding could cause a chain reaction including work stoppage, increased change order requests and an overall increase in construction costs.

The best practice will be for general contractors to make (and actually stick to them) New Year’s resolutions to prepare for the law that comes into effect in 2018, that include:

  • Implement a system that will allow the general contractor to monitor and verify, in real time, its subcontractors’ payments to employees. Ideally, implement a system to confirm evidence of payment such as a signed acknowledgment of payment by each subcontractor’s employee;
  • Include broad audit provisions in subcontracts requiring subcontractors and sub-subcontractors to provide payroll records and project award information at specific intervals and within 24 hours upon the general contractor’s request;
  • Include broad defense and indemnity provisions in subcontracts requiring the subcontractors to defend and indemnify the general contractor, and require subcontractors to include a similar provision in their own subcontracts that would require lower tier subcontractors to also defend and indemnify the general contractor for claims arising from their respective employees’ work;
  • Include a provision in subcontracts giving the general contractor the power to approve or reject the hiring of subcontractors of all tiers;
  • Require personal guarantees from owners, partners or other key subcontractor personnel;
  • Require subcontractors at every tier to be bonded.

Finally, and perhaps most significantly, AB 1701 makes it now more important than ever for general contractors in California to ensure they are doing business with reputable and accountable subcontractors. Under the new legal landscape, selection of a subcontractor solely on the basis of the lowest bid could be a post-holiday recipe for disaster.

 

David W. Wolfe is a contract attorney with Porter Simon licensed in California, with offices in Truckee and Tahoe City, California, and Reno, Nevada.

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The content contained and opinions expressed in this blog are solely those of the author. This blog contains content and opinions concerning the law generally, and is not intended to constitute legal advice or to create any attorney‑client relationship with the reader. The reader should consult with an attorney about any specific legal issues prior to embarking on any course of action or inaction involving legal matters. The author makes no claims, promises or guarantees about the accuracy, completeness, or adequacy of the contents of this blog and expressly disclaims liability for any errors and omissions.