New California Law Makes Direct Contractors Liable for Unpaid Wage Obligations of Subcontractors

Feb 26, 2018

AB 1701 places the burden on direct contractors to protect themselves from these claims.

The 2017 California Legislature passed AB 1701 making direct contractors (contractors dealing directly with owners) responsible for the wage obligations of their subcontractors.

An article in California Construction Law Blog by Garret Murai outlines the provisions of the new law and explains what direct contractors can do to protect themselves from these claims.

“Under Ab 1701, beginning January 1, 2018, for contracts entered into on or after January 1, 2018, direct contractors may be found liable for unpaid wages, fringe or other benefit payments or contributions, including interest, but excluding penalties or liquidated damages, owed by subcontractors of any tier to their workers.” In other words, under the new law, if a subcontractor to one of a general contractor’s subcontractors fails to meet its labor obligations, the general contractor is potentially liable even if it is completely unaware that this sub to a subcontractor has employees working on a project.

This obligation is limited “to a worker’s performance of labor included as part of the contract between a direct contractor and owner.”

The claim cannot be filed by the worker; it must be brought by a third party representing the wage earner, such as the Labor Commissioner, union trusts, or joint labor-management cooperation committees.

Direct contractors can protect themselves by requiring subcontractors to supply detailed information, including payroll records, hours worked, labor rates, and fringe benefits for all workers on their projects.

“A direct contractor may withhold as ‘disputed’ all sums owed if a subcontractor does not timely provide the information requested … until that information is provided.”

Mr. Murai recommends that direct contractors contractually obligate subcontractors to provide the information required under AB 1701; “beef up their indemnity provisions … require bonds or a letter of credit”…. [and] “require personal guarantees” from owners and other principals of subcontracting companies.

This is yet another issue that makes it imperative that contractors stay abreast of the latest legal developments affecting the construction industry, and have legal counsel prepare and review all legal documents before they are signed.

Source—

You Are Your Brother’s Keeper. Direct Contractors in California Now Responsible for Wage Obligations of Subcontractors, Garret Murai, California Construction Law Blog, Jan. 22, 2018.