Direct Contractors to Assume Liability for Unpaid Wages by Subcontractors on Private Works
That’s right–direct contractor liability just increased. Assembly Bill 1701, which adds section 218.7 to the Labor Code, imposes liability on direct contractors for any unpaid wages or fringe benefits owed by a defaulting subcontractor, even if the subcontractor has been paid in full.
Here’s a breakdown of the law, which goes into effect on January 1, 2018:
Who is Impacted?
Labor Code section 218.7 applies to any private works direct contractor, meaning “the [contractor] that has a direct contractual relationship with the owner.” Cal. Civ. Code § 8018.
What Are the Limits?
The bill provides that direct contractors assume, and are liable for unpaid wages, fringe or other benefit payments or contributions incurred by a subcontractor at any tier acting under, by, or for the direct contractor; however, it does not extend to penalties or liquidated damages.
Who Can Bring Suit?
The bill authorizes the Labor Commissioner to enforce liability for unpaid wages. It also permits third parties owed fringe benefits or contributions (such as union trust funds) to bring a civil action. Finally, the law permits certain joint labor-management cooperation committees to bring an action after providing at least 30 days’ notice to cure.
For the time being, the law prohibits a private right of action by individual an employee.
When Can Suit Be Brought?
An action under this statute must be brought within one year of either (i) notice of recordation of completion/cessation of the direct contract or (ii) actual completion of direct contract.
How Can Contractors Protect Themselves?
The bill provides that direct contractors may request payroll records from subcontractors at any tier to ensure proper payments are being made, and authorizes direct contractors to withhold as “disputed” all sums owed if a subcontractor does not timely provide requested payroll records. Even so, auditing the payroll of subcontractors does not relieve a direct contractor of liability under the statute
Direct contractors are therefore advised to choose their subcontractors wisely, audit subcontractor payroll where administratively feasible, and ensure their subcontracts contain broad auditing, defense, indemnity provisions, and personal guarantees from the principles of the subcontractors. Direct contractors could also contractually require subcontractors to obtain from each employee performing labor on the project, prior to payment of any progress or final payment, the applicable lien, bond or stop payment notice releases set out in Civil Code sections 8132-8138. Finally, direct contractors are advised to look into whether payment and performance bonds, or other types of insurance (such as subcontractor default insurance), can be used to protect against the risk imposed by this statute.
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