On all subcontracts entered into after January 1, 2018, direct contractors (such as general contractors, home-builders, and builders/developers) could become liable for unpaid wages of employees of subcontractors on private projects under the new California Labor Code § 218.7 (AB1701). This could also impact subcontractors who are liable to direct contractors for sub-subcontractors who fail to pay their employees. Although the new law allows direct contractors to request payroll information from subcontractors, direct contractors could get stuck paying twice for work if the subcontractor’s information is inaccurate, false, or incomplete. Therefore, the only certain way for direct contractors to avoid this liability would be to require subcontractors to provide surety bonds to the direct contractor. This will increase the cost of private projects in general and housing in particular. Although the bonding of subcontractors could increase project costs by one to two percent in added insurance costs (which is not insignificant), the requirement for bonding could preclude many small subcontractors from taking on projects that they are unable to bond. Typically, insurance companies that issue surety bonds will require a subcontractor to pledge assets and provide other financial assurances before issuing a surety bond to a direct contractor covering the subcontractor’s obligations. These financial requirements will prevent many small subcontractors and disadvantaged business enterprises from bidding on subcontracts that require bonding. The inability of small subcontractors to bid on bonded projects could significantly increase project costs beyond the one to two percent for the cost of the subcontractor surety bonds. While wage theft is a genuine concern for everyone involved in development of new housing, this new law may inadvertently have the unattended consequences of driving up the cost of housing and eliminating work for many workers that the law is intended to protect. It might be wiser for the legislature to increase the penalties for wage theft, instead of imposing liability on home-builders that could drive up costs of housing and preclude opportunities for small contractors, subcontractors, and disadvantaged business enterprises.
Other information is available on this topic at /_blog/Labor_and_Employment_Law/post/ab-1701-making-contractors-liable-for-defaulting-subcontractors/
For more information about this topic please contact:
Theodore L. Senet, Esq.
Gibbs Giden Locher Turner Senet & Wittbrodt LLP
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Los Angeles, CA 90067
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