You Are Your Brother’s Keeper. Direct Contractors in California Now Responsible for Wage Obligations of Subcontractors

by Wendel, Rosen, Black & Dean LLP

If there’s one law from the 2017 Legislative Session that’s garnered a lot of attention in the construction press, it’s AB 1701. 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 a subcontractor of any tier to their workers. Here’s what you need to know about AB 1701.

What code section did AB 1701 amend?

AB 1701 added a a new section 218.7 to the Labor Code.

To whom does AB 1701 apply?

AB 1701 applies to direct contractors only. A direct contractor is defined as a “contractor that has a direct contractual relationship with an owner.”

On what types of projects does AB 1701 apply?

AB 1701 applies to private works projects only.

When does AB 1701 take effect?

AB 1701 took effect on January 1, 2018 and applies to all contracts entered into on or after January 1, 2018.

What is a direct contractor’s liability under AB 1701?

A direct contractor can be found liable for unpaid wages, fringe or other benefit payments or contributions, including interest, but excluding penalties or liquidated damages, owed by a subcontractor of any tier to their workers on a project.  The law limits a direct contractor’s liability to a worker’s performance of labor included as part of the contract between a direct contractor and owner.

Who can bring a claim against a direct contractor under AB 1701?

The following parties may bring a claim against a direct contractor under AB 1701:

  1. The Labor Commissioner can bring an administrative action, issue a citation, or bring a civil lawsuit against a direct contractor.
  2. Third parties owed fringe or other benefit payments or contributions on behalf of a worker, such as union trust funds, may bring a civil lawsuit to collect unpaid wages, fringe or other benefit payments or contributions and interest. Not only that, they may seek reasonable attorney’s fees and costs including expert fees.
  3. Joint labor-management cooperation committees established pursuant to the Labor Management Cooperation Act of 1978 may bring a civil action and, in addition unpaid wages, fringe or other benefit payments or contributions as well as interest, may seek reasonable attorney’s fees and costs including expert fees. However, before bringing a civil action, notice must be provided by first class mail at least thirty (30) days in advance.   A joint labor management cooperation may also bring a civil action against a subcontractor.

Note: AB 1701 does not permit a subcontractor’s workers to bring a claim directly against a direct contractor.

When must a claim be brought under AB 1701?

A claim must be brought within one (1) year of the earliest of the following:

  1. Recordation of a notice of completion
  2. Recordation of a notice of cessation
  3. Actual completion of the work covered by the direct contract.

Note: If a judgment is entered against a direct contractor under AB 1701, the prevailing party is allowed to seek an attachment to property owned by the direct contractor to pay off the judgment.

What can a direct contractor do to prevent claims under AB 1701?

Upon request by a direct contractor, a subcontractor of any tier must provide the direct contractor the following information:

  1. Payroll records for each worker showing: (a) gross wages earned; (b) total hours worked; (c) the number of piece-rate units earned and applicable piece rate, if applicable; (d) all deductions; (e) net wages earned; (f) inclusive dates of the prior period for which the employee is paid (g) the name of the employee and the last four digits of the worker’s social security number or employee identification number; (h) the name and address of the employer; and (i) all applicable hourly rates in effect during the pay period and the corresponding number of hours worked at each hourly rate;
  2. The project name, name and address of the subcontractor, anticipated start date, duration, and estimated journeymen and apprentice hours, and contract information for its subcontractors on the project.

Note: A direct contractor may withhold as “disputed” all sums owed if a subcontractor does not timely provide the information requested under items 1 and 2, until that information is provided.

What else can direct contractors do to protect themselves from wage claims related to workers of their subcontractors?

There are several things direct contractors can do to protect themselves from wage claims by workers of their subcontractors although none is a panacea:

  1. Require subcontractors to provide the payroll information required under AB 1701: Direct contractors can include provisions in their contracts requiring their subcontractors: (a) to include for themselves and their subcontractors, with each application, the payroll information contained in AB 1701 as well as the right to audit a subcontractor’s payroll records; and (b) include in the subcontractor’s agreements a provision requiring lower-tiered subcontractors to provide the same payroll information (note: this is because under AB 1701, while a direct contractor may request payroll information from a subcontractor of any tier, unless the direct contractor is in contract with a second-tier or lower subcontractor directly, such subcontractors are not required to provide the information requested by the direct contractor).
  2. Beef up their indemnity provisions: Direct contractors can beef up the indemnity provisions in their subcontracts to provide that their subcontractors must defend and indemnify the direct contractor should a claim be made for unpaid wages and unpaid fringe or other benefit payments or contributions, including interest, by or on behalf of subcontractor’s employees or the employees of subcontractor’s sub-subcontractors of any tier on the project (note: defense and indemnity provisions are, of course, only as effective as a subcontractor is willing and able to comply with them).
  3. Require payment bonds or a letter of credit: Direct contractors can require that their subcontractors furnish payment bonds or a letter of credit for the benefit of wage claimants (note: of course, it is those subcontractors who are most unlikely to be able to pay their workers who are also the least likely to be able to qualify for bonding. Likewise, subcontractors will likely build in the cost of payment bonds in their bids).
  4. Other protections: Direct contractors can require personal guarantees by the owners, shareholders, members, managers, and partners of subcontractors for the payment of their employee’s wages (note: this isn’t commonly done and, while it may become more common, it will likely be met with some resistance). Direct contractors can also withhold retention and hold retention until the one (1) year statutory deadline (note: again, this isn’t commonly done and may likely be met with some resistance).

Photo credit: bridgesward, CC0 Creative Commons

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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