Effective January 2018, AB 1701, codified as Labor Code section 218.7, created general contractor liability for subcontractors’ wage violations on private construction projects. This liability had already existed for general contractors on public works pursuant to Labor Code section 1743(a). The liability created by AB 1701 extends only to any unpaid wage, fringe benefit, or other benefit payment or contribution, including interest, and does not extend to penalties or liquidated damages. AB 1701 did not grant a private right of action to workers, instead providing enforcement powers only to the Labor Commissioner, third parties owed benefit payments or contributions, and a joint labor-management cooperation committee (“LMCC”).
AB 1701 was based on the idea that general contractors, rather than workers, should bear the risk of loss when a subcontractor at any tier defaults on wage or fringe benefit obligations. The rationale is that general contractors are the best equipped to ensure that subcontractors pay workers because they hire subcontractors and are ultimately responsible for delivering a defect-free and complete project to the project owner. General contractors can request payroll and project information from subcontractors in order to monitor wage compliance, and AB 1701 allows general contractors to withhold disputed sums from any subcontractor that fails to timely provide such information upon request. However, subcontractors remain equally liable for their own debts, and AB 1701 expressly states that it does not prevent general contractors from “establishing by contract or enforcing any otherwise lawful remedies against a subcontractor it hires for liability” created by the subcontractor’s nonpayment of wages or benefits.
Last year, two laws were enacted to create and clarify liability of general contractors for their subcontractors’ failure to pay wages and benefits on private construction projects. This article summarizes these laws and suggests steps general contractors can take to ensure their subcontractors lawfully pay employees while also limiting their own exposure to litigation.
AB 1565 was a follow-up bill to AB 1701 enacted to clarify the scope of liability AB 1701 created. As urgency legislation, it went into effect immediately after Governor signed it in September 2018. AB 1565 removed language from AB 1701 stating that a general contractor’s liability for unpaid wages or benefits is in addition to any other existing rights and remedies. It also added a requirement that, before a general contractor can withhold disputed sums for a subcontractor’s failure to provide information, the contractor must specify in the relevant contract the documents and information that must be provided upon request.
Now that both AB 1701 and AB 1565 are on the books, general contractors should be proactive about monitoring their projects to ensure their subcontractors are meeting wage and benefit obligations. Doing so will help workers and benefit funds get paid timely and fully, and will limit their own exposure to litigation. At a minimum, pursuant to AB 1565, general contractors must add language to their contracts that establish which wage and benefit records a subcontractor must provide upon request. If a subcontractor does not provide the records, the general contractor should withhold disputed funds. If a subcontractor provides the records but the records reveal wage and benefit discrepancies, the general contractor should bring these discrepancies to their subcontractors’ attention and demand that the subcontractor promptly correct any shortfalls.
General contractors may also want to consider taking additional steps to hold subcontractors accountable and protect themselves from liability under these laws. First, general contractors should ensure they do business only with reputable, solvent subcontractors with a history of paying workers and benefit funds timely and fully. Second, general contractors could add a provision to their contracts requiring subcontractors to affirmatively provide signed statements of compliance with wage and hour laws on a periodic basis. This would be in addition to a subcontractor’s duty to provide wage and benefit information to the general contractor upon request, and would encourage subcontractors to track their own compliance with the laws. Finally, general contractors should consider adding additional protective measures to their contracts, such as requiring subcontractors to indemnify them for AB 1701 claims, requiring subcontractors’ owners to provide a personal guarantee against such claims, and/or requiring the subcontractor to post a bond.