California bill mandates contractors are responsible for subcontractors' wage obligations

The law will allow general contractors to inspect subcontractor payroll records and other project information to determine whether the subcontractor is paying its employees in a timely manner.

On Oct. 14, California Gov. Jerry Brown (D) signed into law Assembly Bill 1701, which states general contractors—referred to in the bill as "direct contractors"—are responsible for any employee wage or benefit payments their subcontractors fail to make under contracts entered into after the regulation's effective date, according to www.constructiondive.com. The bill also applies to wage claims from lower-tier subcontractors or sub-subcontractors.

The law will allow general contractors to inspect subcontractor payroll records and other project information to determine whether the subcontractor is paying its employees in a timely manner. If subcontractors don't comply with requests for information, direct contractors can withhold any or all future payments until subcontractors cooperate.

However, direct contractors that must follow through on claims under AB 1701 are liable only for unpaid wages, benefits and interest—not penalties or liquidated damages related to subcontractor claims. Additionally, employees first must take their complaints to the California Labor Commissioner's Office, which pursues claims against direct contractors.

According to Tom Holsman, CEO of the Associated General Contractors of California (AGCC), the new statute stems from union concerns about contractors who were supposed to make contributions to trust funds and pay other benefits but returned to their home states or otherwise were unable to meet those obligations.

Attorney John Antracoli, a partner in the trial section and construction law group at Rutan & Tucker, Costa Mesa, Calif., says the bill is an attempt to protect smaller subcontractors from direct contractors that deny payment to get as much money as possible from a job.

Antracoli says a potential problem with the law is it could inadvertently hurt small subcontractors because direct contractors could aggressively vet subcontractors' financials, resulting in the stricter standards disqualifying smaller firms from jobs.

"This could result in less work going to smaller subcontractors, the very people you're trying to protect with this statute," he says.

Antracoli says the law also potentially could create a costly pile of paperwork as direct contractors try to obtain payroll records and other documents from subcontractors to prove they are paying their employees. Contractors will have to make the call regarding how much work they want to do.

"Construction is going bonkers," he says regarding the large number of projects underway. "Do you even have the resources to do all the checking you would want to do? Are you going to hire more people to protect you against the liability?"

Additionally, under the new law, direct contractors have the authority to change how and when subcontractors traditionally have been paid, with many simply turning in an invoice and being paid for the value of labor and materials completed during a certain time. Karina Sterman, a partner in the litigation and employment law departments of Los Angeles law firm Greenberg Glusker, says contractors could pay subcontractors separately for labor and materials, which would allow subcontractors to receive payment for materials spent on the job. However, regarding labor, direct contractors likely would "pay you after you've paid [your employees]."

Holsman says the AGCC took a neutral position on the current version of AB 1701 after working with the bill's sponsors. The group will continue working during the first quarter of 2018 to "clean up" some language, including how the bill will be enforced and who will enforce it. One of Holsman's goals is to ensure sub-subcontractors have to make claims to the subcontractor who hired them.

Editor’s note: This article first appeared on the NRCA website and can be viewed here.