Prime Contractors Take Note of New California Law Imposing Liability for Subcontractors’ Employees’ Unpaid Wages


California is imposing greater responsibilities on prime contractors for nonpayment of wages and benefits by their subcontractors. On October 14, Governor Jerry Brown signed into law Assembly Bill 1701 (Thurmond), adding Section 218.7 to the California Labor Code. Labor Code § 218.7(a)(1) requires prime contractors, on all private construction contracts entered into beginning January 1, 2018, to assume and be liable for any unpaid wages or fringe benefits incurred by subcontractors of any tier. Although this liability extends to unpaid wages, benefit payments, and union contributions (including interest thereon), it does not extend to any penalties or liquidated damages resulting from a subcontractor’s failure to make such payments in the first instance. As a result, going forward in California, prime contractors on private projects will need to be as involved in monitoring their subcontractors’ payroll practices as their public works counterparts.

While the new law also forbids the prime contractor or any other person from evading or negating the protections of the law, it expressly allows contractors of any tier to provide for contractual remedies against downstream subcontractors who fail to timely pay their workers. So while a prime contractor, for example, can require its subcontractors to defend and indemnify it in any suits brought by sub-subcontractors, the prime cannot escape liability to the unpaid claimants themselves for the subcontractor’s non-payment of wages.

How else can prime contractors protect themselves?

Although prime contractors can protect themselves by requiring subcontractors to post payment and performance bonds, this is not a panacea. First, the subcontractors most likely to fall into arrears on their payroll contributions are also those least likely to qualify for bonding.  Second, requiring all subcontractors to provide bonds will increase the prime contractor’s bid price, making it less competitive.

So, how else can a contractor protect itself?  With information about the potential wage claimants, for starters. Labor Code § 218.7(f)(1) requires subcontractor to provide specified payroll records upon the request of the prime and higher-tier subcontractors (i.e., records, which, at a minimum, contain the information set forth in [Labor Code § 226(a)], and which are payroll records as contemplated by [Labor Code § 1174]). These records are subject to the partial redaction of social security numbers, but must contain information sufficient to apprise the requesting contractor of the status of the subcontractor’s payment of wages, fringe or other benefit payments or contributions to a third party on the employee’s behalf. In addition, the law requires subcontractors, upon request, to provide “award information, including the project name, name and address of the subcontractor, contractor with whom the subcontractor is under contract, anticipated start date, duration, and estimated journeymen and apprentice hours, and contact information for its subcontractors on the project.” This information will help the prime contractor track payroll data against projected targets.

In addition, a prime contractor can require subcontractors to provide payroll records before issuing payment intended to compensate potential wage claimants, and verifying that all wages and benefits have been paid by subcontractors of any tier. Prime contractors can withhold payment for a subcontractor’s failure to provide the requested or contractually required information. Although a subcontractor’s failure to provide the required payroll records does not relieve the prime contractor from its liability to the claimants, Labor Code § 218.7(i) allows the prime contractor to withhold as “disputed” all sums owed if a subcontractor does not timely provide the requested payroll information, until that information is provided. This allows a careful prime contractor to avoid the risk of double payment (e.g., being liable to the union for monies already paid to an insolvent subcontractor). However, the prime contractor will need to protect itself against the impact of pay disputes in its relationship with the project owner (e.g., delayed receipt of subcontractors’ lien releases for progress and retention payments).

Further, as mentioned above, prime contractors should include indemnity language in their subcontracts. More specifically, they should require all subcontractors to (a) provide the payroll records for the subcontractor and its sub-tiers on a weekly or monthly basis, (b) include language in their sub-subcontracts requiring the same documents to be given to the subcontractors, and (c) defend any claims for non-payment of wages or benefits, and indemnify and hold them harmless for any liability, including attorneys’ fees and costs, arising out of such claims. Such clauses should extend the defense and indemnity obligations to claims arising out of the alleged non-payment of wages and benefits by the subcontractor’s sub-subcontractors of any tier.

Who may enforce the new law?

The new law authorizes the Labor Commissioner to pursue the prime contractor under Labor Code §§ 98 or 1197.1, or through a civil action, but limits the prime contractor’s liability to the Commissioner to unpaid wages, and any accrued interest.

The law also authorizes third parties owed fringe or other benefit payments or contributions on a wage claimant’s behalf (such as Union Trust Funds) to bring a civil action against a prime contractor to seek payment of such benefits, and provides that the court “shall award a prevailing plaintiff in such an action its reasonable attorney’s fees and costs, including expert witness fees.” Thus, whether a project is private or public, Union Trust Funds will recover their fees and costs of pursuing contractors for the overdue contributions of their signatories.

Industry trade organizations can also enforce the new law. Labor Code § 218.7(b)(3) further authorizes a joint labor-management cooperation committee established pursuant to the federal Labor Management Cooperation Act of 1978, 29 U.S.C. § 175a, to sue prime contractors or subcontractors of any tier for unpaid wages owed to a wage claimant for the performance of private work. Prior to commencing an action, the committee is required to provide the prime contractor and subcontractor that employed the wage claimant with at least 30 days’ notice by first-class mail describing the general nature of the claim. As with actions by Union Trust Funds, the court shall award a prevailing plaintiff—but not a prevailing contractor—its reasonable attorney’s fees and costs, including expert witness fees.

Although no other party may bring an action against a prime contractor to enforce the liability created by Labor Code § 217.7(a), the large number of parties who can bring such actions to enforce the new law drives home the need for prime contractors on private work to become far more involved in their subcontractors’ payroll practices than in the past.