Under A.B. 1701 (the Act), effective January 1, 2018, a “direct contractor” engaged in “the erection, construction, alteration, or repair of a building, structure, or other private work” becomes liable for all wages and benefits that any subcontractor at any level on that job fails to pay its workers. “Direct contractor” is defined in Civil Code 8018 as “a contractor who has a direct contractual relationship with an owner.”

The Department of Labor or various third parties, including labor unions and federally established joint labor-management cooperation committees, may enforce the Act against direct contractors via administrative or civil actions. However, subcontractor employees may not bring an action themselves.

The Act limits a direct contractor’s liability to “any unpaid wage, fringe or other benefit payment or contribution, including interest owed.” Such contractor would not be obligated to pay any penalties or liquidated damages.

To provide a measure of prior warning and prevention, the Act enables direct contractors to require subcontractors to provide payroll records, including pay stub information under Labor Code 226(a) and the status of fringe or other benefit payments. See also California’s Itemized Pay Stub Requirements, (March 2016).

A direct contractor may withhold as “disputed” any and all payments to a subcontractor until the latter provides the requested records.

A direct contractor is also free to “establish by contract or enforce any otherwise lawful remedies against a subcontractor it hires for liability created by the nonpayment of wages, fringe or other benefit payments.”

Direct contractors should consider better protecting themselves against the consequences of this new law by actions such as:

1. Implement contracts with subcontractors confirming their ultimate responsibility for full wage and benefits payments to their workers;

2. Ensure such contracts require subcontractors, as a condition of payments to them for services rendered, to promptly provide the direct contractor full payroll and benefit information for each pay period;

3. Include indemnification, bonding and/or set-aside provisions in such contracts to ensure quick repayment for any amounts the direct contractor must make to subcontractor employees under the Act; and

4. Consult with a knowledgeable attorney to confirm the Act-related contract provisions needed to protect against subcontractor misconduct to the greatest extent possible.

For more information, please contact one of our attorneys, Tim Bowles, Cindy Bamforth or Helena Kobrin.

Helena Kobrin

January 11, 2018