Preventing Contractor Loss for Sub Failure to Pay Employees

A.B. 1701, effective January 1, 2018, made "direct contractors" liable for all wages and benefits that any subcontractor at any level on a job fails to pay its workers, plus accrued interest. The resulting law, Labor Code 218.7, applies to any California contractor having a direct contract with an owner "for the erection, construction, alteration, or repair of a building, structure, or other private work."

SB 727, effective January 1, 2022 as Labor Code 218.8, will make direct contractors also liable for penalties and liquidated damages for subcontractor non-payment of workers if the contractor:

• "Had direct knowledge of the subcontractor's failure to pay the specified wage, fringe or other benefit payment or contribution";

• Did not monitor required wage and benefit payments by periodically reviewing subcontractor payroll records containing the information on payroll documents compliant with Labor Code 226(a);

• Did not take steps to rectify such a situation upon learning of it, including withholding sufficient payment from the subcontractor; or

• Prior to making final payment to the subcontractor for work performed, did not obtain a sworn written statement confirming the subcontractor has paid all wages and benefits due its employees for the project.

The expanded law will still permit the Labor Commissioner and other third parties including labor unions to enforce these provisions against direct contractors via administrative or civil actions. However, subcontractor employees may not bring an action themselves.

Take-aways: Direct contractors should include in their written subcontractor agreements:

1. Confirmation of subcontractor obligations to pay workers for all wages and benefits;

1. As a condition of payments for services, requirement to provide the direct contractor full payroll and benefits information for each preceding pay period; and

1. Set-aside, indemnification, withholding and/or bonding provisions to promptly compensate a direct contractor for payments to subcontractor workers under the Act.

Best practices also include qualified legal guidance to formulate the contract terms establishing these safeguards.

For more information, please contact Tim Bowles, Cindy Bamforth or Helena Kobrin.

See also:

• Bullet Dodging Part 4 - Building Subcontractors' Exemption From the Strict New Limits on Who is "Independent" (October 31, 2019)
• What's in a Name? - Employers Must Heed Pay Stub Technicalities (May 17, 2019)
• Correct Pay Stubs Save Bucks - Learn California's Specific Pay Stub Requirements to Avoid Penalties (May 3, 2018)
• What's New for 2018 Contractors Liable For Wages And Benefits If Subcontractors Don't Pay Their Employees (January 11, 2018)

Helena Kobrin
October 14, 2021