WORKPLACE LAW – Contractors Liable for Subcontractors Failure to Pay Employees

Question: As a general contractor, what should I know about the new law that makes me responsible for wages my subcontractor owes to its employees?

Answer: For contracts entered into on or after January 1, 2018 for the erection, construction, alteration, or repair of a building, structure, or other private work, a “direct contractor” (i.e., a contractor who has a direct contractual relationship with an owner) is now jointly liable for unpaid wages, fringe benefits, or other benefit payments or contributions that the direct contractor’s subcontractor, or a lower tier subcontractor, owes to its employees for labor connected to the contract. This is true regardless of whether the direct contractor already paid the subcontractor in full for the work performed under the contract.

This new law does not make the direct contractor liable for penalties or liquidated damages associated with these claims, and it does not give the subcontractor’s employees the right to sue the direct contractor. Only the California Labor Commissioner, labor unions, and joint labor-management committees can bring a lawsuit against the direct contractor for unpaid wages owed to the subcontracted employees. The Labor Commissioner can also bring administrative claims under this new law through administrative hearings or by citation.

Notably, a labor union or joint labor-management committee that successfully brings an action under this new law is entitled to recover its attorneys’ fees and costs, including expert witness fees. The direct contractor’s property can also be attached to pay for any judgment that is entered pursuant to this new law.

To help contractors verify that subcontracted employees are being paid properly, direct contractors now have the right to request payroll records, including employee wage statements, from their subcontractors and lower tier subcontractors. Both direct contractors and subcontractors have the right to request project award information from lower tier subcontractors. Direct contractors can also withhold as “disputed” all sums owed if a subcontractor does not timely provide the requested records and information.

As a California contractor, there are steps you can take to help minimize your liability in connection with subcontracted employees. The most basic step is to ensure that you are partnering with reputable subcontractors. This law places a heavy burden on direct contractors for their subcontractors’ compliance with wage and hour law, so it is in your interest to partner only with subcontractors that you trust to follow the law, to indemnify you when wage claims arise from their employees, and to bring in only reputable lower tier subcontractors for the job.

Secondly, general contractors and developers should review and revise their contracts with legal counsel to include certain assurances, audit provisions, and indemnity provisions in relation to this new law. In addition to requiring your subcontractor to defend and indemnify you against wage claims brought by subcontractors’ employees, you may want to require that your subcontractor include a similar provision in its own contracts that would require lower tier subcontractors to also directly defend and indemnify you, as the direct contractor, for claims arising from their respective employees’ work under the contract. You may also want to consider requiring the subcontractor to post a bond to satisfy potential wage claims arising from its employees in connection with the contract.

Planning now for potential expanded wage liability is a prudent step for contractors to take to protect their business and the employees who perform work on their projects.