Contractors on Private Works Now Liable for Unpaid Wages Owed by its Subcontractors

by Michael J. Baker and Jamie N. Furst

California enacted Assembly Bill 1701 on October 14, 2017, which adds section 218.7 to the California Labor Code. It applies to contracts entered into after January 1, 2018 for private construction projects. Under this new code section, all direct contractors (a contractor who has a direct contractual relationship with an owner, per Civil Code § 8018) who make or take a contract in California for the “erection, construction, alteration, or repair of a building, structure” must assume and be liable for debt owed to a wage claimant, or third party acting on behalf of the wage claimant, by the contractor’s subcontractor (a contractor that does not have a direct contractual relationship with an owner, per Civil Code § 8046). It applies to wages incurred by the subcontractor for the wage claimant’s performance of labor included in the subject of the original contract between the contractor and the owner. It applies only to unpaid wages, fringe benefits or other benefit payment or contribution, including interest. It does not apply to penalties or liquidated damages. 

This newly enacted section does not apply to any work performed by an employee of the state, a special district, a city, a county, a city and county, or any political subdivision of the state, because a similar law already exists that applies specifically to public works. Under existing law, employees of subcontractors may recover unpaid prevailing wages from the contractor on a public works project as “workers” employed on a public works project, under Labor Code section 1770, et seq. In fact, the state of California is authorized to withhold payment to contractors based on their subcontractor’s failure to pay wages. In turn, those contractors are authorized to withhold that payment from their subcontractors.

The Labor Commission may bring a civil action or an action under Labor Code sections 98 or 1197.1 to enforce a contractor’s liability under Labor Code section 218.7. The limit of a contractor’s liability is unpaid wages, including interest owed. A third party who is owed fringe or other benefits and joint labor-management cooperation committees have the ability to bring a civil action to enforce a contractor’s liability under this section. If the action is brought by a joint labor-management cooperation committee, the prevailing plaintiff is entitled to its reasonable attorneys’ fees and costs, including expert witness fees. Prior to bringing suit, the committee must provide a 30 day notice to the contractor.

Contractors are now authorized to request that their subcontractors provide payroll records to ensure the subcontractor is current on its payments for wage, fringe, and other benefits. The contractor may also request the subcontractor provide an estimate of journeymen and apprentice hours for that particular project, among other things. If a subcontractor does not provide the requested information, the contractor is able to withhold as “disputed” all sums owed to the subcontractor.

Labor Code section 218.7 does not limit a contractor’s ability to enforce any lawful remedies it may have against a subcontractor it hires for liability it incurs by the subcontractor’s nonpayment of wages. It also does not alter the owner’s obligations to timely pay a contractor or the contractor’s obligations to timely pay its subcontractors, except as described above.