Subcontractor Wages: Closing the Loopholes

by Michael J. Baker and Christy D. Joseph

This year California ushered in a new law effective January 1, 2018 for private works construction contracts, California’s Labor Code section 218.7. The law applies to all direct contractors who make or take the contract in California for the “…erection, construction, alteration, or repair of a building, structure…” who 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. This applies to wages incurred by the subcontractor of any tier, 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 payments or contributions, including interest. It does not apply to penalties or liquidated damages.

This law has a laudable goal: making sure employees’ wages are paid. In the construction industry, that now includes the ability to tap any “direct contractor” on the shoulder to collect those wages. That goes for the wages of “…any subcontractor at any tier acting under, by, or for the direct contractor…” On a large project the list of subcontractors and all their tiers might be extensive. This new labor code provision by its terms states that it is only unpaid wages, fringe or other benefit contributions and interest owed that may be sought against the subcontractor, not penalties or liquidated damages. Unfortunately, the section also states that the obligations and remedies are in addition to those otherwise provided by law, even though it goes on to state that nothing in this section shall be construed to impose liability on the direct contractor other than for unpaid wages, fringe benefits and interest. 

Some may have taken comfort in the language that seemed to limit the enforcement of actions under this provision to either the Labor Commissioner, a third-party owed fringe benefits, or a union. But wait! California’s Labor Code section 2699, the Private Attorney General Act – better known as PAGA – deputizes any “aggrieved employee” to act on behalf of the Labor Commissioner to bring a claim on behalf of all aggrieved employees for any violation of the Labor Code after first following certain notice procedures. Furthermore, PAGA actions are afforded class status without an aggrieved employee ever having to seek class approval. There can be hefty penalties in a PAGA action, most of which go to the state not the aggrieved employees.

The only good news is that Labor Code section 218.7 seems to fall within the provision that will at least allow an employer to avoid the PAGA liability and penalties if they act with some haste – 33 days from the postmark of a PAGA notice letter – and correct the alleged violation. Unfortunately, whether or not there even is a violation is often a matter hotly in dispute, especially if it is alleged as to a large base of workers, so the challenges remain. Another unanswered question, one subject to voluminous litigation, is whether those unpaid wages can include meal and rest break penalties. Granted Labor Code section 218.7 excludes penalties, but the California Supreme Court opined some years ago, that meal and rest break penalties are “penalty wages” and thus subject to the three year statute of limitations for wages and not the one year statute of limitations for penalties. It’s no wonder that employers are left scratching their heads for understanding. 

Conclusion
What steps can you take to modify these risks? As is often the best practice in construction you need to document the facts. Employers should document meal and work break periods and require your subcontractor to complete a “Statement of Non-Performance of Work” if no labor or work is performed for a specific week or day on the project by the subcontractor, use software to document payroll certification, create contract forms requiring affirmative certification of payroll and labor compliance, enforce compliance through financial means including withholding for disputed sums which is allowed under the law. It is worth the time and effort to create some simple forms and a contract procedure for submitting the information as part of the payment application. Implementing such a process will help document compliance with Labor Code section 218.7 and protect you from potential loopholes.