General Contractor’s Potential Liability for Unpaid Subcontractor Wages – Assembly Bill 1701 (Labor Code 218.7)

Jase Hamilton, CPCU, AFSB
The State of California has passed a number of new laws in recent years but none has been so widely discussed by the construction industry as Assembly Bill 1701 (Labor Code 218.7). This new law extends liability to a general contractor on a private construction project for unpaid wages, fringe, and other benefits owed to a subcontractor’s employees. This is regardless of the tier of the subcontractor or if the subcontractor has already been paid or not.

Before discussing possible protections, there are a few key components of the law to mention:

  • The new law became effective January 1, 2018;
  • All claims against the general contractor must be made within one year of the earliest of the recording of the notice of completion, the recording of the notice of termination of work, or the actual completion date;
  • The general contractor can seek indemnity from the subcontractor to recover costs incurred as result of a claim;
  • If requested by the general contractor, the subcontractor is required to provide its payroll records to show compliance with its wage obligations on the project; and
  • Claims are limited to unpaid wages, fringes, and other benefits, and may not include claims for liquidated damages or penalties.

How to Protect Your Company

When new and potentially unfavorable laws are enacted, there is usually an immediate scramble to avoid the negative impacts it may bring. However, as a general contractor, claims cannot be fully avoided. Like many other exposures to loss, the best practice is to implement procedures that reduce the possibility of a claim.

Drafting a favorable contract is a good first line of defense. This includes but is not limited to:

  • Including language that shifts the liability created by the new law back to the subcontractor.  For example, the general contract should include language affirming that every subcontractor is accountable for full and timely payment of their workers and all sub-tier subcontractor’s workers;
  • Requiring subcontractors (all tiers) to provide time cards and wage statements monthly with their pay applications. If the subcontractor fails to provide this information, they do not get paid;
  • Including a comprehensive indemnity clause and/or obtaining personal guarantees from subcontractors at all tiers; and
  • Requiring the subcontractors to defend the upstream party in the event a claim is made under the new law. This requirement should be outlined in the indemnity clause and/or defense clause.

Performance and Payment Bonds

A second line of defense and more secure solution is for the general contractor to require its subcontractors to provide performance and payment bonds.  The performance bond protects the general contractor (obligee on a subcontract bond) from losses in the event that the subcontractor fails to perform the contract. The payment bond guarantees that the subcontractor will pay their workers, subcontractors, and materials suppliers and that the project will be a lien-free project. Requiring performance and payments bonds from your subcontractors transfers the risk of a subcontractor’s non-performance and non-payment to the surety company.

With the introduction of this new law, it is even more critical for general contractors to thoroughly prequalify their subcontractors and implement safeguards to protect them from undue claims. Adding contract language/provisions that transfer the burden back to the subcontractor and implementing additional risk mitigation requirements surrounding tracking payroll should now be a staple of all subcontracts on private construction projects.

If you have additional questions regarding this Bill or if we can be of direct assistance, please do not hesitate to contact us.

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Note:  This document is provided for informational purposes only and does not purport to be a legal opinion. For legal assistance, please consult your attorney.