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By Jeremy Nisen
April 16, 2018
Last fall, California's AB 1701 passed and went into effect this year as California Labor Code Section 218.7. The law puts more responsibility on a project's general contractor for wages and benefits owed to those working for a subcontractor. However, what is the extent of those responsibilities and potential liabilities? To clear up possible confusion, we spoke to some experts who helped us flesh out the new law, what it means right now, where it’s headed, and what a GC should know about it.
Randy Ruff, an attorney who heads the construction practice at Ogletree, Deakins, Nash, Smoak & Stewart, P.C., provided an accessible explanation of what the bill means.
"This bill makes general contractors for residential and commercial building projects liable for unpaid wages and benefits of their subcontractors’ and sub-subcontractors’ employees. It allows the employees, the California Labor Commissioner, Benefits Funds, or a joint labor-management union committee to sue for unpaid wages and benefits and recover attorneys’ fees and interest," said Ruff.
Furthermore, the law requires subcontractors to give the GC detailed payroll information to validate that the subs are paying their workers and allows the GCs to withhold payment if the subs refuse.
“If a subcontractor receives a progress payment and fails to pay its employees, the general contractor will wind up paying those employees out of its own pocket—effectively paying twice for the same work,” added Ruff.
Peter Tateishi, CEO of the Associated General Contractors of California, also emphasized that the bill requires subcontractors to give the GC transparency and access to their records. Tateishi, in fact, characterized Section 218.7 as largely being an added layer of compliance for the GC.
"It's a new layer of oversight for GCs working with subs, so that does add time and labor on our end," he explained. "Compliance can be a costly function, but this is the new reality we're living in."
He said that among the new law’s ramifications is the need to design contracts differently to ensure the GC's ability to inspect records "and ensure subcontractors are meeting deliverables in terms of wages and fringe benefits."
Ruff contends that the bill "essentially turns every private construction job into a certified payroll job."
"Weekly certified payroll reporting is common in federal, state, and local government contracting, but not in private residential and commercial construction. The bill will require additional back-of-the-house administration efforts on the part of every contractor and subcontractor to prove on a continuing basis that every employee of every tier on the project is correctly classified and is being properly paid."
Mike Wilson, who is also a construction attorney at Ogletree, Deakins, based in the firm's San Francisco office, helped us understand what this could mean in practical terms. He says that, as recently implemented, it is still too early to gauge what the immediate impact of this law will be.
"Even though the Labor Commissioner has already issued multi-million dollar citations for Labor Code violations, enforcement of section 218.7 will not likely lead to many newsworthy cases because the affected employee(s) will typically file claims against its direct employer (the subcontractor) first," Wilson explained.
The Labor Commissioner will likely assist any affected employees with recouping their wages from the subcontractor, and only look to the general contractor in situations where the subcontractor is under significant financial stress.
Nevertheless, Wilson also indicated there is a likelihood this new law will increase a GCs' costs of doing business—costs that he reminds us will be passed along to the consumer.
"In terms of profits and liability, general contractors will quickly realize that the larger the project, the larger the potential exposure under this new law," he said. “If the general contractor is required to pay twice for work performed by its subcontractor’s employees and to be liable for a claimant’s attorney’s fees and costs, those extra expenses can significantly cut into profit margins.”
For this reason, section 218.7 provides another avenue for general contractors and certain subcontractors to ensure that their contracts have good indemnity provisions, especially since wage claims are typically not covered by insurance.
Meanwhile, this section will also be a big boon for those subcontractors who have a reputation for taking care of their employees. A GC will have greater confidence that using the right subcontractor will not affect profit or increase potential liability.
Tateishi indicated that while the Associated General Contractors of California took a neutral position on AB 1701, it did so with the promise of a follow-up "cleanup bill" in the new year. He said that AB 1565, "an urgent trailer bill, which means it will go into effect with signature if passed," seeks to clarify some of a GC's obligations under section 218.7.
"It alleviates some of the pain of what can happen if the subcontractor fails to pay," Tateishi explained, leaving the general contractor only responsible for wages and fringe benefits—not other penalties. He said that it's being worked on now, and he is optimistic that AB 1565 could potentially be implemented by the new fiscal year or late summer.
Of course, the exact language and ramifications won't be known until that time, so it is something for GCs to keep their eyes on.
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