In mid-October, California passed a bill which will make general contractors liable for any unpaid wages and fringe benefits owed to employees of subcontractors. The ruling will go into effect on Jan. 1, and will apply to all private construction projects entered into after that date.

Needless to say, the bill was met with resistance on the side of contractors who argued that it would further inflate costs which would ultimately be borne by buyers. While the bill does provide ways for contractors to seek indemnity from subcontractors who do not pay their employees, it does not offer possibilities to avoid the liability altogether.

Read on for an overview of the main provisions of the bill, and suggestions what subcontractors can do to ensure they don't end up paying twice. Assembly Bill 1701 is fairly brief and straightforward in its provisions. In a nutshell, the bill mandates the following:

● Employees of subcontractors on private projects, regardless of their tier, acting under, by, or for a general contractor can bring action against the general contractor for unpaid wages and fringe benefits, including interest, even if the subcontractor has already been paid by the general contractor. Such action may possibly also be in the form of a claim against the contractor’s surety bond since, as is mandated by the California Contractors State License Board: “The bond is filed for the benefit of consumers who may be damaged as a result of defective construction or other license law violations, and for the benefit of employees who have not been paid wages that are due to them.”

● A third party, such as a union, owed fringe or other benefits by a subcontractor or contributions on a wage claimant’s behalf will also be able to bring civil action against the general contractor.

● A joint labor-management cooperation committee is the third party mentioned in the bill that may bring action against a general contractor. Beyond employees, third parties and this committee, nobody else will be allowed to do so.

● The general contractor's liability does not extend to include any penalties or liquidated damages that arise due to a subcontractor's failure to pay wages or benefits.

● Any action taken under the bill against a general contractor must be within one year of the earliest recordation of the notice of completion, the notice of cessation of work, or the completion of the work covered by the contract.

● The bill does not allow general contractors to evade or negate in any way its provisions.

Protections for Contractors
Naturally, all of the above presents general contractors with the possibility that they may end up having to pay for labor twice. Luckily, the bill also introduces a number of mechanisms for general contractors to protect themselves.

General contractors can include indemnity clauses in the contracts they have with subcontractors. These clauses can require subcontractors to indemnify and hold general contractors harmless from actions that arise against them out of the provisions of this bill. While this does not spare general contractors the liability they have under this bill, it provides them with legal recourse against subcontractors.

The bill allows general contractors to request payroll records related to the work being done by the subcontractor for the general contractor. Further information that can be requested from the subcontractor are details of the contract, i.e. award information including targets, duration of the project, etc.

General contractors are also allowed to withhold payment of unpaid wages or benefits as 'disputed', even if an action is brought against them, if a subcontractors fails to provide the information specified above in a timely manner.

Bottom Line
Construction industry representatives, such as Tom Scott, executive director of the National Federation of Independent Business-California, have repeatedly stated that they believe workers should be paid everything they have earned. At the same time, they have also strongly objected against the bill being the appropriate measure to achieve such an aim.

Contractors are now worried that the introduction of this bill will result in even higher costs down the line which will further exacerbate California's housing crisis. Apart from possibly having to pay for labor twice, while dealing with subcontractors who don't pay, such costs may also come in the form of introducing new procedures to regularly check subcontractors' payroll records. Ironically, these procedures themselves may result in delays in payments to subcontractors.

What is your take on this bill? Do you think it will be as disruptive as contractors claim or will its benefits outweigh the costs associated with it? Let us know in the Comments section below.