Lanak & Hanna
On October 14, Governor Jerry Brown signed Assembly Bill 1701 into law. This troubling new legislation will create additional problems for general contractors who now must ensure that their subcontractors pay their workers.
Under A.B. 1701, workers who are not paid in full by their subcontractor employers have a new cause of action directly against the general contractor for those unpaid wages. They are not left to only pursue their subcontractor employer. This, even if the general contractor has already paid the subcontractor for worker’s wages and has no contract funds left on the project. It exposes the general contractor to paying twice.
The law can be enforced by the State, or through private action by a worker’s attorney. Attorney’s fees are also available to the successful claimant, as are fees for any expert witnesses and the worker can attach the general contractor’s assets to satisfy any wage award. The worker has one year from the recorded notice of completion to pursue his claim. The law goes into effect on all construction contracts entered into after January 1, 2018. It applies to both wages and fringe benefits.
A.B. 1701 was strongly opposed by the California Building Industry Association who saw it as an attempt to hold an innocent general contractor liable for the violations of their subcontractors. The BIA contends that this bill will hurt the construction industry, particularly the new homebuilding sector which is trying to keep pace with rising housing demands. A.B. 1701 was promoted heavily by the union trade subcontractors who see it as a another measure to prevent wage theft in the construction industry.
For public works contractors, the impact of A.B. 1701 is lessened. Unpaid subcontractor workers already have a legal right to pursue the general contractor’s project payment bond for unpaid wages. The general contractor is ultimately responsible to reimburse the surety for any payments. However, the worker now has a direct cause of action directly against the general contractor, even though those parties do not have a contract with each other.
The impact of this Bill will be felt most in the non-bonded private works arena where the general contractor must essentially now guarantee the payment of wages to all of its subcontractor’s workers. This places a heighted responsibility on general contractors to more diligently audit and oversee their subcontractor’s payments to ensure their workers are getting paid.
So how can general contractors avoid costly claims under this new Legislation? First and foremost, require your subcontractors to post both payment and performance bonds. Those bonds will protect the general contractor and ensure that in the event the subcontractor is not paying its workers, their surety, not you, will be responsible to resolve any 1701 claims. If your subcontractors cannot bond, consider requiring some form of security to guarantee the wages portion of the subcontract. Trust deeds on real property, letters of credit, even a personal guarantee, are all forms of added security to ensure that the general contractor will not be left without recourse should that subcontractor fail to pay its workers. By the time that wage claim reaches the general contractor, retention will likely already have been paid and without that added security, the general contractor will be left to defend against a wage claim without any remaining subcontractor funds.
General contractors should also improve their monitoring of subcontractor’s payment information. If the subcontractor is signatory to any union agreements, stay in touch regularly with the union to ensure they are not in arrears. A.B. 1701 permits the general contractor to request paperwork from their subcontractors proving they are current on their labor. Utilize those tools and stay on top of your subcontractors. While it is certainly more work for your project staff, it may save you in the long-run.
Also, ensure that your standard subcontract agreement is updated to reflect that if the subcontractor does not regularly provide paperwork conforming payment of its labor, that is grounds for the general contractor to withhold progress billings and retention. If those requirements are clearly set forth in the subcontract itself, it should protect the general contractor from any claim by the subcontractor of Prompt Pay violations. Place the burden back on the subcontractor to prove to you that they are paying their workers before it is too late.
For more on this topic, contact Colin K. McCarthy.