General Contractor Liable for Wages and Benefits of Sub’s Employees
General contractors beware: For all private works contracts you enter into on or after January 1, 2018, you are responsible for the unpaid wages, fringe and other benefits owed by subcontractors or sub-subcontractors on your jobs. California Labor Code Section 218.7.
Interestingly, the employees themselves – the persons most seriously harmed if a subcontractor doesn’t meet payroll – are given no new rights or remedies under this provision.
Rather, the new law gives the right to sue to: (1) The California Labor Commissioner, (2) a Joint Labor-Management Cooperation Committee established under the federal Labor Management Cooperation Act of 1978, and (3) a third party owed fringe benefit payments or contributions on a wage claimant’s behalf (typically a labor union).
These claimants are also entitled to recover attorneys’ fees if they prevail.
How can the general contractor (and developer) protect itself? First, Subsection (f) of the new law requires that the subcontractor provide payroll records and project award information upon the general contractor’s request, and it allows the general contractor to withhold all disputed sums if the information is not timely provided. This statutory requirement extends to all sub-subcontractors as well. Therefore all contracts with subcontractors should include a provision requiring production of this information on a specified schedule, and further compelling that all subcontractors require the same information, on the same schedule, from all sub-subcontractors.
Second, all contracts with subcontractors should include provisions indemnifying the general contractor for all claims brought under Section 218.7 that derive from work performed by the subcontractor or that subcontractor’s sub-subcontractors. The subcontractors’ financial ability to stand by such an indemnity should be one consideration when comparing bids.
Third, the general contractor should put in place mechanisms to assure that all payroll information is timely received and reviewed as part of the overall disbursement process. Ideally these systems should include a method for receiving acknowledgment by all relevant employees of the subcontractors and their sub-subcontractors, as well as from third parties entitled to recover fringe and other benefit payments or contribution.