CALIFORNIA LAW IMPOSES UPON CONTRACTORS THE OBLIGATION TO ENSURE PAYMENT TO SUBCONTRACTOR’S EMPLOYEES…OR PAY THE WAGES AND BENEFITS THEMSELVES
Commencing January 1, 2020, general contractors in California face another potential obligation: they are now “guarantors” of the obligation of their subcontractors to pay the subcontractor’s employees all wages and benefits due on the construction project. And this is true whether the subcontractor was negligent, intentionally derelict, or merely insolvent.
Handling this new obligation will require the wise general contractor to alter its own methods of payment and supervision of its own subcontractors as outlined below.
The Basic Law:
In October of 2019 Governor Brown signed into law Assembly Bill 1701, which makes general contractors,(called “direct contractors” in the Bill), financially responsible to pay for any employee wage or benefit payments that the general contractors’ subcontractors fail to make under contracts entered into in California after the Bill’s effective date. Note that this obligation applies to wage claims of lower-tier subcontractors (or subcontractors of subcontractors.) The general contractor must ensure that the subs and subs of subs pay their workers’ wages and benefits.
General contractors under that Bill are not liable for penalties or liquidated damages related to claims against the subcontractor. The general contractor is liable only for the unpaid wages, benefits and interest. The process is that employees file their complaints first to the California Labor Commissioner's Office, which then pursues claims against general contractors. Thus, the general contractor is not confronting the workers but a State agency.
In an effort to give some protection to the general contractor, the law allows the contractor to inspect subcontractor payroll records and other project information to determine whether the sub is correctly paying its employees in the correct amount and in a timely manner. If subcontractors do not comply with the general contractor’s request for information, the general contractors can withhold any or all future payments until the subs do allow access and if the subcontractor is not making requisite payments to the employees, the general contractor can do so and also claim breach of contract on the part of subcontractor assuming the general contractor has the correct provisions in the subcontract agreement. There is relief for the general contractor-but also much more responsibility and work now required.
Rationale of the Law:
According to Tom Holsman, CEO of the Associated General Contractors of California, the new statute arose due to union concerns about out of state contractors who were required to make contributions to trust funds and pay other benefits, but returned to their home states or otherwise became unable to meet those obligations. The bill's sponsors include the California Conference of Carpenters, although the law applies to all contractors, union affiliation notwithstanding.
Changes in How the Contractors Work with Subcontractors Required:
The law is going to require the wise general contractor to alter methods to assure that the subcontractor’s workers are being paid according to law and to add various wording to the subcontracts that allow inspection and remedies if the subcontractor is not adhering to the law. Before hiring a subcontractor, many general contractors may decide to review their financials to make sure sufficient financial backing is available. An alternative is to divide payments up so that the general allocates sums directly to an account dedicated to payment of the workers.
As one general contractor told the writer, “If I am going to have to pay his workers if he doesn’t, then I am going to have to take steps that he does not pocket the money that should go to his workers…since he will actually be pocketing my money.”
While there is always the use of bonds to protect the general contractor, those are expensive and could price the subcontractor out of the market. This law may have the result of favoring well-funded larger subcontractors over the less well financed small subcontractor who may not be able to demonstrate to the worried general contractor that sufficient reserve funds are on hand. Many general contractors will not want to go through the extra paperwork and toil of ensuring that the subcontractor’s workers are fully paid. The “easy” way for the general contractor may be to work with much larger and presumably richer subcontractors to minimize the danger.
Ambiguities in the Current Law:
The Bill passed is confusing on the issue of whether a sub-subcontractor's general contractor is the hiring subcontractor (“direct contractor”) or whether it is the subcontractor who is the “direct contractor” to the sub-subcontractor. Such confusion is not unusual in newly drafted legislation and is likely to be cleared up over the next years but for now the careful general contractor will assume that the sub-sub contractor should also be carefully managed if such liability is to be avoided. Note that the subcontractor also would face potential liability if the sub sub does not pay its workers, so the subcontractor should plan on working with the general contractor to ensure such payment is made.
As with so much law, unintended consequences can be severe. While the goal of protecting workers is certainly to be admired, if the end result is to have general contractors favor large well-funded subcontractors to avoid the additional paperwork and liability, then the small builders will have an even more difficult time to stay in business. Essentially, the legislature has made general contractors the guarantors of payment to workers of subcontractors…and perhaps sub subcontractors…and this is going to require an alteration in the contractual and auditing relationship between the two on every job.