California Assembly Bill 1701 (“AB 1701”) was signed into law on October 14, 2017, and significantly expanded potential liability of general contractors for unpaid subcontractor wage claims on construction projects.

California Labor Code Section 218.7, created by AB 1701, went into effect on September 19, 2018, and applies to private construction contracts entered into on or after January 1, 2018. Labor Code Section 218.7 subjects “direct contractors” to potential liability for claims for unpaid wages made on behalf of employees of subcontractors or sub-tier contractors who perform work required under the contract between the “direct contractor” and the owner. Section 218.7 refers to the definition of “direct contractor” used under the mechanic’s lien statutes, which includes either a “contractor with a direct contractual relationship with the owner” or a “prime contractor.” Section 218.7 therefore generally applies to all general contractors on construction projects.

Section 218.7 affords no private right of action to individual employees. Claims may only be brought by the Labor Commissioner, unions claiming unpaid fringe benefits, or a joint labor management cooperation committee (comprised of labor unions and management) organized under federal law. A prevailing union or joint labor-management cooperation committee may recover attorneys’ fees and costs, but no reciprocal right to recover fees and costs is provided to prevailing direct contractors.

Section 218.7(a)(2) limits potential liability to claims for unpaid wages and benefits and expressly excludes liability for penalties or liquidated damages. General contractors therefore are not subject to claims for statutory penalties associated with unpaid wage claims, such as waiting time penalties, under Section 218.7

The time to bring an action for unpaid wages or benefits under Section 218.7 is substantially shorter than the statute of limitations period for direct employee wage claims. An action under Section 218.7 must be brought within one year of the recordation of a notice of completion or a notice of cessation of work or within one year of actual completion of work covered by the direct contract, whichever is earliest.

Section 218.7(a)(3) does not prohibit a direct contractor or subcontractor from establishing by contract or enforcing any lawful remedies against a subcontractor it hires to protect against liability for unpaid wage or fringe benefit claims. General contractors should therefore ensure that all subcontracts include specific indemnity language to protect against claims for unpaid wages or benefits brought on behalf of their subcontractors’ employees. Provisions warranting strict compliance with all wage-and-hour regulations should also be included in subcontract agreements, specifically within progress payment and final payment provisions.

Section 218.7(f) gives direct contractors the right to inspect subcontractors’ payroll records maintained pursuant to Labor Code Section 1174 to ensure compliance with wage regulations. Additionally, general contractors may withhold payments that are due to the subcontractor if the subcontractor fails to timely provide payroll records or project information records needed to confirm payment of wages and benefits due to its employees. Provisions referencing a general contractor’s right to inspect payroll records and withhold payments pursuant to Labor Code section 218.7 should be incorporated into all subcontract agreements.

If you are a general contractor whose subcontracts were drafted prior to this new law, please contact our office to discuss your options to insulate your organization from further liability.