By: William F. Bresee, Esq. and Philip A. Toomey, Esq.

Effective with respect to development and construction contracts entered into on January 1, 2018 or after, California has implemented new legislation aimed at subjecting construction contractors to potential liability for wage claims of employees of subcontractors and all down-tier subcontractors who work on a contract between the general contractor and a private sector owner. The new legislation, enacted as California Labor Code Section 218.7, draws upon a definition – “direct contractor” – used in the state’s mechanic’s lien enactments; that definition includes a “contractor with a direct contractual relationship with the owner” or a “prime contractor.” The extent of the liability includes not only unpaid wage claims, but “fringe or other benefit payment or contribution, including interest owed;” it does not extend to penalties or liquidated damages (Cal. Lab. Code § 218.7(a)(2)). As such, on projects engaging union labor or those performed under project labor agreements, union contributions, medical plan, retirement plan, unemployment tax contributions and the like, which are unpaid by a down-tier subcontractor, can be levied on the prime contractor. Much as is the case with mechanic’s lien legislation, it is immaterial if the prime contractor already paid the subcontractors for the work.

The enactment, initiated in the State Assembly, was sponsored by unions who represent carpenters and other building trades, and was strongly opposed by the California Building Industry Association and the Associated General Contractors of California.

The new law does not confer wage claimants themselves with any right to sue direct contractors. Civil actions against the direct contractor for unpaid wages owed to a wage claimant may only be brought by the California Labor Commissioner and joint Labor-Management Cooperation Committees established under the Federal Labor Management Cooperation Act of 1978; additionally, the California Labor Commissioner may bring its claims through administrative hearings or its citation process. Third parties that claim to be owed unpaid fringe or other benefit payments or contributions on behalf of wage claimants (labor unions) may bring a civil action against the direct contractor for such claims. While the statute specifically states the law may not be enforced directly by the employees, creative class action counsel could well advance a claim on behalf of a class of unpaid subcontractor employees that the general contractor’s failure to ensure payment gives rise to a claim under California’s Private Attorney General Act, or amounts to a violation of California’s Unfair Business Competition law (California Business and Professions Code § 17200). Defending such claims would normally be at the sole expense of the general contractor, since most standard employment practice liability insurance exclude coverage for wage claims.

Actions initiated by the California Labor Commissioner, a Labor-Management Cooperation Committee, or a union are subject to a one-year statute of limitation, which begins on the earlier of the filing of a notice of completion or cessation of work or actual completion of the work under the direct owner-prime contract. A prevailing union or joint Labor-Management Cooperation Committee may recover attorneys’ fees, experts’ fees and costs, but no reciprocal right to recover fees and costs is provided to prevailing prime contractors. Enforcement on a judgment can include attachment of a prime contractor’s property.

The legislation does provide some potential relief and protection for prime contractors. Upon the prime contractor’s request (which can be in the form of a contractual obligation), subcontractors and lower tier subcontractors must provide payroll records and project award information to the prime contractor. The payroll records (which shall be redacted to prevent disclosure of an individual’s full social security number) must contain information sufficient to apprise the prime contractor of the subcontractor’s payment status in making fringe or other benefit payments or contributions to a third party on the employee’s behalf. A subcontractor’s failure to comply with this requirement does not relieve the prime contractor from the liability imposed by the new enactment. (Cal. Lab. Code § 218.7(f)). If, however, a subcontractor does not “timely provide” the requested records and information [without specifying what is “timely”], the prime contractor may withhold as “disputed” all sums owed to the non-complying subcontractor (Cal. Lab. Code § 218.7(i)).

Initial Actions Which Contractors Should Contemplate

  • Review and update existing subcontract templates used for California private work to ensure the inclusion of provisions requiring subcontractor and sub-tier contractor compliance with California Labor Code § 218.7.
  • Require weekly certification of payment of all wages and benefits from all subcontractors, and establish audit process to verify the certifications.
  • Incorporate into a private works project pay application process for subcontractors and their sub-tier contractors evidence of payments of wages, fringe benefits and contributions (potentially including, depending on the project, acknowledgment of payment by third parties entitled to recover fringe and other benefit payments or contributions from the prime contractor under California Labor Code § 218.7.)
  • Include in such California subcontract agreements an audit provision requiring subcontractors and sub-tier contractors engaged by them to provide payroll records, benefits and contribution records, and project award information regularly (for example, monthly or with project pay applications) and/or upon request. In view of the lack of a definition of “timely” in Lab. Code § 218.7(f), specific deadlines for handing over such information should be included.
  • Include in such California subcontract agreements indemnity provisions that require subcontractors to defend and indemnify the general contractor for claims that are brought pursuant to California Labor Code § 218.7 and require that subcontractors include parallel provisions protective of the prime contractor in their contracts with sub-tier contractors.
  • Consider imposing a contract requirement that subcontractors provide a payment bond and/or a letter of credit to address California Labor Code § 218.7 claims made against the prime contractor.
  • For smaller subcontractors, consider imposing a requirement for personal guarantees from owners, partners or key personnel of obligations under California Labor Code § 218.7.

These (and, potentially, other) actions should position a prime contractor to monitor its subcontractor wages and benefits payments without undue hardship while protecting against California Labor Commission, union or Labor-Management Cooperation Committee actions for recovery of wages and benefits payments due to subcontractor or sub-tier contractor workers.

For any further analysis of how this California enactment will affect your interests, or if you have any questions on this article, please feel free to contact William F. Bresee or Philip A. Toomey of Leech Tishman Fuscaldo & Lampl at 626.796.4000.

William F. Bresee is a partner in Leech Tishman Fuscaldo & Lampl, LLC, and chairs its Construction and Energy Practice Groups. Bill is also a member of the Corporate and International Practice Groups. Bill can be reached at 626.796.4000 x 325 or 412.261.1600 x261 or wbresee@leechtishman.com.

Philip A. Toomey serves as Leech Tishman’s West Coast Business & Employment Client Relations Partner and practices in the firm’s Employment, CorporateLitigation and Real Estate Practice Groups. Phil is based in the Leech Tishman’s El Segundo, CA office. He can be reached at 424.738.4400 or ptoomey@leechtishman.com.

Please feel free to contact Bill with any questions you may have on this and other design and construction matters or Phil with any questions you may have on this or other employment matters. For more information on Leech Tishman’s legal services, please visit www.leechtishman.com.

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Leech Tishman Fuscaldo & Lampl is a full-service law firm dedicated to assisting individuals, businesses, and institutions. Leech Tishman offers legal services in alternative dispute resolution, aviation & aerospace, bankruptcy & creditors’ rights, construction, corporate, employee benefits, employment, energy, environmental, estates & trusts, family law, government relations, immigration, insurance coverage & corporate risk mitigation, intellectual property, international legal matters, litigation, real estate, and taxation. Headquartered in Pittsburgh, PA, Leech Tishman also has offices in El Segundo, CA, Chicago, Los Angeles, New York, Sarasota and Wilmington, DE.

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