Developers and Contractors Are Potentially Liable For Subcontractors’ Employees’ Unpaid Wages

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California Labor Code section 218.7 makes contractors legally liable to pay their subcontractors’ employees if the subcontractor fails to pay them on all private works construction contracts entered into on or after January 1, 2018. But the legislation does not stop there. A contractor is liable for fringe benefits owed to either the employee, or to their respective trade union. If the labor union files suit to recover sums owed, it is entitled to recover its reasonable attorneys’ fees incurred in bringing such an action – and they’ll almost certainly win because the subcontractor either did or did not pay their employees. This is strong incentive for attorneys to file these types of actions. 

In addition, the Labor Commission is empowered to enforce the statute, and whether a claimant could make a Private Attorneys General Act claim – meaning file a lawsuit to recover penalties for themselves and other aggrieved employees and for their attorneys’ fees – remains untested.

Private enforcement of the statute is only beginning. A Southern California general contractor recently received a letter from attorneys representing a local union (assume that for geographic reasons the project required union subcontractors) saying:

We are informed that [Subcontractor] owes the [Union] fringe benefit contributions and interest totaling $100,000 based on work performed by its employees on [your project]. Although this amount is due and payable, [Subcontractor] has failed to pay this amount to the [Union].

We also understand that [Your Company] is the prime/general contractor on this project. Pursuant to California Labor Code § 218.7, a prime/general contractor is jointly liable for the failure of its subcontractor (of any tier) to pay the fringe benefit contributions on behalf of its employees. Pursuant to this statute, the [Union] demands payment of $100,000 from [Your Company]. If this payment is not received by [15 days from the date of the letter], the [Union] will file a lawsuit to collect this amount. If a lawsuit is necessary, the [Union] is entitled to collect the unpaid contributions, interest, and reasonable attorneys’ fees and cost.

With some variation, this is the substance of the letter a California contractor actually received. The contractor decided to pay the Union. Very possibly the right decision.

The California Labor Commissioner recently announced a fine of nearly $70,000 against a general contractor whose subcontractor failed to pay his employees. In announcing the enforcement action, the Labor Commissioner said:

Up-the-chain general contractors are now responsible for wage theft committed by their subcontractors on all construction projects in the state[.] General contractors who choose subcontractors that do not pay wages owed will pay a hefty price. The Labor Commissioner’s Office will use all the tools at its disposal to return these stolen wages – including the placement of liens on these properties which will have a hold until the labor these workers poured into these projects is paid for in full.

That the Labor Commissioner misunderstands the construction industry is evident from her charge that “[g]eneral contractors…choose subcontractors that do not pay wages owed…”. The fact is general contractors are not trying to cheat hardworking people – subcontractors’ employees – out of their wages. But intent is not relevant. Even if the contractor paid the subcontractor for the subcontractors’ employees’ wages, if the subcontractor didn’t pay those wages, the contractor is liable for their payment just the same. Furthermore, owners and developers of property also stand to be negatively impacted through the statute’s enforcement given the Labor Commissioner’s threat to record liens against projects as an enforcement mechanism.

California contractors and developers have some options to mitigate their risk, but there is one thing all contractors should be doing – revising their subcontracts. If the subcontract provides specific statutory provisions, the contractor may withhold payment to the subcontractor until the subcontractor produces payroll records demonstrating payment of its employees. It’s not a perfect remedy, and there are other superior alternatives, but without providing the subcontractor notice of this right in the subcontract, payment may not be withheld for a subcontractor’s refusal to provide its payroll records to prove payment of its employees.

The statute of limitations for a claim under this statute is one year after project completion. This means that on long-term projects that started in late 2018 and 2019, the statute of limitations likely hasn’t started to run. In turn, that means the construction industry is likely to see many more private and public enforcement of section 218.7.

The worst thing a contractor or developer can do is do nothing.  At the very least, contractors should communicate with their subcontractors and ensure their operations are running smoothly and their employees are being paid.  If there’s a sense that something is wrong, payment of wages can be confirmed by requesting payroll records documenting payment.  Small tweaks to subcontracts will offer some limited protection if correctly implemented.  Without the proper contract provisions, the contractor, and the developer facing a lien against its project, cannot take advantage of the only available statutory protection, and face potential liability for their subcontractors’ employees’ wages if not paid by the subcontractor.

Yaniv Newman, Esq. is a member of Sullivan Hill’s Construction, Insurance Coverage, and Commercial & Business Litigation practice groups. His practice is primarily focused in the areas of construction and insurance coverage matters. For more information about of the impact of California Labor Code 218.7 and how contractors and developers can protect themselves, contact Yaniv Newman at newman@sullivanhill.com or 619-595-3246.

About Sullivan Hill:

Sullivan Hill has provided efficient, aggressive and responsive legal representation for more than 50 years. The firm provides full service representation to clients in a variety of industries with an emphasis in insolvency, construction disputes, insurance coverage, employment law, real estate, business disputes, civil litigation, and transactional work.  The firm has offices in San Diego and Las Vegas.

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On February 6, 2020
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