AttorneyEmployment Law

Don’t Pay Twice: Unpaid Subcontractor Employee Wages and Cal. Labor Code § 218.7

Beginning January 1, 2018, Contractors are directly liable for the wages of any unpaid employee of their subcontractors, of any tier.  This is the effect of California Labor Code § 218.7[1].  California has continued its efforts to ensure that worker’s who are not paid their wages are guaranteed to receive them, no matter who ultimately must pay[2].

Contractors should already be familiar with the risks of unpaid subcontractor wages.  Under the old laws, an unpaid employee could file a mechanic’s lien[3] or stop notice[4] on the project.  The contracts signed with the owners (or, potentially, with the prime contractor) frequently require that the Contractor satisfy all lien claims brought against the project – essentially guaranteeing that the Contractor will, at its own expense, keep the project clear of all liens and claims.  As a matter of course, Contractors are already familiar with protecting themselves against unpaid wage claims.  These risks have led to the common usage of lien waivers, joint checks, and similar requirements.

What is new, however, is who may bring these claims and the anticipated frequency of these claims.  Under the new law, the State (by way of the Labor Commissioner) may sue you directly for unpaid wages, as well as any “third party owed fringe or other benefit payments or contributions on a wage claimants behalf.”  In other words, either the State or the labor unions may directly sue the Contractor for wages.  And, Labor Code § 218.7 incentivizes them to file as many suits as possible – because §218.7(b)(2) requires the Court to “award a prevailing plaintiff in such action its reasonable attorney’s fees and costs, including expert witness fees.”  Notice that the statute provides only for an award to plaintiff (the labor union suing the contractor) and does not provide for fees for the prevailing party (which would be either side who won[5]).  The statute is clearly intended to incentivize exactly these lawsuits against Contractors.

So, what is the Contractor to do?  As always, an ounce of prevention is worth a pound of cure and prevention comes with drafting the initial contract.  The Contractor is advised to (1) make sure these claims do not occur; (2) make sure the Contractor has recourse if the claims occur; and (3) make sure any recourse is collectible.  Contractors may approach the problem as follows:

First, include a provision in their contracts which requires all subcontractors to provide all payroll records and information sufficient to confirm that the subcontractors have actually paid all persons on those records[6].  Contractors are expressly permitted to request this information under Labor Code § 218.7(f)(1) – (2).  Moreover, if the Contractor requests this information and does not receive it, Contractors are now statutorily authorized to withhold all funds owed subcontractors as disputed as a defense to prompt payment claims. (Cal. Labor Code § 218.7(i).)  Contractors have also been allowed to require payment request back-up as a condition precedent to payment.

Contractors are strongly advised to consult with counsel of their choosing and have their contracts reviewed to comply with all laws and the particularities of their project.  For those Contractors resistant to following advice of counsel until after the lawsuit has started, Contractors would be well-advised to at least base their contracts on something more authoritative than a random example copy-pasted from the internet.  Many Contractors have success basing their contracts from model contracts sold[7] by the Association of General Contractors of California[8] (“AGC”).  The AGC Long Form Standard Subcontract, for example, covers these payroll requests as conditions precedent to payment[9].  Request this information in the face of every payment application.  Do not pay for any subcontractor labor costs unless and until furnished with evidence that the subcontractor’s payroll obligations have been satisfied.

Second, Contractors should ensure that they have a direct contractual right to pursue their subcontractors for any claims made by the subcontractor’s employees or others performing work for the subcontractor.  These claims would be encompassed by a broadly worded indemnity provision.  Your contracts likely already include an indemnity provision.  These provisions are the subject of legislation re-shaping what risks and obligations may be assigned between the parties.  This area, more than many, requires careful review of the terms of the contract in order to avoid the limitations of Civ. Code § 2782.05, and others, intended to limit the scope of permissible indemnity agreements.  An appropriate indemnity provision would also encompass a duty to defend – i.e., that the subcontractor is obligated to either (1) handle your legal defense itself or (2) reimburse you on demand for the costs of defense you have incurred.

Third, ensure that there is some way to collect what you are owed from the subcontractor.  None of the legal language above means much if the subcontractor goes bankrupt and, by reason of law or by difficulty in tracking assets, you cannot collect what you are legally entitled to.  This is a real risk – the only way a Contractor reaches this situation is if their subcontractor fails to pay the wages of the people it hired – not a good sign for the subcontractor’s financial stability or available assets.  Therefore, do not rely on the subcontractor’s business assets.   Consider requiring the subcontractor to obtain an insurance policy or payment bond which would protect you and cover these wage claims.  You may also consider requiring the owner of the subcontractor to sign a personal guarantee obligating the owner himself/herself to satisfy all obligations owed under the indemnity provision.

If you are in litigation relating to a dispute with your subcontractors or relating to unpaid wages on your project, seek legal advice immediately.  Nothing in this article is intended as legal advice and nothing in this article substitutes for having an attorney acting on your behalf reviewing and addressing the particular circumstances of your situation.

[1] In relevant part: “For contracts entered into on or after January 1, 2018, a direct contractor making or taking a contract in the state for the erection, construction, alteration, or repair of a building, structure, or other private work, shall assume, and is liable for, any debt owed to a wage claimant or third party on the wage claimant’s behalf, incurred by a subcontractor at any tier acting under, by, or for the direct contractor for the wage claimant’s performance of labor included in the subject of the contract between the direct contractor and the owner.” (Labor Code 218.7.)

[2] Employers should all be aware of Labor Code § 558.1.  Though interpretation of this section is correctly before the courts, one popular interpretation would be to make all individual owners and officers of a corporate employer personally liable for any unpaid wages of an employee.

[3] Civ. Code § 8400 (“A person that provides work authorized for a work of improvement, including, but not limited to, the following persons, has a lien right under this chapter: […] (b) Subcontractor. (c) Material supplier. (d) Equipment lessor. (e) Laborer….”)

[4] Civ. Code § 9100 (“…any of the following persons that have not been paid in full may give a stop payment notice to the public entity or assert a claim against a payment bond: (1) A person that provides work for a public works contract, if the work is authorized by a direct contractor, subcontractor, architect, project manager, or other person having charge of all or part of the public works contract. (2) A laborer….”)

[5] Employers would be well cautioned that employment claims generally provide the risk of attorney fees against the employer; even where statutes are written to provide for attorney fees in both directions, the standard for obtaining these fees is nearly unreachable. (see e.g., Gov. Code §12940(b).)

[6] “Upon request by a direct contractor to a subcontractor, the subcontractor and any lower tier subcontractors under contract to the subcontractor shall provide payroll records, which, at a minimum, contain the information set forth in subdivision (a) of Section 226, and which are payroll records as contemplated by Section 1174, of its employees who are providing labor on a private work, […]  The payroll records must contain information sufficient to apprise the requesting party of the subcontractor’s payment status in making fringe or other benefit payments or contributions to a third party on the employee’s behalf.” (Cal Lab Code § 218.7(f)(1).)

[7] AGC Contracts are available for sale online here: https://www.agc-ca.org/OnlineContracts/ .  The same website provides ‘sample’ copies of the contracts – these samples contain all of the language of the contract for sale and therefore permit the interested Contractor to review the association’s preferred language and what the contract may do to protect their interests.

[8] No affiliation and no compensation have been provided by the AGC.  The AGC forms are simply (1) easily available, (2) generally well-crafted, and (3) thorough approaches to construction contracts.  However, there is no true “one-size-fits-all” solution to each job or to each contractor, and as the law changes, the AGC forms may or may not be perfectly up to date.  As always, an individualized review can be useful for the Contractor and each Contractor is advised to consult with an attorney of his or her choice.  Nothing in this discussion is meant to guarantee the accuracy or usability of any contract, and this article does not constitute legal advice or create an attorney-client relationship.

[9] See e.g., Long Form Standard Subcontract, Section 4, “Subcontractor agrees to furnish, if and when required by Contractor, payroll affidavits, […] and it is agreed that no payment hereunder shall be made […] until and unless such documents have been furnished.”

       

       Brett K. Wiseman; Senior Associate 

       bwiseman@madisonlawapc.com  

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