Tales of subcontractors who close up shop before paying their employees are not all that uncommon, but they are certainly not common enough to require General Contractors to pay for that same labor twice. Last month, the California Legislature passed Assembly Bill No. 1701, which requires the General Contractor of a private construction project to pay all unpaid wages and fringe benefits owed to an employee of a subcontractor, irrespective of the tier, and even if the General Contractor made the payment. With the Governor’s recent signature, Assembly Bill No. 1701 is now the law of the land. Here is what you need to know:
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It applies to all private (but not public) construction contracts entered into on or after January 1, 2018;
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It gives a subcontractor’s employee a direct cause of action against the General Contractor for any unpaid wages and fringe benefits, even if the General Contractor has fully paid the subcontractor;
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It gives a third party owed fringe or other benefits a cause of action against the General Contractor;
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All actions by the employee or third party must be filed within one year of the earliest of the recordation of the notice of completion, the recordation of the notice of cessation of work, or the actual completion of the work;
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The General Contractor cannot contract to avoid the liability imposed by Assembly Bill No. 1701, but it can seek indemnity from the subcontractor; and
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At the General Contractor’s request, the subcontractor shall provide the General Contractor with its payroll records.
As the saying goes, “the road to hell is paved with good intentions.” This legislation is obviously bad for General Contractors, but it is really bad for consumers. Housing is expensive enough already and this legislation will inevitably increase costs, which will be passed along to homebuyers and project developers. Ironically, General Contractors are frequently forced to use certain subcontractors because of local hiring requirements, and often times these subcontractors are the shops that are not well run, and are most likely to default on their obligations. The fact that General Contractors are forced to use certain subcontractors, and then have to potentially pay twice for the same labor because of subcontractor mismanagement, violates common notions of fairness. Sacramento’s overreaction is like placing somebody in a full body cast because of a sprained pinkie. Another irony is that General Contractors will now place even more emphasis on subcontractor payroll documentation, which will further delay payments to subcontractors, and actually worsen the financial position of subcontractors who live progress payment to progress payment. Unfortunately, Sacramento politicians too often think that “feel good” legislation like this is good governance, but the reality is quite the opposite.
This document is intended to provide you with information about construction law related developments. The contents of this document are not intended to provide specific legal advice. This communication may be considered advertising in some jurisdictions.
