California recently passed burdensome legislation that holds general contractors liable for unpaid wages by subcontractors. The law was added to the California Labor Code on January 1, 2018. Although the provisions of this legislation are not as uniformly unfavorable as you might anticipate, it is still bad news for general contractors.

A general contractor now faces the possibility of liability for unpaid wages owed to the employee of a subcontractor who has already been paid in full. Furthermore, it imposes a practical obligation on the general contractor to monitor the payroll practices of its subcontractors. The consequential increase in building costs can only worsen California’s housing crisis.

Features of the New Law

Although the new provisions are complex, some of the more relevant features are listed below:

  • Laborers cannot sue general contractors directly.  Three parties are allowed to sue: (i) the Labor Commissioner; (ii) a joint labor-management cooperation committee; and (iii) a third party owed benefits on behalf of a laborer who claims unpaid wages.

  • Liability is joint and several. This means that when there are several potential defendants (a solvent general contractor and an insolvent subcontractor, for example), the plaintiff (the party seeking compensation) can sue any single potential defendant for 100 percent of the obligation, leaving it to that defendant to seek proportionate reimbursement from the other.

  • Liquidated damages are prohibited. Liquidated damages are a specific amount of damages specified in advance by contract. A labor contract, for example, might assert liquidated damages of $10,000 for any unpaid wage claim.

How to Protect Yourself

The following are some tips on contractual provisions that might protect a general contractor from liability in this unfavorable environment. This list is far from complete, and the usefulness of many potential contractual provisions are likely to depend wholly on the specific nature of the individual project.

  • Include indemnity clauses in contracts with subcontractors that require them to (i) defend against wage claims that the general contractor may become liable for and (ii) compensate the general contractor for any such liability. Of course, most construction contracts already include indemnity clauses. These clauses should be carefully examined to determine if their scope should be expanded.

  • Require payment bonds of all subcontractors. This will ensure that the subcontractor has the financial means to satisfy wage liability to the general contractor.

  • Require subcontractors to produce payroll data on demand, and establish systems that allow general contractors to confirm the timely payment of wages to subcontractors.

When it comes to drafting or redrafting construction contracts, the aphorism “the devil’s in the details” is nowhere more appropriate. One misplaced word or ambiguous term can completely defeat your purpose.

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