In January 2018, California Labor Code section 218.7, commonly referred to as AB1701, went into effect, and it could have a massive impact on the way the contractors do business with subcontractors. Laborers can now seek direct compensation from the general contractor who contracted with their employer on private projects, if their wages remain unpaid.
Laborers now have one year after completion of a project (or a Notice of Cessation) to file a claim through the California Labor Commissioner in order to attempt to obtain their unpaid wages from the direct contractor, defined as the contractor with a contractual relationship with the homeowner on the project. Previously, laborers could maintain a mechanic’s lien claim against private property, without needing to serve a 20-day preliminary notice, but there was no statutory obligation on the direct contractor to reimburse the laborers their unpaid wages. The only minimal protection here for direct contractors is that the employee would not be able to recover penalties or liquidated damages from the direct contractor.
Even though Labor Code § 218.7 imposes certain obligations on the subcontractor to provide the direct contractor with relevant project and payroll records, the subcontractor’s failure to comply with those obligations does not relieve the direct contractor from liability to the laborer. Essentially, General Contractors, in addition to overseeing the work on site and managing the relationship with the owner, must now also oversee the subcontractor’s payroll practices during a project.
Labor Code § 218.7’s apparent purpose was to protect employees, an important legislative goal. However, the way that the law was drafted could greatly increase general contractors’ exposure when subcontracting work and their cost of doing business. Contractors who commonly hire subcontractors need to be extremely careful about who the subcontractor is, and even what their business practices look like, not just their expertise in the scope of work they are contracting to complete. Nothing in § 218.7 alters the owner’s obligation to timely pay the direct contractor, or the direct contractor’s obligation to timely pay a subcontractor. This means that a direct contractor could pay a subcontractor who fails to pay his employees, and then be forced to pay a laborer who makes a claim for unpaid wages – leaving the direct contractor to be stuck paying for the same labor twice.