NEW YEAR: NEW LAW
Labor Code Section 218.7- Well Intentioned, Not Well Thought Out
by John McGill
It’s a new year so there must be some new rules; wouldn’t want anyone to actually get too comfortable with the law. Better to keep everyone on their toes.
Labor Code section 218.7 is the latest from the Legislature to make sure workers get paid (something everyone can agree on) by making the contractor hiring the non-paying subcontractor responsible for the wages of the unpaid worker (not something everyone can agree on). That’s correct; if you hire a subcontractor and the subcontractor does not pay his/her workers, then the direct contractor must pay the worker. Section 218.7 is a rule you need to consider not only when you hire a subcontractor but when you draft your subcontracts.
A quick review of Section 218.7.
First, it only applies to private works, not public works contracts. It only applies to contracts entered into on or after January 1, 2018. It applies to any “direct” contractor that takes a construction contract in California. “Direct” contractor is any contractor – general or specialty- that enters a contract with an owner for work on a “building or structure”. Section 218.7 makes the “direct” contractor responsible for any unpaid wages to any worker hired by a subcontractor, including second tier or lower subcontractors. There does not have to be a direct contractual relationship with the offending sub, only that the sub is performing work that is part of your contract with the owner.
The extent of liability is limited but still quite broad. The direct contractor can be responsible for wages, benefits and contributions, and interest on the unpaid amount, but not for penalties or liquidated damages that might also be assessed. Essentially, you pay what should have been paid, including interest on what should have been paid.
Section 218.7 does not prevent a direct contractor and a subcontractor from agreeing in the subcontract to any “lawful remedies” to address 218.7 violations. This is where your subcontract language is important. As a “direct” contractor you can and must include in your subcontract your right to obtain from your subcontractors their payroll records for any workers on the project. You also want to require that your subs include the same or similar language in any lower tier subcontracts for the project so both you and they have the right to access the lower tier subcontractor’s payroll records. If you will withhold payments for 218.7 wage issues, you need to include this in the subcontract and you need to include your right to obtain payroll information in the subcontract otherwise you cannot withhold payments for 218.7 violations.
The “lawful remedies” to consider are payment bonds from any subcontractor or sub-subcontractor and your right to claim on those bonds if there is any issue with wages (and a requirement the bond remain in effect until the conclusion of any limitations period for a 218.7 claim), your contractual right to withhold payments for any disputed wage payment issues that might arise, specific documentation that demonstrates wages are being timely paid (possibly some form of certified payroll report from the sub or sub subcontractor), daily reports with the names of all workers on site that day, and/or an indemnity obligation from the subcontractor and any lower tier subcontractor that protects and defends you if this situation ever arises. The indemnity should be specific to 218.7 issues; don’t just rely on the general indemnity provisions in your subcontract, which may not cover this kind of issue.
There are only three groups that can bring a claim in court for the unpaid wages: the Division of Industrial Relations, the individual who is owed the wages, or a joint labor-management committee. The court in the first two scenarios would be State court but the joint labor-management committee can bring an action in anycourt of competent jurisdiction, including Federal court.
If an action is brought to get unpaid wages the prevailing party gets their attorney fees and costs, including expert fees. If the employee is not paid, and can demonstrate he/she has not been paid, then it would seem the best approach is to resolve the issue with them as quickly as possible. The remedies included in your subcontracts are what you want to pursue, and those are against the offending subcontractor.
The statute of limitations for asserting a 218.7 claim is one year from the earliest date of notice of completion, notice of cessation, or actual completion of the direct contract work. This could be problematic. The notice of completion can be filed anytime or not at all. The notice of cessation likewise can be filed anytime or not at all. The fact a claim can be made one year afterthe actual completion will also be problematic. By then, your subcontractors may be long gone, the documents you need may no longer be available, and any bond claim might be time barred. If the unpaid worker is a second-tier subcontractor’s employee, the 1-year statute to bring the action for unpaid wages could be especially problematic if the second tier’s work was completed at the beginning of a long project and the worker has a year from the completion of the project to bring their claim.
Section 218.7 is well intentioned but not well thought out. As it is written, it can be exploited and abused by the unscrupulous. If you are a “direct” contractor the best protection is a solid subcontract, with clear and explicit terms about what you can review and obtain from a sub, what documentation you want included with all pay applications, how long payroll documents need to be maintained by your subs and any lower tier subs, an indemnity for any unpaid wages, and/or a payment bond with a long tail; that and good monitoring and compliance oversight to make sure the problem is identified early on and corrected. These types of claims will likely come out of the blue and as a surprise. Prepare early so you aren’t caught flat footed.
Bio: John McGill is an attorney representing contractors and suppliers throughout the Bay Area and Northern California in both private and public work disputes. He is the author of California Contractor’s DESKTOP GENERAL COUNSEL 3d ed. What You Need To Know About California Construction Law.
Contact info: 707 337 1932