California bill mandates contractors are responsible for subcontractors' wage obligations
On Oct. 14, California Gov. Jerry Brown (D) signed into law Assembly Bill 1701, which states general
contractors—referred to in the bill as "direct contractors"—are responsible for any employee wage or
benefit payments their subcontractors fail to make under contracts entered into after the regulation's effective date,
according to www.constructiondive.com. The bill also applies to wage claims from lower-tier subcontractors or
The law will allow general contractors to inspect subcontractor payroll records and other project information to
determine whether the subcontractor is paying its employees in a timely manner. If subcontractors don't comply with
requests for information, direct contractors can withhold any or all future payments until subcontractors
However, direct contractors that must follow through on claims under AB 1701 are liable only for unpaid wages, benefits
and interest—not penalties or liquidated damages related to subcontractor claims. Additionally, employees first
must take their complaints to the California Labor Commissioner's Office, which pursues claims against direct
According to Tom Holsman, CEO of the Associated General Contractors of California (AGCC), the new statute stems from
union concerns about contractors who were supposed to make contributions to trust funds and pay other benefits but
returned to their home states or otherwise were unable to meet those obligations.
Attorney John Antracoli, a partner in the trial section and construction law group at Rutan & Tucker, Costa Mesa,
Calif., says the bill is an attempt to protect smaller subcontractors from direct contractors that deny payment to get
as much money as possible from a job.
Antracoli says a potential problem with the law is it could inadvertently hurt small subcontractors because direct
contractors could aggressively vet subcontractors' financials, resulting in the stricter standards disqualifying
smaller firms from jobs.
"This could result in less work going to smaller subcontractors, the very people you're trying to protect with this
statute," he says.
Antracoli says the law also potentially could create a costly pile of paperwork as direct contractors try to obtain
payroll records and other documents from subcontractors to prove they are paying their employees. Contractors will have
to make the call regarding how much work they want to do.
"Construction is going bonkers," he says regarding the large number of projects underway. "Do you even have the
resources to do all the checking you would want to do? Are you going to hire more people to protect you against the
Additionally, under the new law, direct contractors have the authority to change how and when subcontractors
traditionally have been paid, with many simply turning in an invoice and being paid for the value of labor and
materials completed during a certain time. Karina Sterman, a partner in the litigation and employment law departments
of Los Angeles law firm Greenberg Glusker, says contractors could pay subcontractors separately for labor and
materials, which would allow subcontractors to receive payment for materials spent on the job. However, regarding
labor, direct contractors likely would "pay you after you've paid [your employees]."
Holsman says the AGCC took a neutral position on the current version of AB 1701 after working with the bill's sponsors.
The group will continue working during the first quarter of 2018 to "clean up" some language, including how the bill
will be enforced and who will enforce it. One of Holsman's goals is to ensure sub-subcontractors have to make claims to
the subcontractor who hired them.