Language California Construction Direct Contractors Must Add to Subcontracts Beginning on January 1, 2022, Per Senate Bill 727 


William L. Porter Founder & President Specializing in Construction Law, Business Law and Labor Law
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Senate Bill No. 727, Imposing Liability on Contractors for Wage Claims of Subcontractor Employees:

California Senate Bill 727 was approved by the Governor on September 27, 2021.  The new Act amended Labor Code Section 218.7 and added a new section 218.8 to the Labor Code.  Both Labor Code sections impose on “direct contractors” in the construction industry (defined by Civil Code 8018 as “a contractor that has a direct contractual relationship with an owner”) liability for the wage violations of their subcontractors and sub-subcontractors at any tier when working on California private construction projects.  

Specifically, new Section 218.8 expands the liability of direct contractors for wage claims of the employees of subordinate subcontractors on projects for contracts executed beginning on January 1, 2022. The liability of the direct contractor under Labor Code 218.8 will include “any debt owed to a wage claimant or third party on the wage claimant’s behalf, incurred by a subcontractor at any tier acting under, by, or for the direct contractor.” Specifically included as listed liabilities of the direct contractor are: “any unpaid wage, fringe or other benefit payment or contribution, penalties or liquidated damages, and interest owed by the subcontractor on account of the performance of the labor.”

There are exceptions: Under 218.8 (a)(3) a direct contractor on a private project shall not be liable for “penalties” and “liquidated damages” “unless the direct contractor had knowledge of the subcontractor’s failure to pay the specified wage, fringe or other benefit payment or contribution, or the direct contractor fails to comply with all the following requirements:”

Section 218.8 (a)(3)(A) then goes on to describe the list of tasks a direct contractor must perform to escape liability for penalties and liquidated damages for the wage violations of subcontractors of any tier when the direct contractor cannot prove that it had no knowledge of the subcontractor’s failure to pay the specified wage, fringe or other benefit payment or contributions.  These tasks include, generally: (A) the monitoring of payroll records and payments “by the subcontractor of wage, fringe or other benefit payment or contribution to the employees or a labor trust fund.” The subcontractor payroll records must “at a minimum, contain the information set forth in [Labor Code section 226(a)] and which are payroll records as contemplated by [Labor Code section 1174]”; (B) upon discovery of the failure to pay the wage, fringe or other benefit payment or contribution to the employees or the labor trust fund, the Contractor must “diligently take corrective action to halt or rectify the failure, including, but not limited to, retaining sufficient funds due to the subcontractor for work performed on the private construction project.”; and (C) “obtain an affidavit signed under penalty of perjury from the subcontractor that the subcontractor has paid the wage, fringe or other benefit payment or contribution to the employees or the labor trust fund for all work performed on the private construction project,” 

Labor Code section 218.8(b)(2) provides that “a third party owed a fringe or other benefit payment or contribution on a wage claimant’s behalf may bring a civil action against a direct contractor to enforce the liability for any unpaid wage, fringe or other benefit payment or contribution, penalties or liquidated damages, and interest owed by the subcontractor on account of the performance of the labor…” 

Labor Code section 218.8(b)(3) provides that “A joint labor management cooperation committee…may bring an action in court…against a direct contractor or subcontractor to enforce liability for any unpaid wage, fringe or other benefit payment or contribution, penalties or liquidated damages, and interest owed by the subcontractor on account of the performance of the labor…”

In addition, section 218.8(b)(2) and (3) both provide that “The court shall award a prevailing plaintiff in such an action their reasonable attorney fees and costs, including expert witness fees.”  Note that the statute does not state that the prevailing “party” shall be awarded its fees and costs. It instead states that the prevailing “plaintiff” shall be awarded its fees and costs. Legally, this means that if an employee wins, he or she is awarded their attorney fees and costs and expert witness fees.  In contrast however, if the employer wins, it receives nothing and is never able to recoup the significant legal expenses it incurred in defending and winning the case brought against it.  This puts the employer at a distinct disadvantage.  Since employees and their attorneys bear no risk of being compelled to pay fees and costs to the employer when they lose weak, frivolous, or entirely false claims, they have little incentive to avoid such claims, knowing that it is less expensive for employers to pay frivolous claims than fight the claims with no hope of recouping the costs for doing so. The wisdom of such a policy is the subject of political debate.

The description of the new law as noted above is only a shorthand version. For a full review of Senate Bill 727 see this link, current as of this writing: https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202120220SB727  

If the link becomes inactive, you might try searching for Labor Code 218.8 at this link: https://leginfo.legislature.ca.gov/faces/codes.xhtml 

What Can a Direct Contractor Do to Protect Itself?

Listed in Labor Code 218.8(f) are provisions the direct contractor should review as an outline of language the direct contractor should include in its standard subcontract document to protect itself from the imposition of penalties and liquidated damages. The direct contractor should also include language in the subcontract requiring that the subcontractor include the very same language in its own subcontracts and in the subcontracts of further successive lower tier subcontracts so that the same provision is incorporated into subcontracts of every tier.  

Section 218.8(i), referencing 218.8(f), provides that “the direct contractor may withhold as “disputed” all sums owed if a subcontractor does not timely provide the information requested under [section 218.8(f)], until that information is provided.”

Although legal counsel for a direct contractor may advise somewhat different language, one option for consideration as a clause the direct contractor might consider including in subcontracts in order to address the language of Labor Code 218.8(f) and withhold payment from subcontractors who are believed to have failed to properly pay employees wage, fringe or other benefit payment or contribution and avoid liability for penalties and liquidated damages is as follows:

# __ Compliance with SB 727/Labor Code 218.8:

For subcontract agreements on California projects for which Contractor has entered into a contract with an Owner on or after January 1, 2022, Subcontractor represent that it is familiar with and shall comply with the requirements of SB 727, embodied in California Labor Code Section 218.8. Contractor reserves the right to require, as a condition for payment of any or all progress payments to Subcontractor, that Subcontractor and its sub-subcontractors of all tiers, provide Contractor with all payroll records for their respective employees who have worked on the Project. Such information shall contain, at minimum, the information set forth in California Labor Code Section 226 and which are payroll records as contemplated by Labor Code Section 1174, of its employees who are providing labor on a private work, which payroll records shall be marked or obliterated only to prevent disclosure of an individual’s full social security number, but shall provide the last four digits of the social security number.  The payroll records must contain information sufficient to apprise the requesting party of the Subcontractor’s payment status in making fringe or other benefit payments or contributions to a third party on the employee’s behalf.  In addition, at the request of Contractor, Subcontractor shall provide the Contractor award information that includes the project name, name and address of the Contractor and Subcontractor and any sub-contractors with whom Subcontractor is under contract, anticipated start date, duration, and estimated journeymen and apprentice hours, and contact information for its sub-contractors on the project. Contractor shall also have the right to request an audit of the payroll records for Subcontractor and its sub-subcontractors of all tiers at any time, up to two (2) years following final completion of the Project. Subcontractor also acknowledges that its indemnity obligations to Contractor, found elsewhere in this Agreement, include liabilities of Contractor under SB 727.”

By using the above or similar language, the direct contractor can help pave the way to avoiding penalties and liquidated damages due to the failures of its subcontractors at all tiers in paying wage, fringe or other benefit payments or contributions for its employees. This or similar language will assist in providing legal justification in withholding disputed sums from subcontractors. Without this or similar language, the direct contractor may lack legal justification for withholding payment.

The entire purpose of each law is not always found within the language of the statute. This particular law, while certainly protective of employees, also contains broad language favoring plaintiff’s bar trial attorneys and joint labor management cooperation committees. In order to protect themselves in a challenging legislative environment, construction employers need to keep themselves informed and take what actions they can within the bounds of the law to protect themselves. The intention of this article is to inform the industry of a new burden construction employers face and perhaps one method of seeking at least some reasonable protection under the law.

 

Article by William L. Porter, Esq. in 2021. Mr. Porter is a principal in The Porter Law Group, Inc. in Gold River, California. He can be reached by phone at (916) 381-7868. Visit the firm’s website at www.porterlaw.com and www.AppliedLegal.com

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