Avoiding Wage Claims in California Construction | California Construction Law Blog

For both private works projects and state and local public works projects in California, higher-tiered contractors can find themselves opening up their wallets if their lower-tiered subcontractors fail to pay their workers. And if you think this is just another one of those crazy California things, think again. Higher-tiered parties on federal public works projects can also be asked to open up their wallets if their lower-tiered subcontractors stiff their workers.

While we’re coming upon the season of giving, here’s a Scrooge-like guide on things you can do to avoid finding yourselves on the hook for your lower-tiered subcontractor’s even more Scrooge-like failure to pay their workers.

PRIVATE WORKS PROJECTS

Are higher-tiered contractors on private works projects liable with their lower-tiered subcontractors for failing to pay their workers?

Yes, with some limitations.  With its enactment in 2019, Labor Code section 218.7, which applies to contracts entered into between January 1, 2018 and December 31, 2021, and later enactment of Labor Code section 218.8, which applies to contracts entered into on or after January 1, 2022, “direct contractors” who enter into contracts for the “erection, construction, alteration, or repair of a building, structure, or other private work” jointly liable for “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 for the wage claimant’s performance of labor included in the subject of the contract between the direct contractor and the owner.”

It is  important to note both the breadth and limitations of Labor Code sections 218.7 and 218.8. Both sections are limited to “direct contractors” (i.e., parties in direct contract with the project owner), not to all higher-tiered parties who have lower-tiered subcontractors, and only apply to wage debts owed by subcontractors not material suppliers. However, it makes direct contractors liable for wage debts owed by lower-tiered subcontractors of all tiers, whether a 1st tier subcontractor, a second-tier subcontractor, or lower, and applies broadly to all private works construction whether ground up or not.

So what exactly are direct contractors liable for on private works projects?

Under Labor Code sections 218.7, which applies to contracts entered into between January 1, 2018 and December 31, 2021, direct contractors are liable for unpaid wages, fringe or other benefit payments or contributions, and interest but not penalties or liquidated damages. However, under Labor Code section 218.8, which applies to contracts entered into on or after January 1, 2022, direct contractors are liable for for unpaid wages, fringe or other benefit payments or contributions,  and interest as well as penalties or liquidated damages.

Who can go after a direct contractor for wage debts owed on private works projects?

The California Labor Commissioner, in response to a complaint filed by an unpaid worker, can bring an administrative wage enforcement action, issue a citation, or bring a civil action against the direct contractor for unpaid wages and interest. In addition, unions owed fringe or other benefit payments or contributions can bring a civil action against the direct contractor, and if they do, are also entitled to recover their reasonable attorneys’ fees and costs as well as expert witness fees.

Finally, joint labor-management cooperation committees established under the federal Labor Management Cooperation Act of 1978 can bring a civil action against the direct contractor and offending subcontractor for unpaid wages, and if they do, are also entitled to recover their reasonable attorneys’ fees and costs as well as expert witness fees. However, they must first provide the direct contractor and offending subcontractor 30-days’ notice of such claim by first-class mail describing the general nature of the claim, the project name, and the name of the employer.

What if the direct contractor does not have sufficient assets to pay for the wage debts owed by a subcontractor on a private works project?

I believe, or at least hope, this situation would be rare, but direct contractors can have their property attached to (i.e., sold) to satisfy any judgment rendered against the direct contractor.

What is the deadline for a claim to be brought against a direct contractor on a private works project?

A claim against a direct contractor must be filed within one (1) year of the earliest of the following: (1) recordation of a notice of completion; (2) recordation of a notice of completion; or (3) actual completion of the project.

Is there anything direct contractors can do to protect themselves against such claims on private works projects?

There are, some of which are obvious, some statutory, and some things that direct contractors can do contractually. First, the obvious. Hire reputable subcontractors. Of course, unless right of approval provisions are included in the subcontract between the direct contractor and subcontractor, direct contractors likely won’t have control over who a 1st tier subcontractor or lower subcontracts with. 

Second, Labor Code section 218.8, which, unlike Labor Code section 218.7, makes a direct contractor potentially liable for penalties or liquidated damages, includes a “safe harbor” from penalties and liquidated damages. Under Labor Code section 218.8, a direct contractor is not liable for penalties or liquidated damages unless: (1) the direct contractor had knowledge of the subcontractor’s failure to pay wages, fringe or other benefit payments or contributions; or (2) the direct contractor complies with the following:

1. The direct contractor monitors the subcontractors’ wage, fringe or other benefit payments or contributions through periodic review of the subcontractor’s payroll records;
2. Upon becoming aware of the subcontractor’s failure to pay wages, fridge or other other benefit payments or contributions, the direct contractor takes corrective action to halt or rectify the failure, including, but not limited to, retaining sufficient funds from the subcontractor; and
3. Prior to making final payment to the subcontractor, the contractor obtains an affidavit from the subcontractor, signed under penalty of perjury, that the subcontractor has paid all wage, fringe or other benefit payments or contributions. 

In addition, under both Labor Code section 218.7 and 218.8, upon request by a direct contractor to a subcontractor, the 1st tier subcontractor and any 2nd-tier subcontractors must provide: (1) payroll records showing the last four (4) digits of the social security numbers of workers working on the project with information, as applicable, of fringe or other benefit payments or contributions (“Payroll Information”); and (2)  award information including the project name, name and address of the subcontractor, the contractor with whom the subcontractor is under contract, anticipated start date, duration, and estimated journeymen and apprentice hours, and contact information for its subcontractors on the project (“Award Information”).

Note: A question raised by one of our clients was whether a payment withholding is considered a good faith or or bona fide “dispute” for purposes of the state’s prompt payment laws. The answer is yes, with caveats. Labor Code section 218.8 states that a payment withholding is considered “disputed” for purposes of the state’s prompt payment laws but only if: (1) the subcontract provides that the subcontractor must provide upon request (or automatically) Payroll Information or Award Information; (2) such information is not provided; and (3) money withheld is released upon submission of such information.

Finally, I believe there are a few things a direct contractor can do contractually:

1. As discussed, include right of approval provisions in the subcontract giving the direct contractor the right to approve 2nd tier and lower subcontractors to help ensure that only reputable subcontractors, who are more likely to pay their workers, are hired.
2. Include provisions requiring that subcontractors provide the Payroll Information and Award Information discussed above, or be subject to withholding, so that the direct contractor has the right to withhold payment from the subcontractor without fear of being subject to prompt payment penalties. Also include a flow-down provision requiring that subcontractors include the same requirements in their subcontracts with 2nd-tier subcontractors and a requirement that their subcontractors include the same requirements in any subcontracts with their lower-tiered subcontractors. In fact, I would argue that such provisions be drafted even broader and specifically state a direct contractor can withhold payment from a subcontractor, not only if Payroll Information and Award Information is not provided, but if a subcontractor does in fact not pay wages when due or (and this gets a bit dicier legally) if the direct contractor has an objective good faith believe that the subcontractor has not or will not pay wages when due.  
3. Ensure that your indemnity provisions are broad enough to cover “wage claims” including claims for “penalties” and “liquidated damages.”
4. This may not work in all situations, since its would impact the direct contractor’s bid on a project, but require that 1st tier subcontractors obtain a payment bond and the right of the direct contractor to make a claim on that payment bond for unpaid wages, fringe or other benefit payments or contributions, including, interest, penalties, and liquidated damages.

STATE AND LOCAL PUBLIC WORKS PROJECTS

Are higher-tiered contractors on state and local public works projects liable with their lower-tiered subcontractors for failing to pay their workers?

Yes, with some limitations. Labor Code section 1777.5 provides that all higher-tiered parties, whether a direct contractor or subcontractor, are liable as a penalty to the state or local entity awarding the project up to two hundred dollars ($200) for each calendar day, or portion thereof, that a worker is paid less than the prevailing wage rate for the work or craft in which the worker is employed on the public works project. 

Who makes the decision on the penalty and the amount of the penalty?

The California Labor Commissioner decides the penalty and the amount of the penalty. The amount of the penalty is based on consideration of: (1) whether the mistake in paying prevailing wages was a good faith mistake and, if so, whether the error promptly and voluntarily corrected when brought to the attention of the contractor or subcontractor; and (2) whether the contractor or subcontractor has a prior record of failing to pay prevailing wages.

1. Not Less Than $40/Day: If the mistake in paying prevailing wages was a good faith mistake and was promptly and voluntarily corrected when brought to the contractor or subcontractor, and the contractor or subcontractor did not have a prior record of failing to pay prevailing wages, the penalty may not be less than forty dollars ($40) per calendar day for each worker paid less than the prevailing wage rate for the work or craft in which the worker is employed on the public works project.
2. Not Less Than $80/Day: If the contractor or subcontractor has been assessed penalties within the previous three (3) years on a separate public works project, and those penalties were not withdrawn or overturned, the penalty may not be less than eighty dollars ($80) per calendar day for each worker paid less than the prevailing wage rate for the work or craft in which the worker is employed on the public works project.
3. Not Less Than $120/Day: If the Labor Commissioner determines that the violation was willful, as defined in Labor Code section 1777.1(c) (i.e., failure to provide certified payroll records within thirty (30) days of request by the public agency awarding the project or DLSE), the penalty may not be less than one hundred twenty dollars ($120) per calendar day for each worker paid less than the prevailing wage rate for the work or craft in which the worker is employed on the public works project.

What is the deadline for a claim to be brought against a higher-tiered contractor on a state and public works project?

Labor Code section 1777.5 does not provide a deadline by which a penalties can be assessed by the Labor Commissioner. However, the regulations, at 8 CCR §232.70, provides that “[a] determination for violation of Labor Code section 1777.5 shall be issued and served on the Affected Parties no later than three years after date of accrual.” Reasonably interpreted, “date of accrual” can be understood to mean the date in which prevailing wages were not paid.

Is there anything higher-tiered contractors can do to protect themselves against such claims on state and local public works projects?

There are, some of which are obvious, some statutory, and some things that direct contractors can do contractually. First, the obvious. Hire reputable subcontractors. Of course, unless right of approval provisions are included in the subcontract between the direct contractor and subcontractor, direct contractors likely won’t have control over who a 1st tier subcontractor or lower subcontracts with. 

Second, Labor Code section 1777.5 includes a “safe harbor” for direct contractors (referred to in the statute as “prime contractors”), but it is only available to prime contractors, not subcontractors. Under Section 1777.5, prime contractors are not liable for penalties for a lower-tiered subcontractor’s failure to pay workers their prevailing wage rates if:

1. The prime contractor includes in its subcontract with its 1st tier subcontractor a copy of Labor Code sections 1771, 1776, 1777.5, 1813 and 1815.
2. The prime contractor monitors its subcontractor’s payment of prevailing wages through periodic review of the subcontractor’s certified payroll;
3. Upon becoming aware of its subcontractor’s failure to pay prevailing wages, the prime contractor takes corrective action to halt or rectify the failure, including, but not limited to, retaining sufficient funds from the 1st tier subcontractor; and
4. Prior to making final payment to the 1st tier subcontractor, the contractor obtains an affidavit from its subcontractor, signed under penalty of perjury, that the subcontractor has paid all prevailing wages. 

Note: Labor Code section 1777.5 is a bit ambiguous. It provides that prime contractors and higher-tiered subcontractors are liable for the failure of lower-tiered subcontractors to pay prevailing wages, however, the “safe harbor” is unclear whether the prime contractor must conduct periodic reviews of the certified payrolls of all lower-tiered subcontractors or only of the 1st tier subcontractor. 

Finally, I believe there are a few things a direct contractor can do contractually:

1. 1. As discussed, include right of approval provisions in the subcontract giving the direct contractor the right to approve 2nd tier and lower subcontractors to help ensure that only reputable subcontractors, who are more likely to pay their workers, are hired.
   2. Include a copy of Labor Code sections 1771, 1776, 1777.5, 1813 and 1815 as discussed above and include a provision that specifically states that the prime contractor can withhold payment from a subcontractor if certified payroll is not provided.  
   3. Ensure that your indemnity provisions are broad enough to cover “wage claims” including claims for “penalties” and “liquidated damages.”
   4. This may not work in all situations, since its would impact the direct contractor’s bid on a project, but require that 1st tier subcontractors obtain a payment bond and the right of the direct contractor to make a claim on that payment bond for unpaid wages, fringe or other benefit payments or contributions, including, interest, penalties, and liquidated damages.

FEDERAL PUBLIC WORKS PROJECTS

Are higher-tiered contractors on federal public works projects liable with their lower-tiered subcontractors for failing to pay their workers?

Ok, stop saying that Californians are crazy. Ok, we are crazy. But we’re not always alone in that craziness. Indeed, on federal public works projects, higher-tiered contractors are also jointly liable with their lower-tiered subcontractors for failing to pay their workers prevailing wages under the Davis-Bacon Act.

Federal regulations, 29 CFR 5.5(6), provides that “[t]he prime contractor is responsible for the compliance by any subcontractor or lower tiered subcontractor with all contract clauses in this section. In the event of any violation these clauses [which includes the payment of prevailing wages], the prime contractor and any subcontractor(s) responsible will be liable for any unpaid wages and monetary relief, including interest from the date of the underpayment of loss, due to any workers of lower-tier subcontractors, and may be subject to disbarment, as appropriate.”