In an unprecedented move, California recently enacted new legislation to hold state contractors directly liable for certain employment decisions of their subcontractors. Specifically, AB 1701, codified at section 218.7 of the California Labor Code, requires general contractors to ensure that their subcontractors' workers — with whom they have no employment relationship — are properly paid. Under this new law, general contractors on private construction projects are potentially liable for payment of any employee wages and benefits that the project subcontractors fail to pay their own workers.

Despite opposition from business and construction industry groups, AB 1701 passed the California Assembly by a wide margin (52-13), was signed by Governor Jerry Brown in November 2017, and went into effect on January 1, 2018. The bill was promoted by labor interests as a remedy for wage theft by unscrupulous subcontractors. However, as the bill's opponents pointed out, the remedy applies to contractors who have no direct employment relationship with the affected workers, thus holding one business accountable for the independent acts of another. The bill singles out contractors, among the many California industries that rely on subcontracted labor, to bear this unique burden.

Pedestrians walk past the California State Capitol building in Sacramento.
Pedestrians walk past the California State Capitol building in Sacramento. Bloomberg/file photo

For general contractors, the good news is that AB 1701 does not provide a private right of action for workers to bring claims directly against a project's general contractor. Instead, Labor Code § 218.7 permits enforcement in just one of three ways: (1) by the Labor Commissioner in an administrative hearing or civil action for recovery of unpaid wages and interest only; (2) by a third party that is owed benefit payments on a wage claimant’s behalf (e.g., a labor union) in a civil action for recovery benefits, attorneys' fees and expert witness fees; or (3) by a joint labor-management cooperation committee in a civil action for recovery of unpaid wages, attorneys' fees and expert witness fees. The statute also does not subject the contractor to liability for any wage penalties or liquidated damages, unlike employers.

The bad news for general contractors is that they are potentially liable for unpaid wages on any tier of the subcontracting chain, including wages owed by subcontractors that have no direct contractual relationship with the general contractor. This means that general contractors could be liable for the employment decisions of subcontractors they have not even had an opportunity to vet.

How aggressive the Labor Commissioner’s Office will be in pursuing general contractors for unpaid wages is uncertain. However, the office may actively enforce this new law, especially in light of its mission "to ensure a just day's pay in every workplace" and "to promote economic justice through robust enforcement of labor laws." AB 1701 also provides a strong incentive for labor unions and joint labor-management committees to bring civil actions against general contractors because it allows these entities to recover attorneys' fees and costs — including expert witness fees.

Although the fairness — and constitutionality — of AB 1701 is open to question and future legal challenge, for now, California general contractors must be aware of their new obligations under this Labor Code provision.

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JoLynn M. Pollard

JoLynn M. Pollard

JoLynn Pollard is a shareholder at Hunt Ortmann who specializes in business and insurance counseling and litigation. She leads the firm’s employment law group and spearheads its insurance group.
Lisa Lawrence

Lisa Lawrence

Lisa Lawrence is a business litigator with more than 10 years of experience in commercial litigation.