General Contractor and Property Owners Left Holding Bag

Labor Code section 218.7, effective January 1, 2018, made general “direct” contractors (those delivering to property owners directly) responsible for wage payments to employees of subcontractors who fail to make those payments. However, direct contractors may be able to prevent such exposure through well-constructed written agreements with their subs. See, Contractors Liable for Wages and Benefits If Subcontractors Don’t Pay Their Employees.

A could-have-been-avoided case in point is the Labor Commissioner’s May 29, 2019 $68,657 assessment against general contractor J.H. McCormick, Inc. for wages the commissioner found subcontractor Universal Structural Building Corp failed to pay its workers. McCormick, apparently lacking the protective contractual measures that would have placed full burden back on Universal, appears in the unenviable position of having to pay that $68,657 presumably after having already covered that amount in the compensation paid the sub for its services.

The Labor Commissioner determined Universal’s violations – including additional substantial penalties section 218.7 did not extend to general/direct contractor McCormick – upon worker complaints that they had been paid nothing for five to six days labor a week, eight to 14 hours a day for the final weeks of the project. Universal reportedly told the workers it had no money and that McCormick, the general, was supposed to pay them.

California Labor Secretary Julie A. Su commented: “Up-the-chain general contractors are now responsible for wage theft committed by their subcontractors on all construction projects in the state. General contractors who choose subcontractors that do not pay wages owed will pay a hefty price. The Labor Commissioner’s Office will use all the tools at its disposal to return these stolen wages – including the placement of liens on these properties which will have a hold until the labor these workers poured into these projects is paid for in full.”

The commissioner’s powers can thus not only reach a general contractor’s accounts to pay an erring sub’s wage shortages, it can also sell off the property on which the project was performed. To prevent such a fiasco, best practices might include:

• General contractor agreements that confirm ultimate subcontractor responsibility for full wage and benefits payments to their workers;

• Contracts that require subcontractors to provide full wage payment documentation each pay period as a condition for the general’s payments to the sub for services rendered;

• Required indemnification, bonding and/or set-aside provisions to compensate the general/ direct contractor for its wage payments to a sub’s employees; and

• Consult with a knowledgeable legal counsel to help put such protections in place.

For more information, please contact one of our attorneys, Tim Bowles, Cindy Bamforth or Helena Kobrin.

Helena Kobrin

June 28, 2019