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SB 727 – Expands Existing Direct Contractor Liability Arising From A Subcontractor’s Violation Of Wage And Hour Laws To Include Liquidated Damages And Penalties When The Subcontractor Fails To Meet Certain Payroll Monitoring And Corrective Action Requirements
Senate Bill 727 (SB 727) makes significant changes to Labor Code Section 218.7, under which a direct contractor taking on a project for the erection, construction, alteration, or repair of a building, structure, or other private work, may be held liable for unpaid wages, benefits, or contributions that any tier subcontractor owes to its workers.
Labor Code Section 218.7 allows direct contractors to require subcontractors to provide certain payroll records so that the direct contractor can evaluate the subcontractor’s compliance with wage and hour laws. The direct contractor may withhold payments until the subcontractor provides those records. In order to withhold payments, the direct contractor must specify in its contract with the subcontractor, what specific documents and information that the subcontractor is required to provide.
SB 727 provides that Labor Code Section 218.7 shall only apply to contracts entered into between January 1, 2018 and December 31, 2021. Contracts entered into on or after January 1, 2022 will be subject to the new Labor Code Section 218.8.
Under Section 218.8, a direct contractor on private work projects continues to be liable for any debt owed to a wage claimant incurred by a subcontractor acting under the direct contractor. However, a direct contractor’s liability now extends to penalties and liquidated damages if the direct contractor had knowledge of the subcontractor’s failure to pay the specified wage or benefit owed by a subcontractor to a worker performing labor on the project. In order to avoid such penalties and liquidated damages, the direct contractor must:
- Monitor the payment of subcontractor wages by periodic review of payroll records.
- Upon becoming aware of a failure to pay wages, the direct contractor must take diligent corrective action to halt or rectify the failure, including withholding payments from the subcontractor.
- Prior to making final payment to the subcontractor, the direct contractor must obtain an affidavit from the subcontractor affirming that all workers have been properly paid.
In order for the direct contractor to be able to meet these requirements, Section 218.8 requires that a subcontractor provide payroll records for its employees working on the project upon request. Section 218.8 further requires the subcontractor to provide the direct contractor with information including the project name, name and address of the subcontractor, the contractor with whom the subcontractor is under contract (for lower tier subcontractors), anticipated start date, duration, and estimated journeymen and apprentice hours, and contact information for its subcontractors on the project upon request.
Section 218.8 also carriers over the direct contractor’s right to withhold as “disputed,” all sums owed if a subcontractor does not timely provide the information required above. However, a direct contractor must specify the documents and information that they will require from the subcontractor.
There exists no private right of action under Labor Code Section 218.8 against a direct contractor by a subcontractor’s employees and the statute includes a number of rules on when and how the Labor Commissioner must notify a direct contractor about a violation.
For schools, universities, and colleges embarking on construction projects, they should be sure to confirm that their direct contractors are aware of these developments in the law and that they are including appropriate provisions in their subcontracts and procedures to protect against liability under Section 218.8. Failing to do so could result in substantial disruptions to projects. Schools and colleges should also include provisions in their contracts with direct contractors requiring them to assume and indemnify them from all liability arising out of or connected with Section 218.8.
(SB 727 amends Section 218.7 of the Labor Code and adds Section 218.8 to the Labor Code.)