You could be liable for subs' nonpayment
Labor dept. issues assessment against direct contractor for sub’s nonpayment
On June 29 the California Labor Commissioner issued a press release in which it announced it had issued citations of $249,879 against a direct contractor and its subcontractor for the non-payment of the subcontractor’s laborers. The Labor Commissioner asserts this is the first time they have held a direct contractor responsible for “wage theft” under section 2010.3 of the Labor Code, which took effect on January 1, 2015.
As contractors who perform work in the public works realm know, the direct contractor and its payment bond surety are liable for any non-payment of wages, including fringe benefits, overtime, and other labor-based payments that must be made under the Labor Code provisions pertaining to public works. The non-payment by the subcontractor makes the contractors liable for the wages, and unless the safe harbor provisions apply, also for significant penalties for each violation. Until the enactment of the laws addressed here, these same penalties did not apply to contractors on private works of improvement.
However, in enacting Section 2810.3 of the Labor Code, the Legislature has now established that the direct contractor is responsible for unpaid wages by the subcontractor where there is a specific use of labor on a project. While I am using the terms “direct contractor” and “subcontractor” in this article, the statute defines what is called a “client employer” and a “labor contractor.” A “client employer” is defined as an entity with a workforce greater than 25 workers, including those hired directly and through “labor contractors” (i.e. subcontractors). That means that a project with more than 25 total workers on it, regardless of where they came from, would be affected by this law. The law also only applies if the labor contractor is providing more than five (5) workers at any given time.
Under this law, the employing contractor shall share with the subcontractor all civil liability and civil responsibility for all workers supplied by the subcontractors for the payment of wages and the failure to secure valid worker’s compensation coverage. The statute includes the timing for notice by the employees, and the obligation to produce documents at the request of the Labor Commissioner.
Now, the set of facts in the press release were somewhat extreme. The subcontractor reportedly “stole” wages from the subcontractor’s own employees, including non-payment of wages and overtime. The amounts that were assessed were substantial such that with penalties, $249,000 was assessed against the direct contractor. While knowledge by the employer (direct contractor) does not appear to be a requirement for liability, the press release put emphasis on this knowledge by the direct contractor’s superintendent.
Knowledge and doing something about these claims is essential. In the public works realm, the contractor can avoid Labor Code penalties (not liability for the wages) by providing the language of the Labor Code in its subcontract, by maintaining wage compliance personnel whose job is to confirm that the employees are being paid their appropriate wages, and taking steps when they learn that the subcontractor’s employees are not being properly paid.
Direct contractors hiring subcontractors on all works of improvement should make sure that they have a good subcontract with an indemnity provision that requires the subcontractor to indemnify for all claims, including labor claims. If a subcontractor bond is not required (many contractors are now requiring such bonds on larger subcontractors), the direct contractor should consider whether to require the officer or principals of a corporate subcontractor to personally guarantee compliance with the labor provisions. This way they cannot hide behind the corporate shield to avoid their willful non-payment of wages.
Lastly, just as one would do on a public works project, direct contractors should consider whether they want to require their subcontractors to prove that they have paid their laborers on a regular basis as a condition for their next payment. Although there will not be a requirement to produce certified payroll records. If the contractor maintains daily logs and notes how many workers are supplied to a job by their subcontractors, the contractor should be able to verify that number of paychecks have been written on a weekly basis by their subcontractor.
When in doubt, you should consult with an attorney knowledgeable in this area of the law to better assist you in protecting yourself.