Enacted by California state legislators in September and effective for contracts entered on or after January 1, 2018, A.B. 1701 makes direct contractors (defined as those with a direct contractual relationship with a project owner) who work on private projects in California responsible for subcontractors who fail to pay their employees—even if the contractors already paid the subcontractors for the work. The law, now codified at Labor Code Section 218.7, subjects direct contractors to liability for the unpaid wages, fringe benefits, or other benefit payments or contributions owed by defaulting subcontractors, plus interest.

This new law places a significant burden on direct contractors in California; provides no safe harbor; and gives third parties, such as unions, standing to bring a civil action on behalf of wage claimants. It also gives the California Labor Commissioner standing to bring an enforcement action against offending contractors, and entitles prevailing plaintiffs to recover their attorney's fees and costs.

There are, however, some limits to the reach of this new law. Lawsuits or enforcement actions under it must be brought within one year of project completion. And at the direct contractor’s request, lower-tier subcontractors must provide payroll records and project award information to the direct contractor for review; and if a subcontractor does not timely provide the requested records and information, direct contractors may also withhold as “disputed” all sums owed that subcontractor.

Direct contractors planning to work on private projects in California after January 1, 2018, should consider:

  1. Including strong indemnity language in all subcontracts,
  2. Requiring subcontractors to be bonded,
  3. Devising means to monitor the financial health of its subcontractors during projects and
  4. Monitoring subcontractors' wage practices, including demanding payroll records and proof of payment.