LEGAL NEWS


Legal News Continued from page 19


claimant’s behalf” (e.g., a labor union); and (3) a joint labor-management cooperation committee. Note that the statute does not confer any private right of action by the wage claimants against the direct contractor. Claimants have one year from


the earliest of the following to file an action under Section 218.7: (1) the date on which a notice of completion of the project is recorded; (2) the date on which a notice of cessation of labor is recorded in connection with the project; or (3) the date on which work on the project is actually completed. Te original version of Section


218.7 required subcontractors, upon request by the direct contractor, to provide itemized wage statements or other payroll records containing “information sufficient to apprise the requesting party of the subcontractors’ payment status in making fringe or other benefit payments or contribu- tions” on behalf of their employees. Upon request, subcontractors were also required to provide direct contractors with information about their lower tier subcontractors on the project. If a subcontractor failed to respond in a timely fashion, the direct contractor could withhold as “disputed” all sums owed to the subcontractor until the information is provided.


Changes Made by AB 1565 AB 1565 amends Section 218.7 in


two notable ways. First, the provision stating that direct contractors’ liability under the statute is “in addition to existing obligations and remedies provided by law” has been removed. Te statute has now been clarified to expressly limit contractors’ liability to wages and benefit payments, plus any interest due on those amounts. Te statute continues to state that direct contractors’ liability does not extend to liquidated damages or penalties that may be incurred by a subcontractor as a result of its failure to pay wages or benefits owed to its laborers. More significantly, contractors


seeking to protect themselves against 20 September/October 2019


the liability created by Section 218.7 must now ensure that specific audit provisions are included in their subcon- tracts. As noted above, the original version of the statute required subcon- tractors to furnish payroll information “upon request.” For any contract entered into on or after January 1, 2019, however, a contractor may not withhold payments as “disputed” for failing to provide this information unless the contract between the direct contractor and its subcontractor identifies the specific documents and information that the direct contractor will require a subcontractor to provide. Subcontractors may include the


same requirements in their contracts with lower tier subcontractors. Both direct contractors and subcontractors may withhold as “disputed” all sums owed to a lower tier subcontractor until the specified information is provided, as long as that information was specifi- cally required by that subcontractor’s contract.


What Can Contractors Do to Protect Themselves?


Contractors can take a number of


steps to protect against the liability created by Section 218.7: 1. Include broad defense and indemnity rights in subcontracts that include claims arising from the subcontractor’s failure to pay wages and benefits to laborers, and requiring subcontractors to defend the direct contractor against such claims.


2. Require subcontractors to provide a payment bond or letter of credit. A subcontractor’s inability or unwillingness to provide one of these may be an indication that a subcontractor is in financial distress or has had difficulties paying its laborers. If a subcontractor is unable to provide a payment bond or letter of credit for reasons unrelated to its financial solvency, consider requiring personal guarantees from the subcontractor’s owners, partners or key personnel with respect to the


subcontractor’s wage and benefit obligations.


3. Prequalify and thoroughly vet subcontractors to ensure that they have a proven track record and are financially solvent.


4. Include audit rights, withholding, and back-charge provisions in subcontracts. Direct contractors should include provisions in their subcontracts requiring subcon- tractors to provide, with every application for payment, itemized wage statements or certified payroll reports for all laborers and other persons entitled to benefits or contributions for the project during the period covered by the application.


5. Implement a system to monitor subcontractors’ compliance with wage and benefit obligations, such as requiring subcontractors to certify and submit evidence of their compliance with those obligations as part of the approval process for every application for payment. If a subcontractor fails to provide the required information, direct contractors should withhold all sums owed until the subcontractor provides the required records.


Section 218.7 specifically provides


that it does not affect the direct contractor’s prompt payment obliga- tions, which includes potential liability for prompt payment penalties. Terefore, unless there is a suffi- cient reason to withhold sums as “disputed,” direct contractors should ensure that amounts not subject to a good faith dispute are paid to subcon- tractors within the time required by law. Since prompt payment penalties can accumulate quickly, contractors should contact a construction attorney if there is any doubt about whether withholding is justified. 


Mary A. Salamone is a partner and


Dan J. Bulfer is an associate with Atkinson, Andelson, Loya, Ruud & Romo (AALRR), Irvine, www.aalrr.com.


California Constructor


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