AB-1701 Update: How it’s sitting with contractors and subs

Drive-thru:

  • California’s AB-1701 leads a trend among U.S. states to hold general contractors liable when their subs don’t pay their workers.
  • The bill has been called contentious, and it has surprised and concerned contractors since it was signed into law.
  • Practicing due diligence on subcontractor qualifying and oversight can help avoid surprise by claims of lost wages.

Wage theft, misclassifying labor, incorrectly classifying employees as exempt, paying only for scheduled work hours, paying per diem to escape paying overtime, and extending comp time beyond state limits—all of these are ways employers defraud workers (either intentionally or unknowingly). California’s AB-1701 seeks to address wage theft and employee misclassification by holding the general contractor liable for unpaid wages on the job. One case highlights the issue.

At issue

In August 2017, the California Labor Commissioner’s office went to court to recover wages allegedly stolen from 249 construction workers who had worked for one subcontractor. The lost wages and damages to workers amounted to $2.6 million.

A spokesperson for the State Building and Construction Trades Council noted that by holding the general contractors responsible for wages owed to subcontractors, such cases would be less likely. Other proponents noted that wage theft is often intentional and used to improve the competitiveness of one contractor over another. Hence, the law would help ensure everyone is playing by the same rules.

In opposition, a spokesperson for the National Federation of Independent Business wrote that contractors would end up paying twice for labor, instead of compelling the subcontractors to pay their employees and subs. Others wondered about holding some businesses responsible for the actions of other businesses and the cost of compliance.

California Governor Jerry Brown signed AB-1701 into law in October 2017.

Perspectives from the industry

Originally, the Wall & Ceilings Alliance, a wall and ceiling trade association, called AB-1701 “the most contentious industry measure of the year.” WACA membership was especially wary of the financial strain subcontractors might face if they didn’t receive progress payments timely. Eventually, the alliance noted that it had secured amendments to address that fear.

The Associated General Contractors of California was neutral on the legislation, preferring to work with the bill’s sponsors to narrow the circumstances of claims.

Do not shy away from asking subcontractors questions about timekeeping, recordkeeping, and pay practices; their failing may very well become yours.

To get an idea of how AB-1701 is sitting with contractors and suggestions for compliance, FUEL asked Thomas A. Lenz, partner at Atkinson, Andelson, Loya, Ruud & Romo, for his perspectives.

FUEL: What do you hear from your construction clients about AB-1701?

Thomas A. Lenz: General contractors and subcontractors have expressed surprise and concern about AB-1701. The possibility of a direct contractor sharing liabilities for subcontractors has energized discussion and education about legal compliance, business relationships, and taking steps to minimize the risk of shared liabilities.

Though the law took effect months ago, there are likely many contractors still unaware that the wage and benefit liabilities of subcontractors they hire could be theirs as well.

FUEL: What are you recommending (or what are they doing) to comply?

TL: All contractors should keep in mind that the law is looking toward expanding liabilities, particularly in a work setting where there are elements of shared control. We see it in the gig economy with cases against Uber, Grubhub, and others. We see it in joint-employer theories brought in a variety of legal cases. We also see it with California construction and, specifically, with AB-1701.

Any direct contractor wants control of its subcontractors. However, with the benefit of control comes the burden of liability risks. With AB-1701, several steps should be considered. They include acting now to review legal compliance and making sure that wages and benefits are timely and completely paid. Compliance today reduces the risk of claims later.

Review of payroll records of any subcontractor should become a regular exercise. Click To Tweet

Due diligence on contractors one works with should be considered before hiring subcontractors. If a subcontractor has a bad reputation, investigate it. You don’t want to hire a subcontractor you don’t know in case of lingering risks and bad practices. Do not shy away from asking questions about timekeeping, recordkeeping, and pay practices; their failing may very well become yours. Review of payroll records of any subcontractor should become a regular exercise, whether in relation to public or private works, to address and resolve issues of non-compliance before they turn to litigation.

There may be other information available to determine whether a subcontractor you consider hiring has failed to pay wages or benefits, or is at risk of doing so. Follow up on the information you receive. Contract language should be reviewed and revised to provide maximum protection, indemnification, and defense against claims. Consider whether bonding should be modified or increased. Other actions may be warranted depending on the details of each situation.

Stay tuned

Another California bill currently on the state senate’s docket, AB-1565 (Thurmond), would address contractor concerns about notifications to withhold payments. AB-1701 didn’t specify the exact circumstances allowing contractors to withhold payments. It also didn’t leave any remedies for subcontractors in dealing with unpaid wages by their subs.

AB-1565 would fix that by making the withholding contractor specify in the contract which documents it requires before withholding payments. That requirement would extend down the line, giving subcontractors the same oversight of their subs. The California Professional Association of Specialty Contractors, California Labor Federation and the California Association of Sheet Metal and Air Conditioning Contractors endorsed this bill.

The Senate Judiciary Committee passed AB-1565 on July 3 and placed it on the Consent Calendar. That means it is a non-controversial bill up for a vote along with other such bills.

Other states too

California is not alone in cracking down on wage theft in construction. In Maryland, Senate Bill 853 will take effect on October 1, 2018. It makes GCs jointly and severally liable when their subs don’t pay their employees according to Maryland’s wage and hour laws. House Bill 4154 in Oregon cleared the state’s House and went to Senate committee on March 3. This bill takes a slightly different approach: the GC is liable only after an employee brings a claim and the State’s Bureau of Labor Commissioner determines they can’t enforce the claim against a sub.

What’s clear is that accurately tracking employee time, at all levels, is getting more important. Treating people fairly is the goal, and accurate time records offer the proof.

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