A new law and its impact on general contractors

AB 1701 is a California law, effective January 1, 2018, that creates new potential liability for general contractors on private works projects.

We talked with Graniterock Vice President and General Counsel Kevin Jeffery to understand the basics. 

When and to whom does AB 1701 apply?

It applies only to general contractors on private works projects. By the way I use the usual term general contractor for convenience, but specifically the law refers to “direct contractors” (defined as “contractors that have a direct contractual relationship with an owner”).

What new potential liability does AB 1701 create?

Under AB 1701 general contractors on private works can be held liable for any unpaid wages or fringes owed by their subcontractors, or subcontractors of any tier, on the project. This potential liability is new in the world of private works. General contractors who operate in the public works sphere are used to this type of exposure on public jobs. Of course, on those jobs, legally-required certified payroll reports help general contractors monitor their subs and manage this exposure.

Is there a time limit on this exposure?

Yes, but it’s longer than any general contractor would like. A claim under AB 1701 has to be brought within one year of actual completion of the prime contract work, or the recording of a notice of completion/cessation, whichever comes earliest.

Who can file an AB 1701 claim?

The law authorizes the Labor Commissioner to issue a citation against a general contractor. Under a Labor Commissioner citation, the general contractor’s liability is limited to any unpaid wages, plus interest. The general contractor would not be exposed to penalties or liquidated damages.

AB 1701 also authorizes actions by union trust funds and joint labor-management cooperation committees. These actions expose general contractors to liability both for any unpaid fringes or other benefit payments, plus reasonable attorney’s fees. (Not surprisingly – this is California, after all – only plaintiffs are entitled to prevailing party attorney’s fees under AB 1701; general contractors can’t recover their legal costs, even if they win the case.)

So, what can a general contractor do to protect itself?

Here are some possibilities. As with any important legal matter, folks should explore their particular risks and circumstances with their own attorney, preferably one with construction expertise.

                1. Require their subcontractors to obtain payment bonds. (Granted, the subs most likely to fail to pay their employees are the subs least likely to qualify for bonding.)

                2. Ensure the indemnity provisions in their subcontracts require subcontractors to indemnify and defend the prime against claims for unpaid wages and benefits – both for the subcontractors themselves, and their subs of any tier.

                3. Create a system to request subcontractors’ payroll records, require them by a firm deadline, and make confirmation of wage and benefit payments a condition to the general contractor’s payments to its subs.

                4. Use retention to mitigate exposure to a subcontractor’s failure to pay its employees.

                5. Adopt a subcontractor prequalification process, or enhance their existing prequalification approach.

                6. This is an aggressive one, but a general contractor could insist that the owner of a subcontractor provide a personal guarantee.