Beware of New California Employee Protection Law

By Abe Livchitz, CPA, Senior Tax Manager
ASL Construction Group

In October, 2017, Gov. Brown signed Assembly Bill 1701 modifying the California Labor Code. The bill requires contractors to assume liability for any unpaid wages or fringe benefits owed to employees of their subcontractors. This provision applies to all nonpublic construction contracts entered into on or after January 1, 2018.  The new law requires diligent contractors to now monitor the payroll functions of their subcontractors and any subcontractors used by their subcontractors.

To help contractors monitor a subcontractor’s payroll compliance, the law requires subcontractors to provide certain payroll information to prime contractors upon request. Failure to provide this information can allow a prime contractor to withhold payment from the subcontractor.

Interestingly, an individual employee of a subcontractor cannot seek payment from the prime contractor. Only the California Labor Commissioner, third parties owed fringe or other benefits (Union Trust Funds) and certain joint labor-management cooperation committees can seek enforcement actions.

Suggested best practices:

  • Request payroll information from subcontractors. This information can relate to both estimated payroll for the specific job and actual payroll and benefit payments. Using this data, a contractor can monitor the reasonableness of actual reported payroll.
  • Delay payments to subcontractors until confirmation of payroll and benefit payments is received and withhold payments to subcontractors that fail to provide requested data.
  • Utilize financially healthy and bonded subcontractors.
  • Modify contracts to include indemnity language and personal guarantees.
  • Subcontractors operating on thin margins should carefully monitor their cash flow as payments from primes for labor may be delayed until after their employees have been paid.
  • Subcontractors should maintain accurate payroll records as they may be asked to provide payroll data to their general before receiving contract payments.

If you have any additional questions regarding how this new law may impact your business practices, please reach out to our Construction Group.