Expanded Employment Liability for General Contractors & Developers: California’s AB 1701 Explained

This new law could expand your potential liability under California labor laws. Read on to learn more about the new law and what you can do to try and mitigate risk …

I. Summary of AB 1701

California’s AB 1701 was enacted in 2017 and effective January 1, 2018, and it amends the Labor Code to expand liability for general contractors and real estate developers. In short, general contractors and real estate developers are now jointly liable for the unpaid wages, fringe benefits, and/or other benefit payments or contributions that a subcontract at any tier fails to make. You read that correctly, any tier!

Lawmakers expressly state that the new law is designed to incentivize general contractors and real estate developers to choose quality subcontractors for private projects commencing after January 1, 2018. Public works projects are exempt from this new law. Moreover, the types of private contracts affected are broadly defined as those for the erection, construction, alteration, or repair of a building, structure, or other work.

ONLY the California Labor Commissioner (on behalf of affected employees or misclassified independent contractors) OR a third-party owed contribution (such as a labor union) may bring suit under this new law. Therefore, employees themselves may not bring suit under the new law. Such a suit must be initiated within one (1) year of either:

• Recordation of the Notice of Completion of the prime contract;

• Recordation of a Notice of Cessation of the work of the prime contract; or

• Actual completion of the work of the prime contract.

II. Best Practices

Under the new law, there are two key protections afforded general contractors and real estate developers. The two protections are discussed below, but it is vital that you speak with an attorney to determine how to implement them appropriately.

First, a general contractor or real estate developer has the express right to request payroll records from all subcontractors to ensure compliance with all employment laws and thus reduce its own predisposition to joint liability therein. These payroll records must, at a minimum, contain information sufficient to apprise the requesting party of the subcontractor’s payment of wages, overtime, and fringe or other benefit payments or contributions to a third party on the employee’s behalf—essentially, itemized pay stubs. This provision also provides grounds for withholding “disputed” funds until such payroll records are received from the applicable subcontractor(s).

Second, the new law does not prohibit a general contractor or real estate developer from providing contractual indemnification provisions in its contracts with subcontractors. Therefore, the contract(s) may contain language that accounts for the new law, preserving inspection rights as described above, and requiring indemnification from any subcontractor not in compliance with the applicable employment laws.

This article is purely for educational purposes, and nothing herein is intended to form an attorney-client relationship. Only a signed retainer and/or engagement agreement with us will form such a relationship. However, for questions or concerns regarding the contents of this article, feel free to schedule a free consultation.