What lawyers and contractors need to know about minimizing exposure

California is cracking down on wage theft in the construction industry.

In one case, a report by the Carpenters/Contractors Cooperation Committee led to a $1.7 million citation by the California Labor Commissioner against a San Diego-based construction company for minimum wage and overtime claims. In another case, the Labor Commissioner recovered more than $860,000 in back wages and liquidated damages and fined a construction company nearly $50,000 for overtime violations. Lyndsay Winkley, "San Diego Construction Company Cited $1.7 million for Wage Theft Violations," The San Diego Union-Tribune (Oct. 19, 2021).

California Labor Code Sections 218.7 and 218.8 are the latest arrows in the quivers of labor organizations and enforcement agencies that seek to redress and deter the underpayment of workers in the construction industry. Under these sections, if a contractor hires a subcontractor, and the subcontractor or its sub-subcontractor does not pay its workers, the contractor must pay the workers - even if the contractor and the workers have no privity of contract!

Sections 218.7 and 218.8 came into effect on Jan. 1, 2022 and apply to private (not public) works contracts. See § 218.7(a)(1); § 218.8(a)(1). Section 218.7 applies to contracts entered into between Jan. 1, 2018, and Dec. 31, 2021, and Section 218.8 applies to contracts entered into on or after Jan. 1, 2022. Id. Both sections cover a "direct" contractor, a term that broadly refers to a contractor that enters a contract in California for the erection, construction, alteration, or repair of a building, structure, or other private work. Id. Note that the word "direct" refers to the contract between the contractor and the owner, not to the contract between the contractor and the delinquent subcontractor. Thus, the direct contractor is liable for nonpayment by a subcontractor "at any tier" for labor on the project covered by the contract between the contractor and owner, regardless of whether it was the direct contractor or its subcontractor who engaged the delinquent subcontractor. Id.

The major difference between Sections 218.7 and 218.8 is liability for penalties and liquidated damages. Under Section 218.7, a direct contractor is responsible for wages, benefits, contributions, and interest on the unpaid amount, but not penalties and liquidated damages. § 218.7(a)(2). Under Section 218.8, a direct contractor is responsible for wages, benefits, contributions, and interest on the unpaid amount, plus penalties and liquidated damages. § 218.8(a)(2). However, the direct contractor is responsible for such penalties and liquidated damages only if the direct contractor did not: conduct period reviews of the subcontractor's payroll records; diligently take corrective action, including by retaining funds to cover the unpaid wages; and obtain an affidavit of payment of wages under penalty of perjury before issuing final payment to the subcontractor. § 218.8(a)(3). Note that under Section 218.8, the direct contractor cannot avoid liability for penalties and liquidated damages unless it meets all three requirements. Id.

There are only two groups that can bring a Section 218.7 or 217.8 claim for unpaid wages: the Division of Industrial Relations and a joint labor-management committee, such as the Carpenters/Contractors Cooperation Committee. § 218.7(b); § 218.8(b). Prior to commencement of an action under these sections, the committee must provide the direct contractor and subcontractor that employed the wage claimant with at least 30 days' notice by first-class mail. § 218.7(b)(3); § 218.7(b)(3). If the direct contractor does not prevail in the case, it must pay the prevailing plaintiff its attorney's fees and costs. § 218.7(b)(2)-(3); § 218.8(b)(2)-(3). The statute of limitations is one year from the earliest date of notice of completion, notice of cessation, or actual completion of the direct contract work. § 218.7(d); § 218.8(d).

Because these statutes are so new, there are very few cases that interpret their provisions, and what few cases there are have not been published. While unpublished cases are binding, one recent case is persuasive to show that causes of action against a joint labor-management committee based on its mailing of the 30-day notice required to commence an action under Section 218.7 are subject to a special motion to strike under the anti-SLAPP statutes, Code of Civil Procedure Section 425.16. BLF Inc. v. Carpenters-Contractors Cooperation Comm. Inc., No. B305136, 2022 WL 909245, at *1 (Cal. Ct. App. Mar. 29, 2022).

An issue that has arisen in practice which remains unclear under existing precedent is how the statutes apply when the Labor Commissioner and a joint labor-management committee both bring actions under Sections 218.7 and 217.8 arising out of the same violations.

In addition to educating contractors about Sections 218.7 and 217.8, attorneys can advise their clients to update their subcontracts and practices to minimize their exposure. Consider including the following provisions in upstream contracts:

● The right to obtain the payroll records of subcontractors and sub-subcontractors for workers on the project.

● The right to obtain certified payroll records of subcontractors and sub-subcontractors showing that workers are, in fact, being paid.

● The right to obtain daily reports with names of workers.

● The right to withhold payments for wage claims that may expose the contractor to liability under Sections 218.7 and 218.8.

● A requirement that subcontractors and sub-subcontractors obtain payment bonds and keep them in place until the statute of limitations for Section 218.7 and 218.8 claims expires.

● The right to claim on those bonds for wage claims that may expose the contractor to liability under Section 218.7 and 218.8.

● A requirement that subcontractors indemnify and defend the contractor for wage claims that may expose the contractor to liability under Sections 218.7 and 218.8.

● A requirement that subcontractors flow down these provisions in their sub-subcontractors.

In addition, consider adopting the following practices:

● Obtain payroll records and monitor subcontractors and sub-subcontractors to make sure they comply with the payroll and recordkeeping requirements.

● Diligently take corrective action, including by retaining funds from subcontractors to cover the wages unpaid by subcontractors or sub-subcontractors.

● Obtain an affidavit of payment of wages by the subcontractor and its sub-subcontractors under penalty of perjury before issuing final payment to the subcontractor.