There are various reasons why a contractor might need to “sub out” some of their work to a subcontractor (sub) — specialized tasks, resource limitations, scheduling, etc. Before hiring a sub for projects in California, construction business owners should be aware of the regulations that are in place under California’s AB 1701 law that went into effect in 2018.

Details of the law

The law puts lots of compliance responsibilities on general contractors (GC)s from a liability and administrative perspective when it comes to subbing out work. Basically, a GC is responsible for any wage and hour violations committed by the subs they hire. The idea behind the law is to ensure employees hired by a sub are paid correctly, and that GCs are more selective when hiring subs for projects.

AB 1701 makes a GC liable for any debt owed to a wage claimant that worked for a sub — even if the claimant worked for a third party hired by a sub. In addition to being responsible for individual wage claims, GCs are also held accountable for civil action lawsuits brought on by the California Labor Commissioner, joint labor-management cooperation committees, or third parties when a sub’s payroll does not comply with wage and hour laws.

GCs can expose themselves to large risks by failing to perform due diligence on subs they hire. To help alleviate some of this risk, AB 1701 allows GCs to take certain measures to protect themselves when hiring subs.

What can general contractors do to protect themselves?

GCs can put several provisions in their contracts when they hire a sub:

  • An audit provision that allows GCs to obtain payroll records on a scheduled basis with specific deadlines or upon request
  • Broad indemnity provisions to protect themselves from any claims that result from a sub’s failure to pay wages and fringe benefits   
  • An agreement that subs must produce their own contracts that require lower tier subs to have similar broad indemnity provisions
  • Policies that spell out how not complying or providing the necessary records could result in withholding payments, back-charges, or termination of the contract
  • Requirement for a payment bond to make sure that all subcontractors, laborers, and material suppliers will be paid in accordance with state regulations
  • Personal guarantees that the subcontractor will pay employees wages and benefits based on laws of the state

It is important for GCs to strictly follow any provisions outlined in a contract, and thoroughly review and track payroll records of subs. Since GCs do have rights under AB 1701 to withhold payments or terminate subcontractors for not satisfying wage or benefit requirements, it is imperative for contractors to be proactive within these laws for their own protection.

Questions on how to stay compliant?

At eBacon, we make sure our clients and our services are always up to date on the latest labor laws. Reach out to us today for a free consultation to see how you can stay compliant and save money.

The material presented here is educational in nature and is not intended to be, nor should be relied upon, as legal or financial advice. Please consult with an attorney or financial professional for advice.