General Contractors Now in the Line of Fire for Subcontractor’s Unpaid Employees

January 4, 2018 | Ryan Kagarakis

With the holiday season in full swing we are reminded of the things that we should be thankful for. This holiday season, employees in the state of California are thankful for our government’s continued efforts to pass legislation heavily favoring them vs. their employer. If you are general contractor in our state, you may not be singing the same tune.

As the population in California continues to grow the immediate need for affordable housing intensifies. With current housing inventory low the only way to meet the demand is to build more new homes. New homes are typically built by a general contractor who then hires specialty trade contractors to perform framing, plumbing, electrical, roofing, etc. These subcontractors also have employees working for them to help complete the work. The general contractor will then pay the subcontractors with the subcontractors’ workers being paid directly by their employer.

This all seems right and fair, correct?

However, with the recent passage of Assembly Bill (AB) 1701, if a subcontractor does not pay their employees, the general contractor is now legally responsible their wages. This will now force the general contractor to pay twice for the same work; once for the amount he has already paid the subcontracted company and again for the unpaid wage labor.

Furthermore, if the general contractor contests the allegation they now have to go to civil court to fight the matter. Consequently, if a civil action is brought against the general contractor it will then become public information and will likely show up on the California Contractor’s License Board website. If they choose not to respond to the allegation their license can be suspended for an “Unsatisfied Civil Judgement” causing more potential economic harm.

The legislation’s intentions were true as they tried to protect employees who don’t get payment from their employer. However, the consequence is that it puts more pressure on general contractors to scrutinize the trade contractors that work for them with the penalty being double paying for work they have done on a project. Furthermore, this now leaves the door open for frivolous lawsuits that general contractors now have to respond to or risk license suspension.

Here are some “best practices” tips for companies using subcontractors:

  • First and foremost: Consult with your attorney to ensure that all existing and future contracts will address AB 1701 and mitigate potential claims involving this matter.
  • Develop a plan to evaluate both existing and new subcontractors for financial stability and reliability.
  • Monitor certificates of insurance for all lines of coverage required within your contract. Continuous certificate review can identify if premiums are not being paid.
  • Update the indemnifying provision in the existing subcontractor agreement to address AB 1701 in the event of a claim.
  • Consider requiring wage bonds from subcontractors so that subcontractor’s employees have recourse if they are not paid.

As always, we recommend addressing any specific questions or concerns that you may have regarding this topic with an insurance professional and/or an attorney specializing in labor matters.

Ryan Kagarakis
Commercial Insurance Broker at Brown & Brown Inc.

Phone: 916.625.4616 | Direct Fax: 800.761.6733