By Marion T. Hack, Esq., Barbara R. Gadbois. Esq. and Gary E. Scalabrini, Esq. of Gibbs Giden Locher Turner Senet & Wittbrodt LLP
On October 13, 2013, California Governor, Jerry Brown, signed several new bills amending prevailing wage statutes. The bill that may have the most significant impact on contractors is Assembly Bill 1336, which extends the period for the California Labor Commissioner and joint labor management committees to enforce the Prevailing Wage statutes from 180 days to 18 months after either the filing of a notice of completion or acceptance of a public work by the awarding body. Because prevailing wage violations are joint and contain obligations of both the subcontractor and the general/direct contractor, this extension of the limitations period means that general contractors may find themselves financially liable for prevailing wages long after projects have been closed out.
The general contractor has little recourse against a subcontractor that has been paid in full and is either no longer in business or financially able to satisfy a wage assessment. General contractors cannot withhold funds from subcontractors in order to wait out the statute without risking possible exposure to prompt payment penalties and lawsuits to recover unpaid balances - unless the direct contractor can document that a bona fide dispute exists between the subcontractor and original contractor.
What should the general contractor do to protect himself against the actions of subcontractors who fail to pay prevailing wages; especially given that this extension of time for the Labor Commissioner to bring enforcement actions is expected to increase the number of litigations?
Here are some actions contractors can take to avoid repercussions:
1. Request Payment and Performance Bonds from Subcontractors in Bid Solicitation
Yes, payment and performance bonds may be financially prohibitive on some projects; however, it may be worth the cost on a prevailing wage job, especially if it involves a subcontractor you don’t have a previous positive relationship with. If the subcontractor is able to provide a bond, make sure the performance bond includes language in the bond itself that covers all prevailing wage requirements. Also, the bond should at least contain language that covers all obligations under the subcontract, which should include the requirement for the subcontractor to pay prevailing wages. Since the statute of limitations for performance bond claims is four years (breach of contract), wage enforcement actions should be covered, and you should be clear under this type of bond. If the subcontractor is unable or refuses to provide bonds on a public works project awarded by a public entity, the general contractor is entitled to withhold any retention from that subcontractor exceeding the amount of retention the public entity withholds from the general contractor pursuant to Public Contract Code 7201. Basically, this opens the door for the general contractor to withhold disputed amounts of payment if prevailing wage violations were found to be committed by the subcontractor.
2. Include Indemnity/Defense Obligations in Subcontract
The general contractor should explicitly include indemnity language that requires the subcontractor to indemnity and defend the general contractor for all prevailing wage claims arising from the subcontractor’s scope of work.
3. Avoid Penalties by following the “Safe Harbor” Provisions of Labor Code 1775
Contractors should note that the Labor Commissioner is no longer reliably waiving penalties when negotiating a prevailing wage claim. As such, it is even more important that contractors comply with the safe harbor provisions of Labor Code 1775. General contractors are not liable for any penalties if they comply with all of the following requirements:
- a. The subcontract includes a copy of the provisions of Labor Code Section 1775, 1771, 1776, 1777.5, 1813, and 1815.
- b. The general contractor monitors the payment of the specified general prevailing rate of per diem wages by the subcontractor to its employees, by periodic review of the certified payroll records of the subcontractor.
- c. Upon becoming aware of any failure of a subcontractor to pay its workers the specified prevailing rate of wages, the contractor diligently takes corrective action to halt or rectify the failure, including retaining sufficient funds due the subcontractor for work performed on the public works project.
- d. Prior to making final payment to the subcontractor for work performed, the contractor obtains an affidavit signed under penalty of perjury from the subcontractor that the subcontractor has paid the specified general prevailing rate of per diem wages to its employees on the project and any amounts due for overtime pursuant to Section 1813. This last obligation, which contractors tend to forget, should be a required closeout document for every job.
4. Include Rights to Conduct Labor Compliance Audit and Interviews in the Subcontract
The liability provisions of California’s prevailing wage laws are intended to encourage general contractors to be selective with whom they do business. Failure to fully investigate a low-bid subcontractor can have serious consequences. While the “Safe Harbor” provisions provide some limited protection from penalty assessments, the greater risk is for unpaid wages. Moreover, periodic review of certified payroll records alone may not uncover subcontractor fraud.
General contractors seeking to mitigate the risk of careless or fraudulent underpayment by subcontractors should consider taking a more proactive “watchdog” approach to ensure subcontractor labor compliance. One way to do this is to include contractual rights to routine performance of random interviews of subcontractor workers and the request of copies of canceled checks to verify amounts actually paid to workers. If the general contractor becomes aware of a subcontractor’s failure to pay specified prevailing wage rates, Labor Code Section 1775 directs the general contractor to “diligently take corrective action” to rectify the failure -- including retaining funds otherwise due the subcontractor. This Labor Code withholding requirement should be sufficient to satisfy the requirement for a bona fide dispute under Public Contract Code Section 7201. so the general contractor can withhold 150% of the estimated value of underpaid wages and penalties from payments due the subcontractor.
Of course, these risk mitigation factors may increase the costs of performing public works project and should to be factored into bids on this type of work.
About the authors:
Gibbs Giden, Locher Turner & Senet & Wittbrodt LLP provides legal guidance and counseling to clients at every stage of a construction project. Gibbs Giden has extensive experience with every type of construction project, including airports, power plants, hospitals, major sports venues, office buildings, correctional facilities, retail locations, major residential projects, universities, courthouses, petrochemical plants, dams, pipelines, and wastewater and water treatment facilities. They have represented public and private owners, design professionals, general contractors, subcontractors, and material suppliers with respect to almost every conceivable circumstance that can arise before, during, and after completion of a construction project. You can find them on the web at www.ggltsw.com