General Contractors are Enforcing Statutory Right to Inspect Subcontractor Payroll Records

Christopher Ng, esq.By Christopher Ng, Esq.
Yes, California’s Assembly Bill 1701 was a doozy. For those of you not yet familiar with the new law, to make a long story short, AB 1701 makes a direct contractor (California speak for “general contractor”) jointly liable for the unpaid wages, fringe benefits, or other benefit payments or contributions of a subcontractor — at any tier! The new law governs private projects only and applies even if the direct contractor has paid its subcontractor.

Labor Code section 218.7(f) does give the direct contractor the right to inspect each of its subcontractor’s employees’ wage statements and payroll records maintained under Labor Code section 1174. Significantly, such “records must contain information sufficient to apprise the requesting party of the subcontractor’s payment status in making fringe or other benefit payments or contributions to a third party on the employee’s behalf.” Importantly, the direct contractor may withhold as “disputed” all sums owed if a subcontractor fails to timely provide the payroll or project information referenced below, until that information is provided. Without a doubt, judges, arbitrators, and juries will be soon called upon to determine factual disputes as to whether a subcontractor timely, properly and/or sufficiently complied with AB 1701 and the subcontract agreement’s requirement to provide such payroll or project information.

Subcontractors are reporting that direct contractors have updated their standard subcontract agreements to address AB 1701’s impacts — and in some cases, complain that direct contractors are now overreacting and overreaching.

Here are some of the common (and uncommon) newly created subcontract provisions proposed by direct contractors for California private projects going forward:

  • Subcontractor’s strict compliance with all wage and hour regulations, including specific defense, indemnity and hold harmless provisions to protect the direct contractor against claims for unpaid wages or benefits brought on behalf of the subcontractor’s employees;
  • Requirement for subcontractors to include a similar contractual provision in their own subcontracts that would require lower-tier subcontractors to also defend and indemnify the direct contractor for claims arising from their respective employees’ work;
  • Direct Contractor’s right to inspect payroll records (at a minimum, information set forth in Labor Code section 226) and project award information (that includes the project name, name and address of the subcontractor, contractor with whom the subcontractor is under contract, anticipated start date, duration, and estimated journeymen and apprentice hours, and contact information for its subcontractors on the project); specifically, subcontractors are being contractually compelled to provide payroll records and project award information at specific periodic intervals to ensure compliance with the law, and sometimes within 24 hours upon the Direct Contractor’s request (the records requested are similar to certified payroll reports required on prevailing wage projects);
  • A backcharge/withholding provision that confirms the Direct Contractor’s right to backcharge or withhold payments from the subcontractor pursuant to Labor Code section 218.7;
  • A provision giving the Direct Contractor the power to approve or reject the hiring of subcontractors of all tiers;
  • Requirement for subcontractors at every tier to provide security in the form of a properly worded payment bond or letter of credit to satisfy claims that are made against the Direct Contractor under the new law;
  • Personal guarantees from owners, officers, and other key subcontractor personnel.

In addition, many Direct Contractors have already implemented a cumbersome “belts and suspenders” type system to confirm evidence of proper payments to downstream employees and other third parties (e.g., securing signed payment acknowledgments by each subcontractor and sub-subcontractor employee and by those third parties entitled to recover fringe benefits or other contributions), as well as a system to prevent fraudulent claims (e.g., identification check-in software or other registration and security methods to confirm the presence and identification of all employees on a job site.

Of course, subcontractors should, at a minimum, flow down all appropriate subcontract provisions to their sub-tier subcontractors. Subcontractors will also want to limit and clearly define the documentation it must provide to the Direct Contractor to comply with AB 1701 and their contractual responsibilities.

 

The content contained herein is published online by Gibbs Giden Locher Turner Senet & Wittbrodt LLP for informational purposes only, may not reflect the most current legal developments, verdicts or settlements, and does not constitute legal advice. Do not act on the information contained herein without seeking the advice of licensed counsel.

Copyright 2018 Gibbs Giden Locher Turner Senet & Wittbrodt LLP

CreditScape Spring Summit Helps Identify and Prepare For Change in Credit

The CreditScape Spring Summit, Powered by United TranzActions, helped attendees uncover areas in their company’s credit operations where they could help implement change in their credit operations to improve the performance of their department. The event was an interactive learning seminar and workshop, which took place April 4 and 5 at the Hyatt Regency Orange County.

Based on the preliminary results of the post-event survey, attendees said they were provided with dozens of ideas to bring back to the office.

“This is an excellent opportunity to evaluate best practices and learn how to implement within your credit and finance team,” said Melissa Kobus, Assistant Director of Credit for Walters Wholesale Electric.

With the common theme of “dealing with change in the credit department,” attendees commented that the sessions met or exceeded their expectations, with every attendee who responded to the survey commenting that they would likely recommend CreditScape to a colleague.

CreditScape gave attendees insights on using social media to track their delinquent customers, tips on automation and how robotic process integration (RPI) will change the credit function in the near future, customer terms pushback assistance, preference claims, customer service tips, credit card surcharge strategies, reading and understanding your customer’s financial data, and a lot more.

Thanks to the attendees, sponsors and CMA members for their support of the event, and we look forward to having you at the next one in 2019!

Here are some photos from the event:

Bob Shultz addresses the audience at the 2018 CreditScape Spring Summit, powered by United TranzActions.
Keynote speaker Joel Block talks about managing change with the audience.
What would an event be without a selfie with keynote speaker Joel Block?
Eddy Sumar gives tips on good customer service techniques during one of the breakout sessions at the event.
Popular speaker Christopher Ng, Esq., updates the audience on construction law changes in California.
CMA Chairman Gent Culver addresses the crowd at the membership luncheon at CreditScape.

CMA Hosts Joint Construction Meeting in Los Angeles

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On October 13, CMA held its first ever joint construction credit meeting, allowing CMA member companies from different vertical industries who sell to the construction industry to get together to talk about common job accounts. In addition, Chris Ng, Esq., spoke to the group on a series of construction law related topics, including the legalities related to job accounts. Amongst the activities at the event included a discussion of best and worst practices, which really hit home with many of the companies who participated. Thanks to all who attended.

Prevailing Wage…for Material Suppliers???!!!, by Christopher Ng, Esq.

Christopher Ng, esq.Last week, I came back from the American Bar Association Forum on Construction Law Annual Meeting in Nashville, Tennessee. On my last night there, my wife and I went to the Grand Ole Opry. One of the featured country artists that night asked the audience, “You know what happens when you play a country music record backwards? You get your truck back, you get your dog back, you get your wife back…” Well, after discussing California’s new Labor Code section 1720.9 (which goes into effect on July 1, 2016) with some of my colleagues from around the country, I couldn’t help but wonder if we here in California are headed backwards when it comes to making our prevailing wage law less cumbersome and taxpayer-funded construction projects less expensive.

California law has traditionally drawn a distinction between the performance of on-site construction labor and the supply of construction materials. AB 219 added new Labor Code section 1720.9, signaling the extension of a legislative trend adding significant complexity, risk and cost for contractors and material suppliers on public works of improvement.

Specifically, AB 219 abrogates and supersedes conflicting case law and a prior (non-precedential) coverage determination by the California Department of Industrial Relations that the delivery of ready-mix concrete to a public job does not constitute a public work subject to prevailing wage laws. As of July 1, 2016, the hauling and delivery of ready-mix concrete from a commercial plant to a public works job will be subject to California’s prevailing wage law.

The “hauling and delivery of ready-mixed concrete to carry out a public works contract” means the job duties for a ready mixer driver and includes receiving the concrete at the factory or batching plant and the return trip to the factory or batching plant. While AB 219 is specific to concrete suppliers, some believe that this is just the tip of the iceberg and that the co-sponsors of the new law (i.e., The California Teamsters Public Affairs Council, The State Building and Construction Trades Council, The California Labor Federation AFL-CIO) will push for additional legislation that could require prevailing wage for other material suppliers. What logical and legal justification exists for excluding the delivery of steel, lumber, paint, fuel, plumbing supplies, electrical components and even port-a-potties?

In the face of vociferous opposition from Associated General Contractors (AGC) and other industry associations, the labor organizations behind AB 219 convinced the legislature and Governor Brown that the new law was merely a logical expansion of prevailing wage law. Specifically, these advocates argued that concrete delivery was already subject to prevailing wage law if delivered by the project direct contractor or a subcontractor, but just not by a material supplier.

So what’s the big deal and what could possibly go wrong? Here are some highlights of the new law which apply to all public projects awarded after July 1, 2016:

  • The cost of almost every public construction project in California will increase; in fact, according to the AGC of California: (1) ready-mix producers estimate that the cost of concrete for projects under AB 219 would increase by 30 to 40 percent; (2) state agencies indicated that the fiscal impact of the new law will exceed $35,000,000; and (3) Caltrans estimated $1 million annually in administrative costs to administer
    the law.
  • Ready-mix haulers and entities that deliver ready-mixed concrete to public works projects will be considered public works contractors under California Labor Code section 1722.1 and must register with the Department of Industrial Relations as set forth in Labor Code section 1725.5.
  • Ready-mix suppliers must develop an accounting and payroll infrastructure capable of processing, submitting and maintaining certified payroll records.
  • Because the material is perishable, a driver’s routine may last just 90 minutes or less (i.e., take load from the plant to the job, wait for truck to be unloaded and return to the plant) and a typical work day will often include deliveries to both public and private works of improvement; therefore, companies must implement a system that can divvy up each driver’s records on an hourly basis to separate private and public work pay records.
  • Before furnishing concrete to a public works job, a ready-mix supplier must enter into a written agreement with its contractor customers, which specifically requires compliance with prevailing wage law (can a standard credit agreement and subsequent exchange of a written quotation, purchase order and/or invoice ever suffice???).
  • Within three working days after their drivers have been paid for the prevailing wage work, ready-mix suppliers must submit certified payroll records to their contractor customers and each project’s direct contractor (if that’s a different entity), accompanied by a written time record certified by the individual driver(s).
  • As with other subcontractors subject to prevailing wage laws, contractors are ultimately responsible for unpaid prevailing wages and unpaid penalties resulting from improper wage payment or improper certified payroll record submission; as such, public works contractors assume more risk as their ready-mix supply “subcontractors” attempt to abide by these new requirements after July 1, 2016.

Without a doubt, California has further complicated its already cumbersome regulatory scheme for public works. Ready-mix suppliers must now gear up to navigate the complexities California prevailing wage law and contractors should double-check their standard form contracts to ensure they contemplate and properly allocated the new risks imposed by AB 219. For additional information and for F.A.Q., see the AB 219 Fact Sheet at http://www.calcima.org/pdf/AB219FactSheet.pdf

For more information contact: Christopher, E. Ng, esq., (310)552.3400 or cng@gibbsgiden.com

The content contained herein is published online by Gibbs Giden Locher Turner Senet & Wittbrodt LLP (“Gibbs Giden”) for informational purposes only, may not reflect the most current legal developments, verdicts or settlements, and does not constitute legal advice. Do not act on the information contained herein without seeking the advice of licensed counsel. Copyright 2016 Gibbs Giden Locher Turner Senet & Wittbrodt LLP ©
www.gibbsgiden.com