Insights

AB 1701 Now in Effect: New Exposures for General Contractors

February 13, 2018

Property & Casualty

As we begin 2018, it is important to remember that AB 1701 is now effective and applicable to contracts entered into this year. The law will create exposures for General Contractors for payment of any tier subcontractors wages and fringe benefits.

More specifically, and per the bill text, General Contractors will be liable for specified debt owed to a wage claimant that is incurred by a subcontractor, at any tier, acting under, by, or for the direct contractor for the wage claimants performance of labor included in the subject of the original contract”. The bill would authorize the Labor Commissioner to bring an action under specified statutes or in a civil action to enforce this liability, as provided. The bill would also authorize a third party owed fringe or other benefits or a joint labor-management cooperation committee, as defined, to bring a civil action to enforce the liability against a direct contractor under these provisions, as specified.

General Contractors already face this exposure if they are performing public or other bonded works via their performance and payment bonds. The biggest potential impact of AB 1701 will be felt by private works General Contractors.

Within one year of Notice of Completion, multiple claimants including attorneys, the Labor Commissioner, and Union Trust Funds can pursue General Contractors for unpaid wages and benefits. It is also possible that the General Contractors property can be attached for security as part of a judgment.

In many cases, and especially with public works contractors, best practices have been in place long before AB 1701 was introduced. Common practices include, but are not limited to:

  • Issuing Joint Checks to suppliers and Union Trust funds.
  • Contractually requiring subcontractors to provide certified payroll records upon notice.
  • Broad and strong subcontract indemnity provisions.
  • Robust subcontractor prequalification processes, especially when working with new subcontractors.
  • Maintaining adequate retainage until proof that obligations have been satisfied.

Using best practices will not guarantee that claims will not be filed. The best way for a General Contractor to mitigate this risk is by bonding subcontractors. When bonding subcontractors, it is standard industry practice that both a performance and payment bond are provided.

A performance bond guarantees satisfactory completion of the contract.

A payment bond guarantees that wages, lower tier contractors, and suppliers will be paid.

Before providing bonds for subcontractors, a surety will go through an extensive underwriting process that includes an assessment of the subcontractor’s capacity to perform the work, financial condition, and character.

In some cases, subcontractors will not qualify for bonding. Todays surety market is aggressive, so subcontractors that do not qualify for reasonable bonding should be considered very carefully.

Subcontractors can be a General Contractors biggest risk. The use of Surety Bonds can assist to properly prequalify the subcontractors and provide a third party guarantor of their performance and payment obligations. One of our services as a professional surety brokerage firm includes assisting contractors in developing sound and practical subcontractor bonding policies and procedures.