Direct Contractors Must Protect Themselves and Be Diligent in Supervising Their Subcontractors Payroll in Light of the New Labor Code Section 218.7

According to the new law, direct contractors, general contractors, or any contractor who has a direct contract with the property owner, are essentially required to supervise their subcontractors payroll to ensure that all wages and benefits are paid in a timely manner to the subcontractor’s employees.

Labor Code Section 218.7 states that upon the direct contractor’s request, subcontractors and lower tier subcontractors must provide the direct contractor with all payroll records and project award information. If the subcontractor or lower tier subcontractor fails to provide the requested records and information, the direct contractor may withhold any sum owed to the subcontractor as “disputed.”

To ensure that their projects go smoothly, direct contractors should require all subcontractors to provide their payroll and project award records by specific deadlines. Moreover, to certify that all of the subcontractors’ employees are paid, direct contractors may find it helpful to require each subcontractor or lower tier subcontractor’s employees or third parties to sign documents acknowledging receipt of payment.

Moreover, direct contractors may require subcontractors to agree to defend and indemnify the direct contractor in the event an action is filed against the direct contractor. Likewise, subcontractors may also require lower tier subcontractors to also defend and indemnify the direct contractor.

Although, the new law applies to any private works contracts executed after January 1, 2018 and places more liability on direct contractors, direct contractors still have various avenues by which they can protect themselves and their businesses. Before entering into a new contract with subcontractors, direct contractors should discuss ways to limit their exposure with their attorney.

Do you think this new law could come up in misclassification claim?  Let us know in the comments below.