Following the passage of Assembly Bill No. 2696, which has been incorporated into the California Labor Code as section 218.8, general contractors may now be held liable for wage violations committed by their subcontractors on private work projects.

Effective January 1, 2025, joint labor-management cooperation committees — which are organizations formed by unions and employers to promote cooperation and resolve workplace issues — have the power to hold direct contractors responsible for the wage violations of their subcontractors. For contracts entered into on or after January 1, 2022, a direct contractor is responsible for any debt or wage owed to a subcontractor’s employee.

When is a Direct Contractor responsible?

To be responsible under California Labor Code section 218.8, a direct contractor must either have knowledge of the wage violation or fail to exercise due diligence to inquire into and verify compliance with wage-and-hour laws.

A general contractor may be liable for labor code violations when its subcontractor fails to appropriately pay an employee, if the general contractor had actual knowledge of the violation or failed to exercise reasonable due diligence in monitoring its subcontractor’s compliance. The statute establishes a relatively low threshold for liability, as contractors can be held responsible not only for violations that they actually knew about, but also for those they should have discovered through proper oversight.

A general contractor’s exposure for its subcontractor’s failure to appropriately pay wages can be extremely costly. A general contractor may be liable for unpaid wages, payments or contributions for fringe or other benefit, penalties, liquidated damages, and interest owed by the subcontractor to its employee. In addition to paying attorney’s fees and costs, general contractors could also be exposed to class actions, as well as Private Attorneys General Act (“PAGA”) – claims that are brought by an individual employee on behalf of the State of California.

How to limit exposure.

A direct contractor is not responsible if they comply with these three requirements:

• Monitor the payment by the subcontractor of wage, fringe or other benefit payment or contribution to employees or labor trust fund. The direct contractor can do this through periodic review of the subcontractor’s payroll records.
• If the direct contractor becomes aware that the subcontractor has failed to pay wages or benefits, the contractor must take action to correct or stop the violation. This might include retaining funds due to the subcontractor for work performed.
• Before making the final payment to the subcontractor for work performed, the direct contractor must obtain a signed affidavit. This document must be signed by the subcontractor certifying that the subcontractor has paid the wages, benefits, or contributions owed to the employees.

Given the significant financial exposure and the relatively low threshold for liability, general contractors should immediately implement comprehensive monitoring systems and establish clear protocols for subcontractor oversight to protect themselves from potentially costly wage violation claims.

Lauren Koger is a law clerk with Dunn DeSantis Walt & Kendrick. Lauren is a J.D. Candidate at California Western School of Law. She graduated from Boise State University, double majoring in Criminal Justice and Psychology. Upon graduating law school and passing the bar, Lauren plans to practice business and corporate law.

Dunn DeSantis Walt & Kendrick provides a broad spectrum of legal services to businesses of all sizes, from small, local start-ups and non-profits to large, national companies. DDWK’s real estate development and construction practice includes representing all segments of the development and construction industries on both private and public projects. 

You can find additional information and resources related to helping business owners and their businesses on the DDWK website.