Lowest bid can become the highest cost

General contractors can be held liable for a subcontractor’s inability to pay wages where contract funds are insufficient to pay minimum wage.

In an attempt to regulate the underground economy of subcontractors who pay below minimum wage, California enacted a far-reaching Labor Code provision in 2003 that is now being used to hold general contractors liable for unpaid wages and other violations of their subcontractors. Labor Code 2810(a) provides: A person or entity may not enter into a contract or agreement for labor or services with a construction, farm labor, garment, janitorial, or security guard contractor, where the person or entity knows or should know that the contract or agreement does not include funds sufficient to allow the contractor to comply with all applicable local, state, and federal laws or regulations governing the labor or services to be provided.

In a recent Court of Appeal decision, Castillo v. Toll Bros., a general contractor sued in a class action by the employees of its framing subcontractor was found liable where evidence showed that the framing subcontractor’s bid was so low that, after covering materials and overhead costs, there were only enough funds to pay the framing subcontractor’s workers $8.70 an hour, while the state minimum wage (determined by the Industrial Welfare Commission) is $13.

The general contractor is potentially liable for the shortfall, plus penalties, interest, costs and attorney fees under Labor Code 2810. An “aggrieved employee” of a subcontractor under an insufficient contract may recover from the general contractor the greater amount of either that employee’s actual damages or $250 per affected employee for the first violation, and $1,000 per affected employee for subsequent violations, plus attorney fees and costs.

The statute further provides that an aggrieved employee can sue for and obtain injunctive relief against the general contractor, and may also recover attorney fees and costs in such an action. If the contract is with a union subcontractor, however, the statute does not apply. The Castillo court did refuse the employees’ request to find the general contractor liable for a much higher prevailing wage, finding that, absent a legal requirement to pay prevailing wage, the standard against which a subcontract agreement will be measured is the applicable minimum wage. This exception does not apply where prevailing wages are required, such as in many public works projects.

It is likely the courts will apply the statute in many construction agreement contexts, including between owners and general contractors, generals and subcontractors, subcontractors and sub-subcontractors, and even to sureties that hire replacement contractors.

To avoid potential liability to downstream subcontractors’ employees, every owner, contractor or surety can take preliminary steps to protect themselves, as the statute provides for a rebuttable presumption that the contract amount is sufficient if particular information is recited on the face of the contract. For more information on establishing a rebuttable presumption of compliance, see Labor Code 2810(d) and (e).

Even with the rebuttable presumption, a contractor must reasonably consider whether the amount it’s paying its subcontractor is sufficient to pay that subcontractor’s employees’ minimum wage. According to the court, “The contracting party’s familiarity with ‘the normal facts and circumstances of the business activity’ is to be used in determining the contracting party’s awareness of the contract’s sufficiency…” Further, the court said the statute’s “should know” language will not insulate a willfully ignorant contractor from liability.

Before accepting a suspiciously low bid from a subcontractor that could cost your company more in the long run, perform your due diligence.

-By Eric N. Kibel, senior associate with attorneys Lanak & Hanna. He can be reached at ekibel@lanak-hanna.com or (714) 550-0418.