For general contractors, risk extends beyond scheduling and project management to subcontractor payroll compliance.
As of January 1, 2025, Assembly Bill 2696 amended California Labor Code section 218.8 and reinforced the exposure direct contractors face when subcontractors fail to pay wages or related amounts on private projects.
When disputes, claims, or compliance failures arise, guidance from a commercial litigation attorney in Santa Rosa can be an essential part of protecting the business and preserving project momentum. The best response is not panic. It is structure, documentation, and prompt action.
What AB 2696 Means for General Contractors
California Labor Code section 218.8 applies to specific private construction contracts entered into on or after January 1, 2022. Under the statute, a direct contractor may be liable for debts owed by subcontractors at any tier for labor performed on the project.
AB 2696 expanded enforcement rights in ways that increase the importance of careful compliance and internal oversight.
Potential Liability May Include:
- Unpaid wages
- Fringe benefit payments or contributions
- Training fund contributions
- Interest
- Penalties
- Liquidated damages
- Attorney fees and costs in certain actions
A subcontractor’s payroll issues can turn into a costly dispute for the direct contractor, particularly where project records are incomplete or corrective action was delayed.
When Penalties and Liquidated Damages
The statute does not treat every category of liability the same way. Unpaid wages and benefit-related amounts may create direct exposure. Penalties and liquidated damages, however, depend on additional circumstances.
A direct contractor may avoid liability for certain penalties and liquidated damages if they’ve completed the three key safeguards.
The 3 Key Safeguards
1. Periodically Reviewed Payroll Records
The contractor must monitor the subcontractor’s payment of wages and benefits through periodic review of payroll records containing the information required by law.
2. Took Diligent Corrective Action
If the contractor became aware of a payment failure, it must act diligently to halt or correct the discrepancy. That may include retaining sufficient funds otherwise due to the subcontractor.
3. Obtained a Pre-Final-Payment Affidavit
Prior to final payment, the contractor must obtain an affidavit signed under penalty of perjury confirming the subcontractor paid the required wages and benefit contributions for the project.
Who Can Enforce These Obligations?
AB 2696 also matters because several different parties may pursue enforcement.
Potential Enforcement May Come From:
- The Labor Commissioner, through administrative proceedings, citations, or civil action
- Third parties owed fringe or other benefit contributions on a worker’s behalf
- Joint labor-management cooperation committees authorized by statute
Actions must be filed within one year of the earliest of project completion, recordation of a notice of completion, or recordation of a notice of cessation.
Once a claim surfaces, delay can narrow both legal and practical options. For contractors facing a wage-related dispute, a commercial litigation attorney in Santa Rosa can help preserve records, assess indemnity rights, and prevent further escalation.
How to Protect Your Business from AB 2696
The most effective response to AB 2696 is disciplined administration. Contractors should build compliance into the bidding, contracting, and payment process of the project.
Vet Subcontractors Before Award
Before executing a subcontract, require bidders to disclose payroll practices, labor obligations, and fringe benefit responsibilities to avoid unnecessary risk exposure.
Strengthen Subcontract Language
Your subcontract should clearly state what documents, and information must be provided, including:
- Payroll records
- Project details
- Lower-tier subcontractor information
The statute specifically allows withholding disputed amounts when required information is not timely produced, but only if the contract properly specifies those requirements.
Request Records Consistently
Do not wait for a complaint. Periodic requests for redacted payroll records and benefit payment information should be part of routine administration, not an emergency measure.
Document Review and Response
Keep records identifying when documents were requested, what was received, who reviewed them, and what corrective steps were taken if issues appeared.
Withhold Funds When Warranted
If warning signs emerge, immediate financial controls may be necessary. Failure to act after learning of nonpayment may increase exposure.
Obtain the Final Affidavit Every Time
Final payment should never be automatic. The required affidavit should be treated as a mandatory closeout item.
Train Project and Accounting Personnel
Project managers, contract administrators, and finance staff should be privy to the law and its early warning signs.
Preserve Indemnity and Reimbursement Rights
The statute does not prevent contractors from enforcing lawful contractual remedies against subcontractors whose conduct created the liability. Strong indemnity provisions remain an essential risk-transfer tool.
Why This Matters Beyond Compliance
AB 2696 is not just a statutory update. It affects leverage, dispute exposure, and project economics. A wage claim involving a subcontractor can quickly evolve into:
- A payment dispute
- A contract dispute
- A records dispute
- A reimbursement or indemnity claim
- A broader business conflict affecting ongoing relationships
A commercial litigation attorney in Santa Rosa can help contractors assess exposure, revise subcontract forms, respond to labor-related claims, and pursue reimbursement when another party causes the loss.
Looking for Commercial Counsel?
AB 2696 places general contractors under a brighter spotlight, and subcontractor oversight procedures now carry even greater legal and financial significance.
Smith Dollar is here to provide practical guidance and trusted counsel. Contact us online or call (707) 522-1100 to discuss your situation and learn how we can help you move forward with confidence.
Disclaimer: This article provides general information and is not intended as legal advice. Reading this does not create an attorney-client relationship. For legal guidance regarding a specific construction or wage-related dispute, consult qualified counsel.
Frequently Asked Questions
Use a consistent compliance process: review payroll records, address issues quickly, withhold funds when needed, and collect the final affidavit.
Yes. A direct contractor may be liable for certain unpaid wages, benefits, and related amounts.
No. It applies to certain private California construction contracts, not every project.
For general contractors, risk extends beyond scheduling and project management to subcontractor payroll compliance.
As of January 1, 2025, Assembly Bill 2696 amended California Labor Code section 218.8 and reinforced the exposure direct contractors face when subcontractors fail to pay wages or related amounts on private projects.
When disputes, claims, or compliance failures arise, guidance from a commercial litigation attorney in Santa Rosa can be an essential part of protecting the business and preserving project momentum. The best response is not panic. It is structure, documentation, and prompt action.
What AB 2696 Means for General Contractors
California Labor Code section 218.8 applies to specific private construction contracts entered into on or after January 1, 2022. Under the statute, a direct contractor may be liable for debts owed by subcontractors at any tier for labor performed on the project.
AB 2696 expanded enforcement rights in ways that increase the importance of careful compliance and internal oversight.
Potential Liability May Include:
- Unpaid wages
- Fringe benefit payments or contributions
- Training fund contributions
- Interest
- Penalties
- Liquidated damages
- Attorney fees and costs in certain actions
A subcontractor’s payroll issues can turn into a costly dispute for the direct contractor, particularly where project records are incomplete or corrective action was delayed.
When Penalties and Liquidated Damages
The statute does not treat every category of liability the same way. Unpaid wages and benefit-related amounts may create direct exposure. Penalties and liquidated damages, however, depend on additional circumstances.
A direct contractor may avoid liability for certain penalties and liquidated damages if they’ve completed the three key safeguards.
The 3 Key Safeguards
1. Periodically Reviewed Payroll Records
The contractor must monitor the subcontractor’s payment of wages and benefits through periodic review of payroll records containing the information required by law.
2. Took Diligent Corrective Action
If the contractor became aware of a payment failure, it must act diligently to halt or correct the discrepancy. That may include retaining sufficient funds otherwise due to the subcontractor.
3. Obtained a Pre-Final-Payment Affidavit
Prior to final payment, the contractor must obtain an affidavit signed under penalty of perjury confirming the subcontractor paid the required wages and benefit contributions for the project.
Who Can Enforce These Obligations?
AB 2696 also matters because several different parties may pursue enforcement.
Potential Enforcement May Come From:
- The Labor Commissioner, through administrative proceedings, citations, or civil action
- Third parties owed fringe or other benefit contributions on a worker’s behalf
- Joint labor-management cooperation committees authorized by statute
Actions must be filed within one year of the earliest of project completion, recordation of a notice of completion, or recordation of a notice of cessation.
Once a claim surfaces, delay can narrow both legal and practical options. For contractors facing a wage-related dispute, a commercial litigation attorney in Santa Rosa can help preserve records, assess indemnity rights, and prevent further escalation.
How to Protect Your Business from AB 2696
The most effective response to AB 2696 is disciplined administration. Contractors should build compliance into the bidding, contracting, and payment process of the project.
Vet Subcontractors Before Award
Before executing a subcontract, require bidders to disclose payroll practices, labor obligations, and fringe benefit responsibilities to avoid unnecessary risk exposure.
Strengthen Subcontract Language
Your subcontract should clearly state what documents, and information must be provided, including:
- Payroll records
- Project details
- Lower-tier subcontractor information
The statute specifically allows withholding disputed amounts when required information is not timely produced, but only if the contract properly specifies those requirements.
Request Records Consistently
Do not wait for a complaint. Periodic requests for redacted payroll records and benefit payment information should be part of routine administration, not an emergency measure.
Document Review and Response
Keep records identifying when documents were requested, what was received, who reviewed them, and what corrective steps were taken if issues appeared.
Withhold Funds When Warranted
If warning signs emerge, immediate financial controls may be necessary. Failure to act after learning of nonpayment may increase exposure.
Obtain the Final Affidavit Every Time
Final payment should never be automatic. The required affidavit should be treated as a mandatory closeout item.
Train Project and Accounting Personnel
Project managers, contract administrators, and finance staff should be privy to the law and its early warning signs.
Preserve Indemnity and Reimbursement Rights
The statute does not prevent contractors from enforcing lawful contractual remedies against subcontractors whose conduct created the liability. Strong indemnity provisions remain an essential risk-transfer tool.
Why This Matters Beyond Compliance
AB 2696 is not just a statutory update. It affects leverage, dispute exposure, and project economics. A wage claim involving a subcontractor can quickly evolve into:
- A payment dispute
- A contract dispute
- A records dispute
- A reimbursement or indemnity claim
- A broader business conflict affecting ongoing relationships
A commercial litigation attorney in Santa Rosa can help contractors assess exposure, revise subcontract forms, respond to labor-related claims, and pursue reimbursement when another party causes the loss.
Looking for Commercial Counsel?
AB 2696 places general contractors under a brighter spotlight, and subcontractor oversight procedures now carry even greater legal and financial significance.
Smith Dollar is here to provide practical guidance and trusted counsel. Contact us online or call (707) 522-1100 to discuss your situation and learn how we can help you move forward with confidence.
Disclaimer: This article provides general information and is not intended as legal advice. Reading this does not create an attorney-client relationship. For legal guidance regarding a specific construction or wage-related dispute, consult qualified counsel.
Frequently Asked Questions
Use a consistent compliance process: review payroll records, address issues quickly, withhold funds when needed, and collect the final affidavit.
Yes. A direct contractor may be liable for certain unpaid wages, benefits, and related amounts.
No. It applies to certain private California construction contracts, not every project.
