⚖️ SB 727: Subcontractor Liability for Wage Theft
California's SB 727 (effective January 1, 2023) fundamentally changed the risk equation for hiring subcontractors. Under this law, direct contractors are liable for their subcontractors' wage and benefit violations on private works projects — not just public works, but all construction projects.
This means that if your subcontractor doesn't pay their workers correctly, you are on the hook.
Why This Matters
Before SB 727, direct contractor liability for sub wages was limited to public works (under Labor Code §1743.1). SB 727 extends this concept to all construction projects in California. If you're a GC or direct contractor, your subcontractors' payroll compliance is now your problem — legally and financially.
What SB 727 Does
The Core Rule
Labor Code §218.7 (as amended by SB 727):
A direct contractor making or taking a contract in California for the erection, construction, alteration, or repair of a building, structure, or other private work is liable for any unpaid wages, fringe benefits, or other benefit payments or contributions, including interest, that are owed by a subcontractor at any tier.
Key Terms
| Term | Definition |
|---|---|
| Direct contractor | The contractor who has a direct contractual relationship with the property owner — typically the GC or prime contractor |
| Subcontractor | Any contractor at any tier below the direct contractor |
| Unpaid wages | Includes regular wages, overtime, minimum wage violations |
| Fringe benefits | Health and welfare, pension, vacation, training fund contributions |
| Other benefit payments | Includes any contractually or legally required benefit contributions |
What's Covered
Project Types
| Project Type | Covered by SB 727? |
|---|---|
| Private commercial construction | Yes |
| Private residential construction | Yes |
| Private industrial construction | Yes |
| Public works | Already covered under Labor Code §1743.1 (even stricter) |
| Maintenance and repair | Yes |
| Alteration and renovation | Yes |
| Demolition | Yes |
Violation Types That Trigger Liability
| Violation | Covered? |
|---|---|
| Paying below minimum wage | Yes |
| Overtime violations | Yes |
| Meal and rest break violations | Yes |
| Unpaid fringe benefits | Yes |
| Pension contribution shortfalls | Yes |
| Health and welfare underpayments | Yes |
| Training fund non-contributions | Yes |
| Prevailing wage violations (public works) | Yes — under §1743.1 |
| Worker misclassification | Indirectly — if misclassification leads to wage underpayment |
How Liability Works
The Chain
Property Owner → Direct Contractor (GC) → Subcontractor → Sub-sub
↑ ↑
Liable for Liable for
sub's violations sub-sub's violations
Who Is Liable?
| Scenario | Who Pays? |
|---|---|
| Sub doesn't pay overtime to its workers | Direct contractor is liable |
| Sub-sub doesn't pay fringe benefits | Direct contractor is liable |
| Third-tier sub has minimum wage violations | Direct contractor is liable |
| Sub has workers' comp violations | Not covered by SB 727 (different enforcement mechanism) |
Liability Is Joint and Several
The direct contractor is jointly and severally liable with the subcontractor. This means:
- Workers can pursue the direct contractor directly — they don't have to exhaust remedies against the sub first
- The direct contractor may end up paying the full amount even if the sub has assets
- The direct contractor can seek indemnification from the sub (but good luck collecting from a sub that isn't paying its workers)
The Notice Requirement
How Enforcement Works
SB 727 includes a notice-and-cure provision:
| Step | Action | Timeline |
|---|---|---|
| 1 | Worker or labor agency files complaint | Against the subcontractor |
| 2 | DIR/DLSE investigates | Standard investigation process |
| 3 | Written notice to direct contractor | DIR or affected workers notify the direct contractor of the violation |
| 4 | Cure period | Direct contractor has a reasonable opportunity to cure the violation |
| 5 | Liability attaches | If not cured, direct contractor is liable for the unpaid amounts |
What "Cure" Means
| Action | Qualifies as Cure? |
|---|---|
| Paying the affected workers directly | Yes |
| Withholding from sub's payments and paying workers | Yes |
| Requiring the sub to pay and verifying | Yes — if done promptly and completely |
| Terminating the sub and claiming ignorance | No — liability already attached |
| Arguing that it's the sub's responsibility | No — that's exactly what SB 727 overrides |
Protecting Yourself
Contractual Protections
Include these provisions in every subcontract:
| Provision | Purpose |
|---|---|
| Compliance warranty | Sub warrants compliance with all wage and hour laws |
| Audit rights | Right to audit sub's payroll records at any time |
| Indemnification | Sub indemnifies you for any SB 727 liability |
| Withholding rights | Right to withhold payments to cover worker claims |
| Insurance requirements | Employment practices liability insurance |
| Termination for cause | Non-compliance with labor laws is grounds for termination |
Contracts Aren't Enough
Contractual protections help you recover costs after you've paid — but they don't prevent liability from attaching in the first place. If your sub is insolvent (which is often the case when they're not paying workers), your indemnification clause is worthless. Active monitoring is essential.
Active Monitoring Program
| Activity | Frequency | What to Look For |
|---|---|---|
| Verify CSLB license | Before contract + quarterly | Active status, correct classification |
| Verify workers' comp | Before contract + when policy renews | Active coverage, correct classification |
| Review sub's payroll summary | Monthly | Unusual patterns — low headcount relative to work, very low hourly rates |
| Spot-check worker classifications | Per project | Workers performing work outside their classification |
| Check for complaints | Quarterly | Search DLSE and CSLB databases for complaints against the sub |
| Interview workers (if concerns arise) | As needed | Are they being paid for all hours? Getting breaks? |
| Verify DIR registration (public works) | Before bid + at renewal | Active registration |
Red Flags
| Red Flag | What It May Indicate |
|---|---|
| Sub's bid is significantly below competitors | May be planning to underpay workers or skip benefits |
| Sub uses mostly 1099 workers | Possible misclassification — SB 727 liability if those workers are actually employees |
| High worker turnover on the sub's crew | Workers leaving because of pay or condition issues |
| Sub is reluctant to share payroll information | Something to hide |
| Sub is new, undercapitalized | Higher risk of cash flow-driven wage violations |
| Sub has DLSE complaints or CSLB disciplinary actions | Prior violations increase future risk |
| Sub uses staffing agencies extensively | Joint employer issues; who is paying the workers' actual wages and benefits? |
SB 727 vs. Previous Law
What Changed
| Factor | Before SB 727 | After SB 727 (Jan 1, 2023) |
|---|---|---|
| Private works | Direct contractor generally not liable for sub wages | Direct contractor liable for sub wages at all tiers |
| Public works | Direct contractor liable under §1743.1 | Same — plus SB 727 provides additional enforcement mechanism |
| Enforcement | Workers primarily pursued subs directly | Workers can go after direct contractor directly |
| Scope | Limited to specific violation types on public works | All wage, benefit, and contribution violations on all projects |
Legislative History
| Law | Year | What It Did |
|---|---|---|
| Labor Code §1743.1 | Pre-existing | Direct contractor liability for prevailing wage violations on public works |
| AB 1701 | 2018 | Extended direct contractor liability to include all wage violations on public works (not just prevailing wage) |
| SB 727 | 2022 (eff. 2023) | Extended AB 1701's framework to all construction projects (private and public) |
Practical Compliance Framework
Tier 1: Pre-Qualification (Before Contract)
- Verify CSLB license (active, correct classification)
- Verify workers' comp insurance
- Check DLSE complaint history
- Check CSLB disciplinary history
- Review sub's safety record (EMR)
- Request references from other GCs
- Evaluate sub's financial stability (bonding capacity, bank references)
- Assess bid against market — is it too low?
Tier 2: Contract Requirements
- Include SB 727 compliance and indemnification language
- Require monthly payroll certifications
- Establish audit rights
- Define withholding rights for non-compliance
- Require workers' comp and GL certificates naming you as additional insured
- Include termination for cause provisions
Tier 3: During the Project
- Collect monthly payroll certifications
- Monitor worker counts vs. project scope
- Conduct periodic site visits — who is actually working?
- Verify any new sub-tiers are CSLB licensed
- Respond immediately to any worker complaints
- Document all compliance verification activities
Tier 4: Issue Response
- Investigate any complaint immediately
- Withhold sub payments if needed to protect workers
- Pay affected workers directly if sub cannot or will not
- Document everything for potential indemnification claim
- Consult legal counsel for significant exposure
- Consider termination if sub has pattern of violations
Financial Exposure Example
Here's how SB 727 liability can escalate:
| Scenario | Exposure |
|---|---|
| Sub underpays 10 workers by $5/hr for 6 months | 10 workers × $5/hr × 40 hrs/week × 26 weeks = $52,000 in back wages |
| Plus overtime violations | Could double or triple the amount |
| Plus missed meal/rest breaks | 1 hour premium pay per violation per worker per day |
| Plus unpaid fringe benefits | $10–$20/hr per worker × all hours |
| Plus interest | Accrues from date of violation |
| Plus attorneys' fees | Workers' attorneys entitled to fees if they prevail |
| Total potential exposure | $200,000–$500,000+ for a single sub on a single project |
The Math Gets Scary Fast
SB 727 liability compounds quickly because it includes wages, overtime, benefits, penalties, interest, AND attorneys' fees. A subcontractor with 20 workers who is systematically underpaying by $3/hr on a 9-month project can create $300,000+ in direct contractor liability. This is why proactive monitoring costs a fraction of what reactive compliance costs.
Interaction with Other California Laws
| Law | How It Connects to SB 727 |
|---|---|
| AB 5 (Worker Classification) | If your sub misclassifies employees as 1099 contractors, SB 727 liability may extend to the resulting wage violations |
| Labor Code §1743.1 | Public works — additional prevailing wage liability on top of SB 727 |
| Labor Code §2810 | Liability for using contractors who fail to comply with labor laws |
| Prompt Payment Act | You still owe your sub per contract — but can withhold if SB 727 liability is identified |
| PAGA (Private Attorneys General Act) | Workers can bring representative actions — exposure multiplied across all affected workers |
Related Resources
- California Compliance Hub — Overview of all California requirements
- CSLB License Guide — Verifying subcontractor licenses
- DIR Registration — Public works registration verification
- Worker Classifications — AB 5 and classification rules
- Subcontractor Management — Managing sub relationships
- California Prevailing Wage — Public works wage requirements
SB 727 is relatively new law and interpretation is evolving. Consult legal counsel for specific situations. Verify current requirements at leginfo.legislature.ca.gov. Last reviewed: February 2026.