Prevailing Wage Claims on California Public Works: Contractor Defense

A civil wage and penalty assessment from the Labor Commissioner gives a public works contractor 60 days to request review, or the assessment becomes final. Labor Code section 1742 then puts the burden on the contractor: “The contractor or subcontractor shall have the burden of proving that the basis for the civil wage and penalty assessment is incorrect.” Back wages, per-worker daily penalties, and liquidated damages can follow. The defense usually turns on the certified payroll, the craft classifications, and what the contractor did about its subcontractors.

When does the prevailing wage law apply?

On “public works,” which the Labor Code defines broadly, and whether or not the contract mentions prevailing wages.

Section 1720(a)(1) covers construction, alteration, demolition, installation, or repair work “done under contract and paid for in whole or in part out of public funds.” “Construction” includes design, site assessment, inspection, and land surveying in the preconstruction phase, and cleanup afterward. Subdivision (b) counts more than direct payments as public funds: below-market land transfers, waived or reduced fees, loans repayable only if conditions are met, and credits against obligations owed to a public entity can all qualify.

There are exceptions. Under section 1720(c), a private residential project on private property isn’t covered unless it’s built under an agreement with a state agency, a redevelopment or successor agency, or a local public housing authority. A public subsidy that is de minimis, meaning both under $600,000 and under 2 percent of total project cost, doesn’t by itself make a private project a public work. Private developers who take public money in any form should get a coverage answer before bidding, not after the Labor Commissioner asks for payroll.

Section 1771 requires payment of “not less than the general prevailing rate of per diem wages for work of a similar character in the locality,” including holiday and overtime rates, on public works over $1,000. It applies to contracted work and to maintenance contracts, but not to work a public agency does with its own forces.

Does it matter that the contract didn’t require prevailing wages?

Not for the wages. It can matter for penalties and for who ultimately pays.

In Lusardi Construction Co. v. Aubry (1992) 1 Cal.4th 976, a public hospital district structured an $18 million expansion through a private corporation and told the contractor the project wasn’t a public work. The contract said nothing about prevailing wages. The California Supreme Court held that “the statutory obligation to pay the prevailing wage does not depend on the contractor’s assent.” The court explained that the awarding body and contractor must take steps to assure compliance, but “It does not follow, however, that the law is intended to be optional with the contracting parties.”

The same opinion gave contractors two protections. A contractor “may be entitled to indemnity from the public entity if it reasonably relied on the public entity’s representations that the project was not subject to the prevailing wage law,” and when a contractor relies in good faith on those representations, “equity prohibits the imposition of statutory penalties against the contractor for failing to pay the prevailing wage.”

The Legislature later added a statutory remedy. Section 1781 lets a contractor sue the awarding body for increased costs, including labor costs and penalties, when work is classified as a public work after the bid is accepted and the awarding body failed to identify it as one in the bid specification or contract documents. The section has conditions and limits for contractors that didn’t bid to or contract with the awarding body directly, so the paper trail on how the project was described matters from the start.

How does a civil wage and penalty assessment work?

The Labor Commissioner investigates, serves an assessment, and the contractor has 60 days to request a hearing.

Under section 1741, the assessment must be served within 18 months after a valid notice of completion is recorded or after the awarding body accepts the work, whichever is later. A contractor that receives one should check that timing first.

Section 1742 sets the rest of the schedule. The written request for review goes to the Labor Commissioner’s office listed on the assessment within 60 days after service. The hearing must start within 90 days before an impartial hearing officer who isn’t a Division of Labor Standards Enforcement employee. The contractor gets to review the Labor Commissioner’s evidence within 20 days of its request. The director’s written decision issues within 45 days after the hearing, and review after that is by petition for writ of mandate in superior court within 45 days after service of the decision.

The burden of proof is the hard part. Because the contractor must prove the assessment’s basis is incorrect, a hearing is won or lost on the contractor’s own records: daily time records, certified payroll, classification decisions, fringe benefit payments, and apprentice documentation. An assessment built on a worker’s estimate of hours is easier to answer with accurate time records than with testimony.

What penalties can a contractor face?

Up to $200 per worker per day for underpayment, plus separate penalties for payroll records and overtime.

Section 1775(a) provides that the contractor and any subcontractor “forfeit not more than two hundred dollars ($200) for each calendar day, or portion thereof, for each worker paid less than the prevailing wage rates.” The Labor Commissioner sets the amount after considering whether the underpayment was a good faith mistake that was promptly and voluntarily corrected, and whether the contractor has a prior record.

The statute also sets floors. The penalty can’t be less than $40 per worker per day unless the error was a good faith mistake promptly and voluntarily corrected once brought to the contractor’s attention. It can’t be less than $80 if the contractor was assessed penalties on a separate contract in the previous three years (unless those were withdrawn or overturned), or less than $120 if the Labor Commissioner finds the violation willful under section 1777.1(c). The workers receive the difference between what they were paid and the prevailing rate.

Two other penalties often appear on the same assessment. Under section 1776(h), a contractor that doesn’t produce certified payroll records within 10 days of a written request forfeits $100 per calendar day per worker until it complies. Under section 1813, the forfeiture is $25 per worker per calendar day for work beyond 8 hours a day and 40 hours a week in violation of the public works overtime article.

Is a prime contractor liable for a subcontractor’s underpayment?

For the wages, yes, jointly and severally. For the sub’s penalties, only in defined circumstances.

Section 1743(a) makes the contractor and subcontractor “jointly and severally liable for all amounts due pursuant to a final order under this chapter or a judgment thereon.” The Labor Commissioner must first exhaust reasonable remedies against the subcontractor before pursuing the prime.

Penalties are different. Under section 1775(b), the prime isn’t liable for a subcontractor’s underpayment penalties unless it knew of the failure or didn’t do all of the following: put copies of the required prevailing wage sections in the subcontract, monitor the subcontractor through periodic review of its certified payroll, take diligent corrective action once it learned of a failure (including retaining enough funds), and obtain the subcontractor’s affidavit under penalty of perjury before making final payment. The Division of Labor Standards Enforcement must notify the prime within 15 days after receiving a complaint about a subcontractor.

That safe harbor is only as good as the prime’s file. A subcontract with the required provisions, a log of payroll reviews, and a signed final-payment affidavit are cheap to collect during the job and nearly impossible to recreate after an assessment arrives.

Can a contractor avoid liquidated damages while it contests the assessment?

Yes, by paying or depositing the full amount within 60 days.

Section 1742.1(a) makes the contractor, subcontractor, and surety liable for liquidated damages equal to wages that “still remain unpaid” 60 days after service of the assessment. If the assessment is later reduced, liquidated damages are owed only on wages found due. Subdivision (b) says there’s no liquidated damages liability if the full amount of the assessment, including penalties, is deposited with the Department of Industrial Relations within that 60-day window to be held in escrow pending review.

Subdivision (c) also lets the contractor request a settlement meeting within 30 days after service, and what is said in that meeting is inadmissible in the later hearing. The 60-day escrow decision, the 30-day settlement window, and the 60-day hearing request all run from the same service date, so the first week after an assessment arrives is when the calendar gets set.

Assessments aren’t the only enforcement route. Under section 1771.2, a joint labor-management committee can sue an employer in court for failing to pay prevailing wages or provide payroll records, with liquidated damages available only if the complaint states the wages due “with specificity” and the defendant doesn’t pay, deposit, or bond the amount within 60 days of service. Ordinary Labor Code claims, such as waiting time penalties on final pay, can come with them.

Steps to take after a prevailing wage assessment arrives

1. Preserve certified payroll, daily time records, timecards, crew logs, subcontracts, payroll review notes, apprentice records, fringe benefit statements, and emails about classifications, under a litigation hold once the assessment arrives.
2. Calendar the 60-day hearing request, the 30-day settlement meeting request, and the 60-day escrow decision from the service date, and check for an EPLI or other policy with notice requirements and any surety that needs notice.
3. Identify the foremen, payroll staff, and project managers who decided classifications and hours, and avoid any action toward workers who complained that could look like retaliation.
4. Pull the documents the assessment turns on: the applicable wage determinations, the classification of each worker, the hours each worked, and the prime’s file on each subcontractor.
5. Talk to a lawyer before responding, contacting the workers or their representatives, or offering anything to settle.

Prevailing wage assessments move on short statutory deadlines, and employment defense for California public works contractors starts with the records that answer the burden section 1742 places on the contractor.

FAQ

Is a contractor liable for prevailing wages if the awarding body said the project was private?

Yes, for the wages. Lusardi held the obligation doesn’t depend on the contractor’s agreement. The same decision said a contractor that relied in good faith on the public entity’s representations shouldn’t face statutory penalties and may have an indemnity claim against the public entity. Section 1781 adds a statutory claim for increased costs when the awarding body failed to identify the work as a public work in the bid or contract documents.

What happens if a contractor misses the 60-day deadline to request a hearing?

Under section 1742(a), “If no hearing is requested within 60 days after service of the assessment, the assessment shall become final.” Liquidated damages can also attach to unpaid wages once 60 days pass without payment or an escrow deposit. Calendaring the service date the day the assessment arrives is the single most important step.

Can a prime contractor be penalized because a subcontractor failed to produce payroll records?

Not under section 1776. Subdivision (h) says “A contractor is not subject to a penalty assessment pursuant to this section due to the failure of a subcontractor to comply with this section.” The prime can still share liability for the subcontractor’s unpaid wages under section 1743, and for underpayment penalties if it doesn’t meet the section 1775(b) monitoring conditions.

Does a small public subsidy make a private development a public work?

Not if it’s de minimis under section 1720(c)(3). A subsidy qualifies as de minimis when it’s both less than $600,000 and less than 2 percent of total project cost, with a separate 2 percent test for projects made up entirely of single-family dwellings. Developers should document how they valued every form of public assistance, since fee waivers and below-market land count too.

If your company has received a prevailing wage assessment

If your company has received a civil wage and penalty assessment, a notice of withholding, or a lawsuit over prevailing wages on a public work, the certified payroll and the classification records usually decide how much of it holds up. Rosenberger + Kawabata represents employers defending employment lawsuits and claims through its business litigation practice, including prevailing wage assessments and certified payroll disputes on public works. Contact Rosenberger + Kawabata online for a confidential consultation, or call (310) 894-6921.

Sources

Labor Code sections 1720, 1741, 1742, 1742.1, 1743, 1771, 1771.2, 1774, 1775, 1776, 1781, and 1813; Lusardi Construction Co. v. Aubry (1992) 1 Cal.4th 976.

This post is general information about California and federal employment law as of November 7, 2026. It is not legal advice, and reading it does not create an attorney-client relationship. Employment statutes, regulations, and court decisions change often, and the outcome of any claim depends on its facts. Past results do not guarantee future outcomes.