More Employer Liability When Contracting for Labor

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AB 1897 is a sweeping new law that will increase liability on employers who contract for labor. The purpose of the law, which goes into effect January 1, 2015, is to hold companies accountable for wage-and-hour violations when using staffing agencies or other labor contractors to supply workers.

To Whom Does This Law Apply?

Any “client employer,” which is defined as a business entity with 25 or more workers that obtains or is provided at least six (6) workers to perform labor within the usual course of business from one labor contractor or various labor contractors.

In other words, this law could apply to employers who use staffing agencies or other labor contractors to supply workers.

Not ‘Client Employer’

The following business entities are excluded from the definition of “client employer” or from the liability imposed under the provisions of this bill, under the following conditions and contracts:

• Business entity with fewer than 25 workers (including those hired directly and those obtained from or provided by any labor contractor);

• Business entity that has five (5) or fewer workers from a labor contractor or various labor contractors at any given time;

• Motor carrier of property that contracts with or engages another motor carrier of property to provide transportation services;

• Employer that utilizes a third-party motor carrier of property with interstate or intrastate operating authority to ship or receive freight;

• Cable operators, telephone corporations and direct-to-home satellite providers that contract with a company to build, install, maintain or perform repair work as long as the name of the contractor is visible on employee uniforms and vehicles;

• Motor club that contracts with third parties to provide motor club services if the name of the contractor is visible on the contractor’s vehicles; or

• The state or any political subdivision of the state.

Not ‘Labor Contractor’

CalChamber Policy Advocate Jennifer Barrera urges employers to review the CalChamber fact sheet on AB 1897, which increases liability for employers that contract for labor.

The following entities are specifically excluded from the definition of “labor contractor” and, therefore, the provisions of the bill will not be triggered if they are the ones providing the labor to the client employer:

• A bona fide nonprofit community-based organization that provides services to workers;

• A bona fide labor organization or apprenticeship program or hiring hall operated pursuant to a collective bargaining agreement;

• A motion picture payroll services company; or

• A third party who is a party to an employee leasing arrangement if the employee leasing arrangement contractually obligates the client employer to assume all civil legal responsibility and civil liability under the law.

Exempt Employees

A worker does not include an employee who is properly classified as exempt from the payment of overtime pursuant to the administrative, executive or professional exemption in the Industrial Welfare Commission Wage Orders and, therefore, if the contract is for employees that fall within any of these exemptions, the provisions of the law will not apply.

What Does the Law Do?

Imposes all civil legal responsibility and liability on the client employer for any wage-and-hour violations committed by the labor contractor for the labor contractor’s employees it supplied pursuant to the contract with the client employer.

Additionally, it imposes civil liability and legal responsibility on the client employer for the labor contractor’s failure to secure valid workers’ compensation coverage for the labor contractor’s employees working pursuant to the contract with the client employer.

Basically, if the labor contractor fails to pay its employees properly or fails to provider workers’ compensation coverage for those employees, the client employer will now be legally responsible.

A client employer can contract for indemnification from the labor contractor for the labor contractor’s failure to pay wages or secure workers’ compensation coverage. There is, however, one exception: client employers cannot shift any legal duties or liabilities under workplace safety laws to the labor contractor.

Additionally, the law requires a client employer or labor contractor to provide to any state enforcement agency or department any information within its possession, custody or control to confirm compliance with applicable state laws.

How Does the Law Work?

A worker who believes he/she has not been properly paid or has suffered an injury and there is no workers’ compensation policy, may pursue an administrative claim or civil action against the client employer, labor contractor or both.

If the worker pursues a civil action, the worker or representative must provide notice to the client employer of the alleged violation(s) 30 days before filing the civil action. A civil action is not just limited to a single-plaintiff action, but can include a class action or representative action under Labor Code Section 2699 et seq.

If the worker pursues an administrative claim, no prior notice to the client employer is required.

To prevail in an administrative or civil action against the client employer for the labor contractor’s alleged violations, the worker will need to prove:

• That he/she was not properly compensated or provided with workers’ compensation coverage;

• That these violations occurred while the employee was working pursuant to a contract for labor between the client employer and labor contractor; and

• The contract was for work within the “usual course of business” of the client employer, meaning the work was regular and customary for the client employer and performed within or upon the premises of the worksite of the client employer.

Best Practices

Any entity that falls within the definition of “client employer” may want to contact legal counsel to determine what efforts may be made to limit the exposure of liability for a contractor’s wage-and-hour violations or failure to secure workers’ compensation coverage.

Additionally, employers may wish to consider the following tips:

• Review all existing contracts for labor or services to determine what contracts may fall within the scope of “usual course of business.” For those contracts that qualify, contact those contractors to obtain assurances of their labor and employment compliance.

• Consider including legal protections for wage-and-hour violations and workers’ compensation coverage, including duty to defend and/or indemnification provisions, in new and existing contracts.

• Limit reliance on and use of contracted labor or services and determine internally where efficiencies can be made with regard to workload or hiring of additional employees.

Staff Contact: Jennifer Barrera

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Jennifer Barrera
About Jennifer Barrera
Jennifer Barrera, senior policy advocate, works with the executive vice president in developing policy strategy and represents the CalChamber on labor and employment, taxation and legal reform issues. Before joining the CalChamber in September 2010, she worked at a statewide law firm that specializes in labor/employment defense. She also advised small and large businesses on compliance issues, presented seminars on employment-related topics, and authored articles in human resources publications. Barrera earned a B.A. in English from California State University, Bakersfield, and a J.D. with high honors from California Western School of Law.