New California Law Imposes Joint Liability on Businesses and Contract Vendors for Wage Violations and Workers’ Compensation Coverage

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For companies using independent contractors in California, 2014 has been a difficult year, with several significant court decisions threatening the contractor model. In June, the Ninth Circuit rejected the parties’ choice of Georgia law in an independent contractor agreement and found that the contractor was an employee under California law. Later that month, the California Supreme Court made it easier for plaintiffs to obtain class certification in contractor misclassification disputes. In August, the Ninth Circuit applied California law to overturn a lower court decision and to reclassify hundreds of delivery drivers as employees.

Now the California legislature has joined the fray, placing new burdens on businesses that use contractors.

Assembly Bill 1897, which takes effect January 1, 2015, creates statutory joint liability for labor contractors and their clients for wage payment violations and failure to provide workers’ compensation coverage if the work being provided is “within the usual course” of the client’s business and is performed at the client’s work site. This means that for any claim in which a worker alleges the contractor failed to pay wages or failed to provide workers’ compensation coverage in California, both the contractor and the company that benefits from the contract labor can be held liable for the contractor’s failings.

Effectively, the result of this new law is that a business that retains a contractor to perform work at the business’s site is responsible for providing the workers’ compensation coverage to the individual laborers retained by the contractor. Client businesses can rely on their contractors to provide such coverage, but if the contractor fails to do so, the client business will be liable.

Companies that retain contractors to provide services must now also worry about the pay structure of their contractor’s workforce. If the contractor uses an independent contractor model rather than an employee model, and those independent contractors are deemed to be misclassified such that they should have been treated as employees, both the contractor and the client are responsible for any failure to pay overtime or a minimum wage.

AB 1897 does not permit companies from contracting around the joint liability statute in their vendor agreements, but the law does permit indemnity provisions. Accordingly, companies that use contractors to provide labor would be wise not only to include indemnity provisions in their agreements, but also to make sure the contractors are sufficiently solvent so that the indemnity provisions are meaningful.

The law permits individual workers to file a civil action against both the direct contractor and the company that benefits from their services, but 30 days’ notice to the client employer is required. The law also prohibits retaliation against any worker who provides notice of a claim or files a claim.

The law does not apply to individual homeowners (or the individual owners of home-based businesses) and the services they receive from a contractor in the home. The law also does not apply to client businesses that have fewer than 25 workers total, including workers supplied by the labor contractor. Client businesses that use no more than five workers supplied by a labor contractor at any given time are also exempt.

The law defines “worker” to exclude employees who are exempt from the payment of an overtime rate under the executive, administrative, or professional exemption. Accordingly, the joint liability rules will not apply where the contractor’s laborers meet one of these exemptions or are legitimate independent contractors.

The new law has been codified as section 2810.3 of the California Labor Code.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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