Your “Independent Contractor” Clause Just Got a Little Less Relevant

by Wendel, Rosen, Black & Dean LLP
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Construction workers

Construction projects are complex, multi-partied, multi-disciplinary endeavors, in which subcontracting all or a portion of the work to be performed is not uncommon.

When subcontracting work, parties usually make it clear in their contracts that the party performing work is acting as an “independent contractor.”  Here’s a fairly typical provision from the AIA A201 General Conditions:

The parties agree that the contractual relationship on Contractor to Owner is one solely of an independent contractor in all respects and that the Contract Documents do not in any way create a partnership, joint venture or any other relationship between Owner and Contractor other than the contractual relationship as specified in this Agreement.

These provisions are intended to shield the contracting party from claims that it is responsible for workers’ compensation premiums, retirement contributions, health care insurance, or other benefits provided for the benefit of employees of the company performing the work. Fair enough.

However, under a new law effective January 1, 2015, which the California Chamber of Commerce has called a “Job Killer,” contracting parties may now be found legally responsible for their subcontractor’s failure to pay their workers, to secure workers’ compensation coverage and for workplace safety violations.

First, a Bit of Background

Before you email your legislator to protest though, it’s important to note that California already has a law that “generally” provides for liability of a “construction” contractor for a subcontractor’s failure to pay wages to its employees.

Labor Code section 2810, which has been on the books since 2004, provides that:

A person or entity shall not enter into a contract or agreement for labor or services with a construction, farm labor, garment, janitorial, security guard or warehouse contractor, where the person or entity knows or should know that the contract or agreement does not include funds sufficient to allow the contractor to comply with all applicable local, state, and federal laws or regulations governing the labor or services to be provided.

However, the “Job Killer” bill, which we should probably refer to by its proper name – AB 1897 – provides more specificity than Section 2810 and adds additional requirements.

Who Does the New Law Apply to?

AB 1897, which created a new Labor Code section 2810.3, applies to “client employers,” which it defines as “a business entity, regardless of its form, that obtains or is provided workers to perform labor within its usual course of business from a labor contractor.”

However, excluded from the definition of “client employers” are:

  1. Business entities with a workforce of less than 25 workers;
  2. Business entities with five or fewer workers supplied by a labor contractor or labor contractors at any given time; and (of course)
  3. State and political subdivisions of the state, including any city, county, city and country, or special district.

A “labor contractor” is defined in turn as “an individual or entity that supplies, either with or without a contract, a client employer with workers to perform labor within the client employer’s usual course of business.”

Excluded from the definition of “labor contractor” are:

  1. A bona fide nonprofit, community-based organization that provides services to workers;
  2. A bona fide labor organization or apprenticeship program or hiring hall operated pursuant to a collective bargaining agreement;
  3. A motion picture payroll services company; and
  4. A third party who is a party to an employee leasing arrangement.

Although on a first reading it may appear that AB 1897 only applies to temporary workers, it also applies to developers (although, probably not project owners, whose “usual course of business” is arguably not construction), general contractors, and subcontractors.

What Does the New Law Provide?

AB 1897 provide that a client employer shall share with a labor contractor all civil legal responsibility and civil liability for all workers supplied by that labor contractor for both of the following:

  1. The payment of wages.
  2. Failure to secure valid workers’ compensation insurance.

In addition, it provides that a client employer may not shift to the labor contractor any legal duties or liabilities for Cal OSHA requirements or violations.

Notwithstanding the Cal OSHA limitation, which would clearly prohibit a contracting party from requiring that its subcontractor defend and indemnify it for Cal OSHA violations, what’s less clear is whether a client employer can require a labor contractor to defend and indemnify it for wage violations and claims that workers’ compensation insurance was not obtained or maintained by the labor contractor. However, presumably you can, as the law provides that it “does not prohibit a client employer from establishing, exercising, or enforcing by contract any otherwise lawful remedies against a labor contractor for liability created by acts of a labor contractor.”

Also unclear from a somewhat academic standpoint, is whether a labor contractor’s failure to obtain or maintain workers’ compensation insurance would subject a client employer to a claim preclusion argument or disgorgement claim under Business and Professions Code section 7031 on the ground that AB 1897 provides that a client employer shall share with a labor contractor “all civil legal responsibility and civil liability” and under Business and professions Code section 7125.2 the failure of a contractor to obtain or maintain workers’ compensation insurance, if required, results in the automatic suspension of the contractor’s license by operation of law. Arguably, the answer would be no, but then again, the new law doesn’t specifically address this.

Other Requirements Under the New Law

AB 1897 also provides:

  1. At least 30 days before filing a civil action against a client employer a worker or his or her representative must notify the client employer of the alleged violations of AB 1897;
  2. Upon request by a state enforcement agency or department, a client employer or labor contractor must provide the agency or department any information within its possession, custody or control required to verify compliance with applicable state laws. These records are required to be made available promptly for inspection and copying.

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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