Our May newsletter provides an in depth analysis of AB1897, a new law greatly effecting California employers who use the services of labor contractors and temporary workforces. This article originally appeared in the May 2015 issue of Valley Lawyer Magazine by the San Fernando Valley Bar Association. It is republished here with permission.
By Kenneth J. Rose and Robert H. Rose
Employers have many reasons for using contractors, staffing companies, and temp agencies to provide labor. However, with Governor Gerry Brown’s signing of AB 1897, at least one of those reasons has been removed for California businesses that have 25 or more workers. Enacted into law on September 28, 2014 and effective as of January 1, 2015, AB 1897 amends California Labor Code section 2810 by creating a new Labor Code section 2810. The statute’s operative language reads:
2810.3(b) 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 coverage as required by Section 3700.
The statutory definition of “client employer” is “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.” Presumably, an employer contractor who contracts for services unrelated to its “usual business” will not be made responsible for those workers under AB 1897. For example, a law firm that contracts with a painting company to repaint its office would not face potential liability under AB 1897 if the painting contractor fails to pay wages earned by the painters.
As will be discussed in this article, there are a number of carve outs limiting the scope of this language; nevertheless, it is clear that AB 1897 will have far reaching effects on any employer seeking to use staffing agencies and labor contractors, and will shift the type of advice attorneys will provide to their clients when faced with these issues.
The California Legislature has attempted numerous times to enact legislation to rein in employers violating or seeking to avoid the application of California’s particularly stringent wage and hour laws. In 1999, AB 633 was enacted making garment manufacturers liable for the guaranteed wages of contractors. In 2003, the Legislature reached further in passing SB 179, which made it illegal to enter into a labor contract for construction, farm labor, garment, janitorial, or security guard services with knowledge that the contract does not provide enough money to allow the contractor to comply with wage and hour law.1
Introduced by Assemblyman Roger Hernandez, backers of AB 1897 saw the bill as a way to protect temporary workers, a segment of the workforce that has been on the rise since the recession. Investigations by ProPublica and the National Employment Law Project suggested that the temporary workers are more likely than permanent employees to be injured on the job and be paid below minimum wage. 2 Essentially, backers saw the problem as this:
“We walk into a Marriott and assume that the people who greet us at the front desk or who clean our rooms each day are employees of the venerable brand (as their uniforms imply). We greet the technicians sent to our home to fix our cable, not even questioning whether they work for the media company to whom we pay our bills. In short, we assume that the companies who invest millions of dollars to convince us of the benefits of buying products under their retail nameplate or to purchase the unique services they offer also undertake the operations needed to produce them – including acting as the employer of all the inter-connected people who make their businesses possible. Those assumptions are increasingly wrong?
In essence, private strategies and public policies allow major companies to simultaneously profit from the core activities that create value in the eyes of customers and the capital markets and shed the actual production of goods and services. In so doing, they have their cake and eat it too.” 3
Unsurprisingly, AB 1897 was enthusiastically supported by unions, such as the California Labor Federation, AFL-CIO and the United Food and Commercial Workers, while being opposed by most business organizations including numerous Chambers of Commerce. Business leaders’ main argument was there already are laws in place to combat wage theft and discourage the use of bad labor contractors, and that the law would simply add an additional regulatory burden on employers.
Nevertheless, AB 1897 was signed into law, and came into effect on January 1, 2015.
The new law applies to “client employers”, which, as stated, are defined 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.” The definition however goes on to exclude entities with under 25 workers (including both directly hired and those provided by a labor contractor), those entities with five or fewer workers provided by a labor contractor, and state or other governmental entities.
“Labor contractor” is defined 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.” As with client employers, the labor contractor definition is limited to exclude non-profit organizations, labor organizations and apprenticeships pursuant to collective bargaining agreements, motion picture payroll services companies, and third parties.
Additionally, the bill provides a few other exemptions, including homeowners and the owners of a home-based business for labor or services received at the home, moving/shipping companies, cable operators as defined by the Public Utilities Code, and motor clubs with dispatching services such as AAA.
Furthermore, the law applies only to non-exempt workers. The mandates of AB 1897 are inapplicable to workers properly classified as exempt under the administrative, executive or professional exemptions in the California Industrial Welfare Commission Wage Orders.
As already discussed, AB 1897 forces employers to share liability for the wage and workers compensations violations of their labor contractors. Previously, if a worker from a labor contractor wanted to name the client employer as a defendant, he or she would have the somewhat burdensome task of proving the existence of a joint-employer relationship. While in many instances the worker would be able to show the amount of employer control of the worker to prove a joint-employer relationship existed and thus that the employer was jointly liable, it was nonetheless not a given. This inquiry is now moot, as the new law provides that in every instance of an employer’s use of labor contractors (provided they meet the definitions discussed), the client employer will be held jointly liable for wage and workers compensation violations.
Therefore, client employers are no longer be able to use labor contractors as a way of avoiding liability. Furthermore, the bill makes clear that its protections are a matter of public policy, and therefore cannot be waived by workers. Nor may a client employer shift by contract its legal duties and liabilities to the labor contractor. There is no knowledge requirement nor any defense that the client employer took all reasonable steps to ensure the labor contractor avoided liability, or that the client employer paid the labor contractor agency in full for the worker services provided. AB 1897 clearly and intentionally imposes strict liability on the client employer.
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. As a precondition to bringing 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. Presumably, if the worker pursues an administrative claim, no prior notice to the client employer is required.
Like most legislation establishing employee protections, retaliation against those seeking to enforce the law is prohibited. Neither the client employer nor the labor contractor may take any adverse action against any worker for providing notification of violations or filing a claim or civil action alleging violations under AB 1897.
Additionally, AB 1897 expressly states that the legal remedies it establishes “are in addition to, and shall be supplemental of, any other theories of liability or requirement established by statute or common law.”
Step 1 – Does AB 1897 apply?
As an attorney advising a client concerned about potential liability under AB 1897, the first thing to examine is whether or not the law applies to the circumstance. For example, AB 1897 will not create shared liability for small businesses, so long as the business at no point hires or contracts 25 or more employees. Therefore, an important point to emphasize to small business clients is to very carefully consider all of the implications of expansion, before determining to bring in enough staff to become covered by AB 1897. Furthermore, attorneys should inform their clients that so long as the labor contractor provides no more than five workers, they can avoid the strict liability of AB 1897.
Attorneys should examine as well whether their clients fall into one of the exceptions, such as the statutory exemptions for shipping companies, public agencies and motor clubs.
In addition to examining whether or not the definition of a client employer is met, the attorney should also examine the labor contractor, and ask whether it could be a non-profit organization, labor organization or motion picture payroll services company.
Finally, the attorney may look at the workers themselves. If the workers supplied by the labor contractor meet the requirements to be exempt under the California Labor Code, and are being treated as exempt employees (i.e. salaried rather than hourly pay and paid at least the minimum salary required under California law), then AB 1897 will not apply. However, considering the tricky nature and many unclear lines, as in any other circumstance, attorneys should advise their clients to be very wary of the dangers of misclassification.
Step 2 – Getting the best contractor and contract possible
Assuming that it is determined AB 1897 will apply, the next step for attorneys is to advise their clients to pick their partners carefully. If, even with the change in law, the employer still feels that using a labor contractor for staffing purposes is beneficial, then it is up to the employer to research the available labor contractors to make sure the one hired is reputable, sufficiently financially stable to pay its bills, and follows a clearly stated policy in conformity with California labor law. This will not by itself shield the employer from liability, but rather is a necessary precaution. The employer should also ensure that its chosen labor contractor has valid workers’ compensation insurance.
The contract between the client employer and labor contractor should include clauses in which the labor contractor promises to follow all applicable labor laws, and that it should for the duration of the contract hold valid workers compensation insurance which covers all workers provided to the employer. This will give the employer some protection via breach of contract claims, but it is still not enough to completely protect the employer from liability.
While AB 1897 expressly forbids contracting to shift all of the liability onto the labor contractor, it does not stop 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.” As such, an indemnification clause in such a contract would still be enforceable. Due to this change in law, attorneys should advise their clients in the strongest way possible of the necessity of a clause in which the labor contractor promises to indemnify the employer in the case of any lawsuit involving a worker provided by the labor contractor alleging California wage and hour or workers compensation violations. Without such a provision the client employer is taking an unnecessary risk, as it will not be able to protect itself from liability caused by actors outside its control. However, because the worker still has the right to obtain relief from the labor contractor and the client employer jointly and severally, even with an enforceable indemnification agreement in place, the client employer is still at risk if the labor contractor has insufficient assets to pay any adverse judgments or is judgment proof.
Other issues of concern
Even if AB 1897 does not apply to a particular situation, employers still need to be concerned about liability under a theory of joint-employment. While this is harder to prove than the automatic determination in AB 1897, it is neither impossible nor rare. There is not a simple test to determine whether a joint-employer relationship exists; rather courts generally employ a case by case method, looking at the amount of control exerted by the client employer over the workers. Such factors include but are not limited to day to day supervision, discipline, ability to hire and fire, and control of employee records. California courts have even taken into account public policy concerns in determining that joint employment existed. 4 Thus, while the employer may avoid liability under AB 1897, they need to be made aware that without care to avoid exerting too much control over the workers, they may still be liable for the violations of the labor contractor.
AB 1897 significantly changes the calculus of the decision by employers to use labor contractors for staffing. While many employers are no doubt aware of the change, there are likely very few who fully understand its full consequences. It is therefore up to the attorneys to identify these issues and be proactive about advising their clients to protect themselves against the additional liability imposed upon them. Employers need to be fully aware of the consequences of using labor contractors before they make the decision to enter into any new agreements for labor.
For those employers effected by the law who still decide to use labor contractors, existing contracts should be rewritten, and new contracts should be drafted to include some form of indemnification. Additionally, client employers should determine if their workers’ compensation insurance policies cover contract workers, and, if not, look into the options for broadening the scope of their workers compensation insurance coverage. While this still may not provide total protection, it is unquestionably the best remaining protection an employer can get against liability.
About the authors:
Ken Rose is the founder and President of The Rose Group, APLC, a global employment law and HR consulting firm. Ken has practiced employment and labor law for over 38 years. He can be reached at firstname.lastname@example.org.
Robert Rose joined The Rose Group in 2014, after previously working at Quinn Emanuel Urquhart and Sullivan in New York. In addition to labor and employment law, Robert’s practice includes international trade law and alcoholic beverage law. He can be reached at email@example.com.
ABOUT THE ROSE GROUP
The Rose Group, APLC was founded in June 2006 by San Diego, California-based employment law specialist Ken Rose. The Rose Group is a boutique firm dedicated to providing cost-effective, practical advice and counsel to employers and employees on domestic and international employment law matters and in related litigation. The Rose Group is often called upon to conduct sensitive workplace investigations. In addition, through Rose Mediation www.rosemediation.us, Ken Rose serves as a neutral mediator and arbitrator in employment law and other civil litigation matters. Ken Rose is listed in the 2014 Who’s Who Legal: Management, Labour & Employment, as well as the 2015 San Diego Super Lawyers. The Rose Group recently added attorney Robert Rose to the practice, and moved its San Diego offices to 10021 Willow Creek Road, Suite 200, San Diego, CA 92131.