New California Law Holds Employers Liable for Labor Contractor’s Wage Violations

10/7/2014 Articles

California Governor Jerry Brown recently signed into law A.B. 1897, significantly expanding the potential liability of employers who use labor contractors, subcontractors, or staffing agencies for workers.  Effective January 11, 2015, A.B. 1897 adds Section 2810.3 to the California Labor Code, proclaiming that an entity hiring a labor contractor or agency is liable for that contractor's or agency’s failure to provide workers with required wages or valid workers’ compensation coverage under Labor Code Section 3700.

What does this mean?

Organizations obtaining “workers to perform labor within its usual course of business from a labor contractor” must assume responsibility for ensuring that the workers are paid and insured in accordance with California law.  Regardless of whether the hiring entity is aware of these violations, workers may bring actions directly against the hiring entity.  Previously, the employee had to demonstrate that the hiring entity employed them jointly with the contractor in order to establish liability.

This law does not apply to hiring organizations with less than 25 workers or with five or fewer workers supplied by a labor contractor at any given time.  The definition of “labor contractor” excludes bona fide nonprofits, labor unions, apprenticeship programs, collectively bargained hiring halls, and motion picture payroll services companies.  “Worker” excludes persons exempt from overtime as executive, administrative, or professional.  The worker must notify the hiring entity of any violations at least 30 days before filing a civil action.

What should employers do?

Organizations using labor contractors or staffing agencies will need to closely monitor those relationships.

First, hiring entities should periodically audit labor contractors to ensure they are properly paying wages and have appropriate workers’ compensation coverage.  Hiring entities need to avoid becoming directly involved in the contractor or agency’s operations, however, as this will expose employers to arguments of being a joint employer for purposes of other liabilities, such as discrimination or wrongful termination actions.  Hiring entities should consult with an employment attorney for more specific guidance based on the individual employer’s operations.

Second, hiring entities should ensure that any agreements with labor contractors include covenants that the contractor will comply with all laws and indemnify the hiring entities for liability caused by their failure to comply.

Finally, depending on a company’s size, number of temporary workers, and other factors, an employer may reconsider the use of labor contractors entirely.  In some cases, the administrative burden of overseeing labor contractors may outweigh the benefits.