First-Time Ruling: “Client Employer” Must Pay for Subcontractor’s Wage Violations
September 25, 2017
by
Susan S. Waag

Susan S. Waag

You work hard to run your business in compliance with the massive and complex set of laws that govern your employment practices. You are meticulous about paying your employees properly, include all bonuses in their overtime rates, pay premiums for missed breaks and list every required detail on pay stubs.

Then you get hit with a legal action, claiming you are responsible for the employment-law violations of some other company you did business with. How is this possible?

Actually, there are several ways this can happen, such as being a joint employer with the other entity, or by exerting control over the other entity. However, the California Legislature thought the traditional ways of establishing liability were too challenging for workers; so the new “big gun” in this battle is a two-year old statute that specifically makes one business responsible for violations of other businesses that provide services, even in the absence of any joint control of workers.

The first official ruling involving this law was issued this summer by the California Labor Commissioner, and resulted in a general contractor being hit with a judgment of nearly $250,000 for the sins of a subcontractor.

While this case involved the construction industry, it is important to understand that the statute at issue is not limited to construction… or agriculture or the garment industry. It also applies when you hire another business to provide janitorial, security, warehouse or other services within the usual course of business. This is unlikely to apply to a business that uses UPS or Fed-Ex for the occasional package delivery; but what if you are a business that uses such an entity to ship thousands of packages per week? What about that marketing company you use? Until litigation resolves a number of issues, the statute’s vague definitions make it unclear just how far this law will reach.

How Did This Happen?

General contractor Deacon Corporation (“Deacon”) hired Champion Construction Inc. (“Champion”) to perform framing and drywall work on a major Deacon construction project in El Segundo, California.

According to the Labor Commissioner, Champion shorted 47 employees on their pay, occasionally “bounced” their paychecks, and ultimately stopped paying the employees for four weeks. In June, 2016, several Champion employees walked off the job and filed wage claims.

In August 2016, the Labor Commissioner issued citations against both Champion and Deacon for a total of $329,617 in unpaid overtime and hourly wages, waiting time penalties, rest period premiums, civil penalties and hourly-rate underpayment. Champion did not challenge the citations, most likely because they had no grounds to do so, or because they were just plain broke.

Deacon filed an appeal, contesting its liability for Champion’s actions. During the appeal hearing, a Deacon superintendent admitted to being aware of Champion’s failure to pay its workers. Although there is nothing in the statute that requires that the client employer knew or should have known of the violation, this admission certainly did not help Deacon’s case.

Deacon was able to provide some evidence that somewhat reduced the amount of the liability, ending up with a final order this summer that it owed $249,879. This is on top of any fees Deacon may have paid to Champion for its services.

Deacon has since filed a writ seeking judicial review of the Labor Commissioner’s ruling.

What Is This Law?

California enacted Labor Code Section 2810.3, effective January 1, 2015. This law states that a “client employer” shall be legally responsible for certain employment-law violations of the subcontractors, staffing agencies or other “labor contractors” that supply workers to the client employer. Such violations include the labor contractor’s failure to pay its employees properly or to provide workers’ compensation coverage for its employees.

In such cases, the client employer will be held liable for the hired entity’s owed wages, damages, penalties and workers’ compensation obligations, even if it already paid the hired entity. The client employer’s liability will be limited to violations relating to workers who served the client employer (as opposed to all workers employed by the labor contractor).

The statute prohibits the client employer from shifting any of these legal duties or liabilities to the labor contractor, and the provisions of Section 2810.3 cannot be waived.

Some Definitions & Exceptions…

The statute defines a “client employer” as any business entity, regardless of form, that obtains or is provided workers from a “labor contractor” to perform labor within its usual course of business. There are exceptions to the “client employer” definition:

  1. A business entity with fewer than 25 workers (workers provided by the labor contractor are included in this head-count);
  2. A business entity that is supplied with 5 or less workers from the labor contractor at any given time; and
  3. When the “client employer” is the state of California or its subdivision (i.e., the government exempts itself from the law – how convenient!).

In addition, the law does not impose individual liability on a homeowner if the homeowner hires a labor contractor to work on their home.

Section 2810.3 defines a “labor contractor” 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.” This can include staffing agencies, all kinds of subcontractors and other businesses; it bears repeating that this is not confined to any particular industry or type of services.

The “labor contractor” definition has a few exceptions, most notably: non-profit, community-based organizations that provide services to workers; and a labor apprenticeship program or hiring hall pursuant to a collective bargaining agreement. This latter exception reflects the fact that several major unions were the driving force behind the bill; if you are a unionized employer who uses the union hiring hall, you are in the clear as to such workers.

Moreover, the statute does not impose liability on a “client employer” of a motor carrier hired to transport property, freight or household goods. A few other, very narrow and specific exceptions also apply.

As with many California employment laws, the statute is vague and subject to many interpretations, some of which may not be resolved without litigation.

Where Does This Leave Me?

Once you fit into the definition of a “client employer” who has used the services of a “labor contractor,” you “shall share with a labor contractor all civil legal responsibility and civil liability for all workers supplied by that labor contractor” for the payment of wages and failure to secure valid workers’ compensation coverage. The legislative history indicates that there is no need for workers to prove any sort of action, responsibility or knowledge of the client employer to establish liability.

The law’s priority is to ensure workers are properly paid and covered by workers’ compensation insurance. Worthy goals, but an unscrupulous labor contractor could have its employees do work for you, not pay them a dime, take your money for the work… and leave you holding the bag for the workers’ wages, plus penalties and fines. You may then go after that labor contractor for indemnification, but that is productive only if they have not already spent or hidden their assets.

What’s an Employer To Do?

The best way to protect yourself as a “client employer” with regard to Labor Code Section 2810.3 is to be proactive in your business dealings.

  • Make sure you understand the law and its many exceptions and wrinkles, and how it might apply to your business model.
  • Before you engage a “labor contractor,” be sure to check them out thoroughly, including their financial stability and real proof of workers compensation coverage.
  • Carefully review the terms of your contract, and spell out any otherwise permissible obligations and remedies for any liability created by the acts of the labor contractor.
  • Monitor the contractor’s payroll activity for workers assigned to you. Have them submit a payroll report to you each pay period, or authorize their bank to provide you with copies of cancelled paychecks for the workers assigned to you.
  • Consider having the contractor provide a bond that would cover worker payments, plus fines and penalties in the event of nonpayment.
  • Monitor the labor contractor’s workers. Are they clocking their hours? Are they working overtime? Are they getting meal and rest breaks? Ensure that their direct employer (your labor contractor) is properly handling these matters.
  • Check existing contracts for compliance with this law, and update them as necessary. Update formerly “standard” contracts for future use.

Conclusion

Given the extremely high stakes game created by Labor Code Section 2810.3, it is worth the time, effort and energy required to actively police these situations. As always, LightGabler is available to assist businesses in discussing ways to protect your business from careless or unscrupulous labor contractors.