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

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[Editor’s Note: We hate being wrong, but hey, it happens. Based on Dave Ross’ comment below we’ve revised this post to reflect that AB 1897 appears to only apply to temporary 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 who use temporary workers may now be found legally responsible if the agency providing these temporary workers fails to to pay their workers, to secure workers’ compensation coverage and for workplace safety violations.

Who Does the New Law Apply to?

The new law, 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.

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 (presumably, this includes minimum wage, prevailing wage, overtime, etc.).
  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.

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

  1. Roger Hughes

    Very interesting article Garret. I sent it to my older daughter who is in-house provider of payroll services for the entertainment industry.

    Roger

    Reply
  2. Dave Ross

    I would be interested in knowing something of the legislative history of AB 1897. I realize that wording in these law changes is always awkward, but my parsing of the bill suggests that it was intended, at least in the construction context, to curtail abuses and avoidance of Workers Compensation and payroll taxes via use of a temp labor agency (e.g. Manpower, CLP or other less reputable provider).

    One section of the new law giving me this impression is (6) … (o), which reads:

    “This section shall not be interpreted to impose liability on a client employer for the use of an independent contractor other than a labor contractor or to change the definition of independent contractor.”

    If every independent subcontractor who provides labor on a jobsite is covered by AB 1897, then to whom does 6(o) apply? Is an independent plumbing (sub)contractor really just a “labor contractor” for the purposes of AB 1897, or “… an independent contractor other than a labor contractor?” Does the GC really become liable for the plumber’s (and every subcontractors’) wages, payroll takes and Worker’s Comp?

    My quick acid test of whether an entity is a (sub)contractor or supplier is whether they supply labor at the jobsite. So, for example, a casework supplier simply delivers the finished goods to the job (all labor performed in their shop), and a casework subcontractor delivers and installs them.

    What makes more sense to me is that AB 1897 is intended to address instances where the casework subcontractor gets its installation workforce from a temp agency (legit or not). In such an instance, now the casework sub cannot avoid the liability of meeting all employer requirements by transferring those responsibilities to the temp agency (“labor contractor”).

    Similarly, a GC cannot absolve itself of employer’s liability by using (non-union) temp workers to complete their self-performed work.

    Another clue (by my lights) is the exemption of union hiring halls. I would not be surprised if, in fact, labor union lobbyists had a hand in crafting and promoting this bill. Construction labor unions have a long history of, and vested interest in, shutting down the lower-cost alternative (construction temp agencies) through legislation. Not necessarily a bad thing, just sayin’ …

    Reply
    • Garret Murai

      Thanks Dave. As always, I appreciate your comments. I read your comments, took another look at the language in the new legislation, and also took a look at the Assembly and Senate floor analyses. And, I agree with your comments.

      According to the Assembly floor analysis, the bill was amended on the Senate floor and, among other amendments, the Senate amended the bill to “[d]elete the term ‘bona fide’ regarding the use of independent contractors and provide that the bill shall not impose liability on a client employer for the use of an independent contractor, other than a labor contractor as defined in the bill.” According to that same Assembly floor analysis, before the Senate amended the bill, the bill provided that it “shall not be interpreted to impose liability on a client employer for the use of a bona fide independent contractor or to change the definition of independent contractor.”

      Thus, before the Senate amendment, the bill read: “This section shall not be interpreted to impose liability on a client employer for the use of a bona fide independent contractor or to change the definition of independent contractor.” And, after the Senate amendment, the bill read: “This section shall not be interpreted to impose liability on a client employer for the use of an independent contractor other than a labor contractor or to change the definition of independent contractor.”

      I’m not sure if the Senate’s amendment deleting the words “bona fide” and adding the words “other than a labor contractor,” clarified or made more ambiguous, the issue of whether AB 1897 only applies to temporary workers or to the workers of traditional subcontractors as well. The Senate’s deletion of the words “bona fide” and addition of the words “other than a labor contractor” may have been because a “labor contractor,” at least legally speaking, is a “bona fide” independent contractor so the inclusion of the words “bona fide” was a a distinction without a meaning.

      Nevertheless, left untouched in both the versions of the bill is the language that “[t]his section shall not be interpreted to . . . change the definition of independent contractor.” Perhaps that is clarity enough since the bill only applies to “labor contractors” and does not, as the bill states, intend to change the definition of independent contractor.

      Reply

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