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Think You Can Outsource Liability? Think Again.

Change in Business Leads to Change in Legislation
With the changing economy, many businesses have moved away from directly hiring all employees and turned to labor contractors, such as staffing agencies, to supply workers.  Until now, labor contractors bore the burden of liability for proper payment of wages and securing workers’ compensation for the workers they supply to a business.  However, California’s recent passage of Assembly Bill 1897 changes these burdens by the creation of a new law, Labor Code section 2810.3, which becomes effective on January 1, 2015.

New Law Creates Civil Liability for Businesses
Labor Code section 2810.3 makes businesses and labor contractors jointly liable for failing to pay wages or secure valid workers’ compensation coverage for the workers supplied by the labor contractor.  The law is directed at businesses who routinely use labor contractor workers in the usual course of business.  It does not apply to all labor contract arrangements or change the definition of an independent contractor. 

Where applicable, a business may now be held civilly liable to a worker for the contract employer’s failure to pay proper wages or to secure valid workers’ compensation coverage.  Workers must provide notice to a business 30 days before filing a civil action. 

Does Labor Code Section 2810.3 Put Your Business on the Hook?
Labor Code section 2810.3 applies only to workers supplied in usual course of business, defined as the “regular and customary work of a business, performed within or on the premises or worksite” of the business.

The law provides exemptions for certain businesses and is not applicable to:

  • Business entities with less than 25 workers, including those hired directly by the business and those supplied by a labor contractor,
  • Business entities with five or fewer workers supplied by labor contractors at any given time, and
  • The state or its political subdivisions, including cities, counties and special districts.

Additionally, the following types of labor contractors are exempt from the law:

  • A nonprofit, community-based organization that provides services to workers,
  • Labor organizations operated pursuant to a collective bargaining agreement,
  • Motion picture payroll service companies as defined in the Unemployment Insurance Code, and
  • Third parties to employee leasing arrangements as defined in the California Workers’ Compensation Experience Rating Plan.

The workers subject to the new law do not include employees who are exempt from overtime rates for executive, administrative and professional employees.  

What Action Can You Take?
Choose your labor contractors carefully.  It is advisable to use due diligence to ensure the labor contractor is in compliance with the law, pays proper wages and secures workers’ compensation insurance.  As the old adage goes, do your homework and you will avoid detention. 

Include an indemnity provision in your contract.  While the new law prohibits shifting liability solely on one party, you may craft your contracts to include a provision for indemnity, or other lawful remedies, for liability created by the acts of the labor contractor.  Pointed contractual language addressing the new law could save you from headaches in the future.

ABOUT THE AUTHOR: 
Kate Besch is a graduate of the University of Iowa College of Law.  She specializes in general liability defense and business litigation.  Contact Kate at 858.263.4115 or kbesch@tysonmendes.com.

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