California enacted AB 1897, effective January 1, 2015 which imposes liability on businesses for a contractor’s failure to pay wages or secure workers’ compensation insurance for its employees. Businesses should review the law and determine, based on their particular circumstances, when they might be held liable for a contractor’s actions or negligence. Action should then be taken to minimize the probability that a contractor will violate the law, and if it does, to minimize the effect on the business.
The key to understanding and complying with the new law is found in the defined terms of AB 1897.
AB 1897 Language
The term “labor contractor” is not used in accordance with common application. Rather, a labor contractor for this new law means a person or business that supplies a client employer with workers to perform labor “within the client’s usual course of business.” Thus, identifying the client’s usual course of business is key. (By the way, a labor contractor does not include an apprenticeship program.)
A “client employer” is an entity that obtains workers to perform labor within the “usual course of [the employer’s] business.” A covered employer must have at least 25 workers, either hired directly or through a labor contractor. If a business does not have at least six workers supplied by a labor contractor at any time it is not considered a client employer.
The “usual course of business” means the regular and customary work of the employer, performed within or upon the premises or the worksite of the client employer. The phrase “regular and customary” is not defined. However, in other employment settings, the term is used to describe activities that are more frequent than occasional but less than constant. If an activity is normally and recurrently performed, then the activity is regular and customary. (DLSE Manual, § 22.214.171.124.)
The law does not define the “worksite” of the client employer. Conceivably, it could be on the construction site where client employer is performing services along with other trades. However, in order for this law to apply, the worker must be performing the regular and customary work of the employer. It is not sufficient for the worker to be on the job site performing duties that the client employer does not regularly or customarily perform.
Application of AB 1897
Due to the definitions, the law has limited applications. First, the employer must have at least six workers supplied by labor contractors at the same time. Those workers must be performing work in the usual course of the employer’s business. Unless the employer has the minimum number of workers performing duties in the usual course of the employer’s business, the law will not apply.
In most cases, office workers obtained by an employment agency are probably working in the usual course of business. Thus, a business would typically share in the civil liability for the contractor failing to pay wages and failure to obtain workers’ compensation insurance for its workers.
A business may be in a similar position with workers performing duties at off-site locations such as construction projects. Whether the business shares civil liability may depend on whether the workers are performing services in the employer’s usual course of business or whether the work performed is not in the employer’s usual course of business. For example, if framing is not in the employer’s usual course of business, and the employer subcontracts that work out, the employer should not incur shared liability with respect to the framers. If the workers are installing electrical conduits, and doing so is in the employer’s usual course of business, then the employer could incur shared liability for the contractor’s negligence or non-compliance with the law.
AB 1897 marks a new strategy by the California Legislature. With its enactment, the Legislature is imposing liability on an entity that has not engaged in wrongdoing. Liability is imposed on a business because a third-party erred. Avoiding this unfair liability will require businesses to give greater scrutiny to its contractors, and also include indemnity provisions in agreements with contractors or with employment agencies.