Last month I wrote about another new law in California targeting independent contractors. That law, signed by Gov. Brown on September 28, puts a potentially enormous liability risk on companies that use workers supplied by “labor contractors” that fail to pay all wages due the workers. Assembly Bill 1897 requires client employers to “share with a labor contractor all civil legal responsibility and civil liability for all workers supplied by that contractor for… the payment of wages and failure to secure workers’ compensation coverage…” Here is part two of that article, which addresses several more questions and answers about the law.
Q: Are all companies that supply a client with workers considered “labor contractors” under this law? No. The term “labor contractor” is defined as an individual or entity that supplies a “client employer” with workers to perform labor “within the client employer’s usual course of business.” The term “usual course of business” means the regular and customary work of a business, performed at the premises or work site of the client employer. The term “labor contractor” specifically excludes (a) a bona fide non-profit organization that provides services to workers; (b) a bona fide labor organization (union) or apprentice program or hiring hall operated pursuant to a collective bargaining agreement; (c) a motion picture payroll services company; and (d) a third party to an employee leasing arrangement if the arrangement contractually obligates the client employer to assume all civil legal responsibility and civil liability under this new law.
Q: Does the “payment of wages” that a client employer may be liable for include payroll and unemployment taxes? Yes. The term “wages” is defined to include all sums payable to an employee or to the state based on the failure to pay wages. It would therefore appear to cover state unemployment taxes and may also cover the withholding of state income taxes in California.
Q: Can a client employer shift its legal duties or liabilities to the labor contractor by contract – if not, can a client employer or labor contractor agree by contract to an indemnification provision? The shared wage and workers’ compensation responsibilities and obligations imposed on a client employer under the law may not be “shifted” by contract or in any other manner to the labor contractor. In other words, a client company cannot prevent itself from being sued and having a judgment against it. However, the law expressly permits the parties to enter into contracts with indemnification provisions between them, whereby one party will become liable to reimburse the other party for their respective liabilities under the new law.
Q: May a worker who has been denied payment of all lawful wages file a lawsuit against the client employer? Yes, but the worker must provide the client employer at least 30 days notice prior to filing any such lawsuit.
Q: What other rights does a worker have under this law? Like most labor and employment laws, the new law also protects workers from any retaliatory action by a labor contractor or a client employer for filing a lawsuit or giving notice of a violation to the client employer.
Q: Does this law have any effect on any of the types of claims or theories of liability that workers have asserted for independent contractor misclassification? No. This new law provides that the imposition of shared liability upon a client employer adds another form of relief for misclassified workers. The law also provides that the rights, remedies and obligations in the new law “are in addition to, and shall be supplemental of, any other theories of liability or requirements established by statute or common law.”
Q: How do client companies know if the labor contractor has properly classified their workers as independent contractors, and what can a client company do to best protect itself from this new form of “shared” liability under California law? One means for client companies to assure themselves that the labor contractor maintains an enhanced level of independent contractor compliance is through the use of one of NTA’s endorsed transportation attorney’s. NTA has a proprietary system designed to measure compliance with IC laws and provides tools to minimize IC misclassification liability. While the majority of NTA’s members are by businesses that retain ICs directly, the same attorneys can be effective for a client company in measuring a labor contractor’s level of compliance. Oftentimes, even a quick review of a labor contractor’s IC agreement will reveal the general level of its IC compliance, determined in accordance with the applicable state and federal laws. Labor contractors that use 1099ers to furnish services to client companies should be favored if their IC relationships, both by contract and in actual practice, reflect a higher level of IC compliance. Those labor contractors that have a lower level of IC compliance should be disfavored by client companies, especially in California, given the enactment of the new law. Almost all IC relationships can be enhanced to a considerable degree. Therefore, client companies can insist that their labor contractors enhance their level of IC compliance if they wish to continue to do business with the client. Client companies can also demand indemnification provisions in their agreements with labor contractors, but these indemnification clauses cannot alone minimize the likelihood that the client company will be sued for shared wage and workers’ compensation liability if the labor contractor has been misclassifying its workers as ICs. The combination of improved IC compliance by the labor contractor and insistence on a suitable indemnification provision is a prudent approach for companies to avoid exposure to this new “shared” liability under California law.
Q: How can the labor contractors that provide 1099ers to client companies enhance their IC compliance and gain a competitive advantage in California over those firms that are not IC compliant? Labor contractors can use NTA to obtain a competitive edge over other labor contractors if they use that process to heighten their level of IC compliance in comparison to their competitors. Enhancements in IC compliance can be achieved by the use of informed restructuring, re-documentation and/or re-implementing of the IC relationships with the labor contractor’s 1099ers, using state-of-the-art tools. Ideally, such IC enhancements are accomplished before a client company demands them as a condition of continuing its relationship with the labor contractor. Such firms can also use their heightened level of compliance as a client retention tool with existing client companies, a marketing tool with potential new clients, and, of course, as a means to reduce their own potential for misclassification liability.
The National Labor Relations Board has tossed a new vegetable into the enormous salad of independent contractor misclassification tests. As companies might expect, the new vegetable smells rotten. They have “invented” an 11th factor test which is the overall evaluation of whether the individual is, in fact, rendering services as part of an independent business.
This is NOT just a California issue – this is a national problem, too. It is clear that the current administration in Washington is clearly against the independent contractor. If you have any doubts whatsoever about the status of your workers, don’t gamble – we have the solutions you need. NTA members can call (800) 805-0040 to schedule an appointment for your own risk assessment.