Businesses could be responsible for violations of outsourced work

August 23, 2017

 

A new ruling by the California Division of Labor Standards has given expanded reach to a 2015 amendment to the Labor Code. This expansion now has serious implications for the construction industry. Before getting into the details of the ruling issued by the Labor Commissioner, let’s take a brief look back at Assembly Bill 1897 for some context:

Effective January 2015, Governor Brown signed Assembly Bill 1897. This bill amended the Labor Code to specify that employers who use subcontracted labor are liable for that contractor’s failure to secure workers’ compensation insurance, pay required wages and provide a safe working environment.

To paint a picture of what this might look like for Central Valley businesses, consider the farmer who grows peaches. At harvest, the farmer calls his farm labor contractor, who shows up with a few dozen employees to perform the picking. In the event that those laborers file a wage violation claim against the contractor, AB1897 assigns a share of that liability to the farmer. This liability is jointly shared between the farmer and the contractor regardless of whether an employer-employee relationship exists, and pays no mind to whether the farmer had direction or control over the work being performed in his orchard.

Now fast forward to June 2017, when for the first time since passage of AB1897 we see a general contractor held liable for the wage violations of its subcontractor. In this case, a Southern California general contractor was unable to contest fines totaling over $250,000 for the wage violations of a drywall subcontractor used in the course of construction. Concerning this case, the California Labor Commissioner commented in a written statement:

“This case addresses the pervasive problem of wage theft in subcontracted industries. Businesses at the top of the contracting chain that profit from workplace violations can no longer escape legal liability by hiding behind their subcontractors, even if they did not control the work performed or know about the violations.”

Particularly concerning for anyone who outsources labor is the precedent set by this ruling. Employers subcontract various operations specifically for the purpose of avoiding the headache associated with controlling the work product and directing the employees.

General contractors, farmers, and anyone else who gets employees from a labor contractor are increasingly astounded to learn they might be on the hook through no fault of their own, for the violations of an unrelated third party. The statement from the labor commissioner solidifies the reality that there is no defense for ignorance in these cases, since knowing or not knowing makes no difference in the eyes of the labor code.

In light of AB1897 and the new implications set forth by this unprecedented ruling, companies who use subcontracted labor, including general contractors, should consider taking proactive measures to protect their enterprise. The first line of defense is contained in the indemnification language within the contract between the client employer and the contractor. That language should clearly identify who is responsible for the correct payment of wages, safe workplace conditions and securing of workers’ comp insurance. This language should also specifically detail the recourse available to client employers who become embroiled in the workplace violations of their labor contractors.

In addition, employers and general contractors might consider requiring labor contractors to provide proof of employment practices liability insurance, just like proof of workers’ comp insurance is a standard prerequisite for awarding a job to a subcontractor. Ideally, additional insured status should be granted to the client employer or general contractor.
Lastly, because financial instability is often a precursor to employment practices claims, employers and general contractors should pay close attention to the financial stability of their labor contractors.

The availability of contract labor is an essential part of many industries. If your organization relies on this type of outsourcing, be sure to work closely with your risk management professional to ensure that steps are taken to mitigate the new risks associated with this exposure.

–Nelson Aldrich is an insurance broker with WISG Insurance, headquartered in Turlock. He can be reached at [email protected]

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