Senate Bill 179, which became effective January 1, 2004 as Labor Code Section 2810, substitutes a new doctrine of vicarious liability for the long-established separation between principal and independent contractor. It does so by making it unlawful for a person or entity to enter into an agreement for labor services with a construction, farm labor, garment, janitorial or security guard contractor, where the person or entity knows or should know that the agreement does not include funds sufficient to enable the contractor to comply with all applicable local, state and federal laws or regulations governing the labor or services to be provided. The contractor's employee aggrieved by a violation of SB 179 can seek redress against the person or entity who entered into the applicable agreement, even though there is no direct contractual or employer-employee relationship between the contracting party and the aggrieved employee. Governor Davis had vetoed predecessor legislation in 2002, but signed SB 179 into law within days after losing the recall election. Proponents of the law may have been targeting certain well-known labor abuses, but the broad scope of the law, and its vague language, will raise issues for many "persons and entities" in California.
Scope. This legislation cracks down on unfair labor outsourcing practices in the garment and agricultural industries. However, subject to the limited exemptions set forth below, the statute sweeps within its scope any person or entity entering into a construction contract, or retaining a contractor to provide janitorial or security guard services. This will include almost all developers, property owners and property managers. There are no limitations as to size of the contract, nor any restriction to either public or private entities. It does not matter whether or not the contractor is licensed. The scope of the laws for which the principal may be liable is also quite broad. The language would appear to cover not only wage-hour laws, such as prevailing wage and minimum wage, but also safety, civil rights and workplace conduct laws and regulations, such as those under the federal and state Occupational Safety and Health Acts.
Exemptions. This law does not apply to a person or entity who executes a collective bargaining contract covering the workers employed under the agreement. Technically, this exemption would apply, for instance, only to a general contractor who executes a collective bargaining agreement. Presumably, the principal could receive "vicarious insulation" if the contractor provides only union labor to the principal; however, it is unknown how the statute will be interpreted in such a situation. Additionally, this law does not apply to homeowners who enter into construction contracts for their homes, provided that a family member of the principal resides in the home for at least part of the year.
Definition of Knowledge. SB 179 applies to the principal who knows or "should know" about the insufficiency of funds. Knowledge includes familiarity with the "normal facts and circumstances" of the relevant business. The extension to "should know" includes knowledge of any additional facts or information that would make a reasonably prudent person inquire further. The principal is also deemed to know information the principal could have discovered if it had requested information that is required by law or by the agreement with contractor.
Rebuttable Presumption. The law permits a principal to obtain a "rebuttable presumption" that an agreement does not violate the statue if certain requirements are met. Note that this presumption only affects the burden of proof; it is not a safe harbor. The presumption applies when a written contract comprising "a single document" includes all of the following (the Labor Commissioner may add to this list by regulations): (1) the name, address, and telephone number of the contractor through whom the labor or services are to be provided; (2) a description of the labor or services to be provided and the commencement and completion dates of those services; (3) the contractor's state employer identification number; (4) the workers' compensation insurance policy number and the name, address, and telephone number of the contractor's insurance carrier; (5) the vehicle identification number of any vehicle that is owned by the contractor and used for transportation in connection with the services provided; (6) the address of any real property to be used to house workers in connection with the agreement; (7) the total number of workers to be employed under the agreement, the total amount of all wages to be paid and the dates when the wages are to be paid; (8) the amount of the commission or other payment to the contractor; (9) the total number of persons who will be utilized under the agreement as independent contractors, along with contractor license identification numbers the independent contractors are required to have under local, state or federal law; and (10) the signatures of all parties, and the date the agreement was signed.
If the information in items 7 or 9 is unknown when the agreement is executed, a "best estimate" can be used, but the parties then have a continuing duty to ascertain the information and reduce it to writing when known. A material change must be in writing in "a single document" and contain all provisions supporting the rebuttable presumption that are affected by the change.
Although some of the required information is standard, other information would be quite onerous to obtain and to update. Further, the interplay between the statute's definition of knowledge and the requirements for establishing the rebuttable presumption may create a trap for the unwary. If the agreement requires updating the information in items 7 and 9 above, the principal will be deemed to know the information that might have been disclosed if the contractor had complied with this requirement, whether or not the principal actually received the information.
Effective Date. SB 179 applies to agreements entered into after January 1, 2004. It is unclear whether SB 179 also applies to amendments entered after January 1. Since the statute applies to a "material change" to the terms or conditions of an agreement, the statute may be broadly interpreted to include any amendments entered into after January 1, 2004.
Enforcement. Individual employees of the contractors and subcontractors enforce SB 179. An aggrieved employee must plead and prove that he was injured by a violation of a labor law or regulation in connection with performance of the agreement. The employee can then recover the greater of all his or her actual damages or $250 per employee per violation for an initial violation and $1000 per employee for each subsequent violation. Because the recoverable damages can exceed the harm suffered by any one employee, and costs and reasonable attorneys fees are available to the prevailing employee, an employee detecting a systematic labor law violation could receive significant damages, and the employee's attorney could receive significant attorney's fees. The aggrieved employee may also seek injunctive relief with, again, potential recovery of costs and reasonable attorneys fees. The statute does not provide attorney's fees to the principal who successfully defends against a claim under SB 179.
It's early days for this statute, which raises more questions than it answers. Persons and entities subject to this statute will have to struggle with the following issues, among others: Are the benefits of the rebuttable presumption worth the burdens, and risks? How will the statute impact competitive bidding situations, particularly public bidding where generally the public entity is required to select the lowest responsible bidder? How does the statute impact typical workers' compensation and employer liability coverages? Will the insurance industry offer extensions of certain coverages in light of this statute or will it develop new products to cover the types of liabilities that may face violators? What gaps in existing coverages do entities need to rectify? What additional risks does the statute pose for proceeding with non-union labor, or without a project labor agreement? How can a contracting party document the state of its knowledge as to whether the contract price is sufficient to enable the contractor to comply with applicable labor laws? We expect these and other issues to play out as this statute becomes better known, and its implications unfold.
For assistance, please contact either of the attorneys listed below:
Jim Fowler | jim.fowler@bingham.com | 415.393.2052 |
Camarin Madigan | camarin.madigan@bingham.com | 925.975.5141 |
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