Executive Summary:  Discount retailer Ross Stores, Inc.'s ("Ross") recent proposed settlement of a California labor law class action filed by immigrant and low wage subcontractors related to janitorial services performed in its Ross Dress for Less and dd's Discounts stores highlights retail employers' risk in managing the janitorial services contractor–subcontractor relationship. Specifically, despite contracting with an independent third-party provider, who in turn subcontracted performance of the janitorial services to smaller, local businesses, Ross could not avoid suit filed by several subcontractors alleging that both Ross and its janitorial services contractor underfunded their janitorial contracts in violation of California's Labor Code and Unfair Competition Law. After the court refused to dismiss the case on the pleadings, and following a year of intense litigation including completion of fact and expert discovery, mediation, and months of on-going negotiations, Ross and its contractor agreed to resolve the matter for $2.3 million and other prospective relief related to future compliance efforts. Vasquez v. USM, Inc. dba USM Services, Inc., Ross Stores, Inc. dba Ross Dress for Less and dd's DISCOUNTS, 3:13-cv-05449, (N.D. Cal.),motion to approve settlement pending.

Background

Since 2008, Ross, an "off-price" retailer, has contracted for janitorial services with a third-party contractor, USM Inc. ("USM"), to provide janitorial services for its Ross Dress for Less or dd's DISCOUNTS stores throughout California. USM provided similar janitorial services to hundreds of retail chain stores around the country by subcontracting with a network of local contractors. Plaintiffs, then-current and former janitors at Ross Dress for Less or dd's DISCOUNTS stores in California, allege that Ross and USM violated Labor Code section 2810 and other California laws by underfunding their janitorial subcontracts. Specifically, these subcontractors, who were primarily immigrants and low-wage workers, claimed that Ross and USM knew or should have known that their janitorial subcontracts did not include sufficient funds to allow subcontractors to comply with all applicable local, state, and federal laws or regulations governing the janitorial services to be provided. Moreover, the subcontractors alleged that Ross and USM violated California's Unfair Competition Law ("UCL"), Business and Professions Code section 17200, et seq., by engaging in unlawful, unfair, and/or fraudulent business acts and practices. The subcontractors also asserted claims under the California Private Attorney General Act ("PAGA") based on Ross' and USM's alleged violations of California law.

Following the trial court's denial of Ross' motion to dismiss the case on the pleadings, the parties litigated the case for a year including: completion of fact and expert discovery which involved numerous written discovery responses, production of over 130,000 documents, and numerous depositions; mediation; and months of on-going negotiation. Following the subcontractors' motion for class certification and Ross' and USM's opposition thereto, the parties agreed to settle the case for $2.3 million and certain prospective compliance-related changes by both Ross and USM. Specifically, Ross and USM agreed to pay $1,000,000 into a settlement fund to cover monetary relief for the class of subcontractors; service awards for the class representatives and class member declarants; PAGA payments to the State of California; and, the costs of settlement administration. As for prospective compliance, USM agreed to (1) require subcontractors to maintain records of the janitors' hours worked and review these records for minimum wage violations, (2) provide janitors with notice of their rights under the California Labor Code, and (3) ensure that the janitors receive minimum wage and overtime pay, including making payments directly to the janitors if needed. For its part, Ross agreed to revise its agreement with USM to ensure that USM's agreements with the subcontractors comply with California Labor Code section 2810 to include assurances that janitors are paid at least minimum wage and that the subcontractors carry a workers' compensation policy, maintain time records, and provide itemized wage statements.

Employers' Bottom Line:  When contracting with third-party janitorial service providers, in addition to standard indemnification provisions, retailers should first be sure to include contract language that clearly states their expectations regarding compliance with federal, state and local employment, labor, and wage and hour laws. Second, retailers should include a requirement that the janitorial services provider take certain affirmative steps to demonstrate its compliance as required by the contract. These affirmative steps can include submitting periodic certifications, data samples affirmatively demonstrating compliance, or an employer-driven compliance effort that requires certain data be shared upon request. To be clear, such measures by retailers will not necessarily shield them from claims. Such measures will, however, contribute to a culture of compliance and provide transparency into the third-party provider's business practices. This transparency must be used, however, to make appropriate decisions about companies with whom a retailer does business. While individual programs will vary by retailer, effective risk management of the janitorial services contractor-subcontractor relationship requires that a program be created at the onset of the relationship to effectively mitigate situations like the one faced by Ross in this case and past situations involving other retailers.