A California federal district court held that companies may owe a duty of care to their prospective contractor’s employees in the hiring of such contractors. In Carrillo v. Schneider Logistics, Inc., plaintiff Everardo Carrillo and others were workers at three California warehouses that Walmart owned or leased, but were actually operated by Walmart contractors. Plaintiffs sued both the contractor-employers and Walmart, alleging the contractor-employers failed to pay them wages (including overtime) in violation of state and federal law and that Walmart was responsible, among other reasons, because it negligently hired the contractor-employers.

According to plaintiffs, “Walmart knew or should have known that each [contractor-employer] had a track record of violating state and federal employment laws, and Walmart’s agreement with [these contractor-employers] created economic pressure to violate these laws.” Walmart engaged the contractor-employers and then allegedly failed to implement procedures to ensure legal compliance and turned “a willful blind eye to rampant violations.” Specifically, plaintiffs claimed it was not reasonably possible for the contractor-employers to meet the productivity requirements and labor cost goals set by Walmart’s contract while complying with the law and maintaining a profit. Walmart moved to dismiss, but the federal district court rejected Walmart’s arguments and found plaintiffs’ allegations sufficient — at least at the pleading stage — to support a duty of care between Walmart and the employees of its contractors.

The negligent hiring claim is particularly important to note because it provides a separate theory under which one company may be held accountable for the actions of another, in addition (or in the alternative) to joint employer liability. Typically, employees will claim that two distinct companies are, in fact, a single enterprise or joint employers such that both companies may be held liable for the actions of either company. Here, the negligent hiring claim purports to extend wage and hour liabilities one step further because, even if Walmart is found not to be an employer under typical theories, it may still be held liable for the wage and hour violations of its contractors if the plaintiffs prove it was negligent in hiring those contractors. It remains to be seen whether plaintiffs will be successful in proving up the theory or, if appealed, whether the theory will stand.

In the interim, companies should be mindful that at least one court recognized a potential duty of care in hiring contractors, and California Labor Code Section 2810(a) specifically prohibits companies from entering into an agreement for certain labor or services (such as janitorial or security services) where the company has reason to know the agreement will not provide sufficient funds to allow the contractor to comply with applicable law.