Effective Jan. 1, 2015, businesses will be directly liable to workers supplied by labor contractors (including temporary and other staffing agencies) when those labor contractors fail to correctly and completely pay wages or fail to provide workers’ compensation insurance coverage to their employees. Businesses using workers from labor contractors are liable to such workers for unpaid wages, even if they have already fully paid the labor contractor. The new law—Assembly Bill 1897, added to the California Labor Code as section 2810.3—also prohibits businesses from shifting liability for compliance with the Cal-OSHA regulations as to those workers. 

Under current law, a worker for a temporary staffing agency or labor contractor is required to prove the existence of a “joint” or “co-employment” relationship to impose liability on the business where they performed their duties.1 The extent of control exerted over the worker’s conditions of employment has been the main factor in determining the existence of a joint employer relationship. The new law, however, makes this showing unnecessary. The result is an expansion of liability to workers of labor contractors when their actual employers fail to obey the law. 

The new law applies to businesses with more than five workers supplied by the labor contractor and 25 employees total (including those supplied through a labor contractor) that uses “workers” to perform labor “within its usual course of business,” which means “regular and customary work” of the client employer’s business. This means, for example, that a restaurant would not be liable for the wages of a plumbing contractor who is brought onsite to repair a plumbing issue, but would be liable for the wages of servers provided by a temporary agency for a banquet event. A contractual waiver between the labor contractor and the client is not permitted under the new law, meaning that a business cannot contractually escape the risk of joint liability. But contractual indemnification is permitted.

The definition of “workers” under the new law does not include workers properly classified as exempt from overtime. And the definition of “labor contractor” does not include bona fide nonprofit community-based organizations providing services to workers, labor unions, apprenticeship programs, collectively bargained hiring halls, or motion picture payroll services. The new law also contains specific exceptions for political subdivision of the state, certain motor carriers of property providing transportation services, and homeowners and home-based businesses for services received at the home. 

What should businesses do to protect themselves?

  • Businesses should carefully select new labor contractors and reevaluate existing contractor relationships, focusing on the contractor’s compliance with relevant labor laws, especially with respect to payment of wages. When the financial viability of a contractor is in question, businesses may wish to consider hiring workers directly.
  • Businesses should ensure that labor contractors’ service agreements provide for indemnification for the labor contractor’s violations of law, including legal fees and costs incurred in defending against such claims. Most service agreements already contain boilerplate language in this regard, which should be carefully reviewed. The evaluation should also include the labor contractor’s financial ability to defend claims.
  • Businesses should require labor contractors to provide certificates evidencing workers’ compensation insurance for workers supplied by the contractor.
  • Businesses should monitor labor contractors to ensure compliance with relevant labor laws. Periodic audits of time records, pay stubs, and workers’ compensation insurance certificates may be useful to encourage compliance. But, businesses should be careful of becoming too involved in the contractor’s operations; creating a “joint employment” relationship still exposes businesses to a wider range of liabilities, beyond those addressed by the new law.
  • Businesses should make sure temporary workers are provided with appropriate safety training to comply with Cal-OSHA requirements, including under the required Illness and Injury Prevention Program.
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