On September 28th, California Governor Jerry Brown signed Assembly Bill 1897, which imposes new risks on businesses who use subcontractors as a source of labor. Historically, a subcontractor’s employee who asserted claims against the subcontractor’s client for labor code violations had a difficult time demonstrating an employment relationship with the subcontractor’s client. Under the new law, any business using workers hired through a labor contractor in the normal course of business becomes automatically liable for the labor code violations of the labor contractor, including the accompanying civil penalties.
The law could have far reaching effects for businesses that rely on subcontractors to provide workers. As written, the law could apply to any business that retains a subcontractor to supply labor that is even tangentially related to the business’ activities. Thus a construction company or office complex that hires a subcontractor to supply security guards could be liable for that subcontractor’s failure to page wages or failure to provide worker’s compensation insurance.
A few key exceptions limit the law’s impact. The law does not apply to businesses with a total workforce of less than twenty-five workers or businesses with five or fewer workers supplied by a labor contractor. Also, the law only holds the business liable for the subcontractor’s wage and hour violations and the subcontractor’s failure to secure worker’s compensation insurance. Businesses would not automatically be liable for the subcontractor’s violations of the other provisions of the Labor Code, such as the Code’s “whistle blowers” provisions. Furthermore, subcontractor’s employees who are exempt from wage and hour laws are unable to use the law to impose liability on the subcontractor’s client.
The first line of defense for businesses that rely on subcontractors for their workforce is to review their agreements with their subcontractor to confirm that those agreements include indemnity language that covers violations of the labor code. The new law explicitly allows a business and its labor contractors to enter into such indemnity agreements.
The next line of defense is to exercise a greater degree of oversight in the subcontractor’s employment practices by demanding evidence of the subcontractor’s compliance with wage and hour laws, as well as evidence of sufficient worker’s compensation insurance. Businesses must now be especially wary of subcontractors who claim they are exempt from following the Labor Code because their workers are independent contractors as opposed to employees. Given the steep penalties associated with misclassifying employees as independent contractors, companies considering doing business with these subcontractors should confer with legal counsel to determine if there is a bona fide independent contractor relationship between the subcontractor and its workers.
Nathaniel Lucey is an attorney in the San Jose office. He can be reached at or 408.286.0880.