New California Law Makes Companies Responsible for Contractor's Failure to Pay Wages

On January 1, 2015, companies that use labor contractors to supply workers will share legal responsibility for paying their wages and providing worker's compensation coverage. Under Assembly Bill 1897, recently signed into law by Governor Jerry Brown, companies will be liable for wages and other penalties in the event a labor contractor fails to pay its employee or secure valid worker's compensation coverage.

A.B. 1897 applies to companies that obtain workers from a contractor to perform labor within the usual course of business, such as companies that hire temporary staff from an agency. The bill does not apply to (1) companies with less than 25 workers, including workers obtained by a labor contractor; (2) companies with five or fewer workers obtained by a labor contractor; or (3) workers supplied by nonprofit organizations, labor organizations or apprenticeship programs that operate under a collective bargaining agreement, or a motion picture payroll service company.

The practical effect of this new law is that a company may no longer deny liability for wages by arguing that it is not the contracted worker's employer. Legal responsibility for wages and workers' compensation coverage is shared regardless of whether the company and the contractor have a contract, and regardless of whether the company had knowledge of the violations. Further, the law does not require that the worker first exhaust legal efforts to recover against the contractor. The worker may, after giving 30 day's advance notice, bring a civil claim against the company without first seeking to obtain relief from the contractor.

A company may, however, still contractually require a contractor to indemnify it if the company is required to pay wages. Therefore, to prepare for this new law, companies using contractors to supply workers should carefully review their contractor agreements to strengthen indemnification provisions and contractor promises to pay their workers and provide worker's compensation coverage.