New California Law May Make Owners Responsible for Service Providers\' Noncompliance with Law
Effective January 1, 2004, new Section 2810 of the California Labor Code requires that a party entering into a contract for construction, farm labor, garment, security guard or janitorial services know that the other party who is providing those services has sufficient resources to comply with all applicable laws.
The purpose of this law is to prevent violations of minimum wage, workers’ compensation and other labor laws by requiring the party receiving the services to determine on an ongoing basis whether the service provider has the financial ability to comply with those laws. The scope of the law is broad and the means of satisfying its requirements are less than certain. The law gives service provider employees the right to sue for damages. In a recent case, four garment workers working for a contractor hired by Wet Seal sued the clothing retailer, resulting in a settlement in which Wet Seal agreed to pay $90,000 to the employees. In addition to the employee’s right to sue, the California Labor Commissioner may also have jurisdiction to enforce the law.
A party may not enter into a service contract if the party “knows or should know” that the contract does not provide sufficient funds for the service party to comply with applicable laws. There is a presumption that this requirement has been satisfied if detailed information about the service party is stated in the contract, including the service party’s tax ID number, liability insurance information, the vehicle identification numbers of the vehicles to be used, the number of workers and amount of wages to be paid and a list of the applicable licenses required for the work. However, obtaining all of the required information will not immunize the non-service provider from liability if, despite the information provided, the non-service provider knew or should have known that the service provider would not have sufficient funds to comply with minimum wage and all other applicable laws.
Owners frequently enter into service contracts that may be subject to this law (directly or through property or construction managers). To protect against the penalties and other consequences of violating the statute, owners and others contracting with service providers should update their contracting procedures and contracts to comply with this statute. Specifically, non-service providers should perform and document an investigation about the service party’s business practices before entering into the service contract, should include in the service contract a representation by the service provider that it has sufficient funds to comply with all applicable laws, and should include an indemnity by the service provider protecting the owner from any liability as the result of any claim that the service provider failed to comply with any applicable law. These steps will provide some safety, but the overall effect of this new statute remains uncertain because of its breadth and the various ways in which it may be enforced.
If you have any questions concerning this Legal Update, please feel free to contact any member of our Finance Group in Los Angeles at:
Pircher, Nichols & Meeks
1925 Century Park East
Los Angeles, California 90067
The PN&M Legal Update is published as a service to our clients and friends. It is intended to provide general information and should not be acted upon without first obtaining professional advice appropriately tailored to your individual needs.