New law puts California operators in labor bind

Jeffrey Horton Thomas

Effective this year, California restaurants, bars, hotels and other businesses that bring in workers through other companies–such as outside valet parking, security, landscape maintenance and temp firms–will be liable to the workers whenever their actual employer (the parking company, for example) fails to pay them overtime, provide meal or rest breaks, pay them on time when they’re fired or quit, or violates other wage-related requirements. In short, the new law, California Labor Code section 2810.3, makes businesses liable for wage-related violations committed by companies other than themselves and against workers who are not their employees. 

The new law is a striking change in the already hostile landscape restaurants face in California. Hospitality operations should prepare now in order to avoid liability.

Under section 2810.3, an individual or company that sends its nonexempt (hourly) employees to another company’s business premises (such as a restaurant or bar) is referred to as a “labor contractor.” The restaurant or other business that receives workers through a “labor contractor” to perform services in the ordinary course of that business’s operations is referred to as a “client employer.”

The law doesn’t apply to client employers with fewer than 25 nonexempt workers. (In counting workers for purposes of this threshold, the client employer’s own employees and workers provided by labor contractors are all counted. For example, if a small restaurant has, say, 21 nonexempt employees of its own and four on-site workers from a labor contractor, section 2810.3 applies.) The law also doesn’t apply to any client employer having five or fewer workers provided by labor contractors at any one time.  Unions, motion picture payroll services and certain employee leasing companies are not “labor contractors” under the law.

Each “client employer,” the law provides, “shall share with a labor contractor all civil legal responsibility and civil liability for all workers supplied by that labor contractor” for wage-related violations and the failure to maintain workers compensation insurance.

Restaurants, bars and hotels commonly hire outside companies to provide on-site workers to perform services such as security, janitorial, window washing, valet parking, landscape maintenance and more. Even modest-sized hospitality operations may have dozens of such workers on their premises each month. The new law makes the hospitality business that receives such outside workers liable to the workers for wage-related violations despite the fact that the restaurant is not the workers’ employer.

Liability will be costly

The liabilities that restaurants and other businesses will “share” with the “labor contractors” that bring workers onto their premises include:

• Liability for a labor contractor’s failure to pay regular or overtime wages, commissions and premium wages where meal or rest breaks aren’t provided;

• Liquidated damages where minimum wage isn’t paid;

• Waiting time penalties if workers aren’t paid on time on their termination; and

• Penalties payable to the workers and the state of California in connection with wage violations and attorney’s fees awards.

Under section 2810.3, workers will have their choice of suing their actual employers (the labor contractors) and the “client employers” in court or filing claims against them with the California Labor Commissioner. Under the law, workers may choose to assert their claims against both the labor contractor and the client employer or either one, alone.  Regardless, the law appears to make client employers and labor contractors jointly and severally liable to the workers. Any liability to the workers or the state won’t be split 50/50 or otherwise between the labor contractor and the client employer; rather, each may suffer judgments for 100 percent of the damages, penalties and attorney’s fees awarded.

The purpose of the new law is to help ensure that employees receive the pay and benefits they earn. To achieve this, the California legislature has given workers and their attorneys a second pocket to go after when rights are allegedly violated. The unfairness in section 2810.3, however, is that the law makes businesses liable for service providers’ violation of their legal obligations to their own employees despite the fact that the businesses receiving the services have no ability to control when and how the service providers pay their employees, provide them with meal and rest breaks and so on.

Act now to protect yourself

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Hospitality operations in California are already a top target of plaintiffs’ attorneys. To make matters worse, plaintiffs’ attorneys will now use section 2810.3 to sue restaurants, bars, hotels and other client employers along with the plaintiffs’ actual employers and the labor contractors. Businesses there and in other states where similar legislation may materialize should take steps now to avoid what will otherwise often be substantial liability under the new law:

1. Restaurants and other businesses must pay closer attention to who they hire as service providers. The vendor charging the cheapest rates won’t necessarily be the least costly one in the long run.

A labor contractor with a history of being sued by its employees for wage and hour violations is probably not the service provider to hire. Businesses may want to have their counsel conduct litigation searches before hiring important, new service providers.  Further, before hiring a service provider, it may be prudent to require the service provider to allow some inspection of its internal wage practices, (i.e., due diligence).

2. New written contracts must be entered into between hospitality businesses and each labor contractor they use. Each contract must contain representations and warranties by the labor contractor expressly assuring the business that the labor contractor will perform in full its wage-related duties to its employees, including the workers the labor contractor sends to the client employer’s premises. 

Further, each contract must provide that the labor contractor will defend and indemnify the restaurant or other business for any wage-related losses, penalties and attorney’s fees in connection with the labor contractor’s employees. Section 2810.3 makes “void and unenforceable” any attempt by a client employer to waive its liability under the new law. However, the law preserves the client employer’s right to provide by contract that the labor contractor must defend and indemnify the client employer for liabilities under section 2810.3.

Defense and indemnification provisions will be worthless, of course, if the labor contractor goes out of business when the wage-claim dispute arises or doesn’t have the money to resolve the dispute for the client employer and itself. For this reason, it is now more important than ever that businesses select long-standing, financially secure service providers who provide on-site labor.

It is a certainty that the contracts in effect now between hospitality operations and their outside service providers do not contain the provisions needed, as joint liability between an outside service provider-employer with its clients for wage-related violations wasn’t on anyone’s mind before the passage of the new law late in 2014.           

3. Businesses should attempt to require that their service providers maintain employment practices liability insurance (EPLI) and name the restaurant or other client-employer business as an additional insured.

4. Some businesses may be tempted to go further and become involved in their service providers’ wage practices to make sure workers are paid as they should be. Resist the temptation. Although exercising due diligence before hiring service providers is necessary, becoming involved in the service providers’ personnel practices once the business has hired the labor contractor risks subjecting the business to liability for the labor contractor’s violations in other areas of employment law, e.g., discrimination, harassment, retaliation, etc., under “joint employer” theories of liability.

5. As another approach entirely, hospitality operations may decide to hire on their own employees to perform services they previously outsourced. For example, the restaurant that had used an outside janitorial company may choose to terminate that relationship and hire its own employees to perform the janitorial function. This approach, of course, raises other cost, insurance and liability considerations.

California hospitality operations and their counsel who don’t prepare now for this new potential liability risk suffering a new variety of litigation and substantial, unplanned expense.

Jeffrey Horton Thomas is the principal of Thomas Employment Law Advocates, a law firm that counsels employers in employment law disputes under federal and California law. Contact him at [email protected] or 310-276-5297.