January 26, 2004
Labor and Employment Department,
Thelen Reid & Priest, LLP
On October 12, 2003, four days after his defeat in California’s recall election, Gov. Gray Davis signed Senate Bill 179 into law. While almost unnoticed by the media, the new statute is noteworthy. It effectively requires developers and other users of contractors to carefully monitor the contractors’ compliance with laws regulating the labor and services provided.
Users that fail to do so can be held liable for significant damages if it is shown that they “knew or should have known” that the contract price was insufficient to enable their contractors to comply with applicable laws.
SB 179 thus truly makes those hiring contractors and subcontractors to provide construction, farm labor, garment, janitorial or security guard services their “brother’s keeper” for the duration of the contract. Users will ignore this new and unexpected obligation at their peril.
SB 179 threatens – as it clearly was designed to -- the historic legal separation between principal and independent contractor, no matter how legitimate and independent the relationship is, by creating a new theory of vicarious liability.
The statute likewise threatens the ability of developers and contractors to accept and rely on low bids. And, although SB 179 is applicable to several industries, its greatest impact may be felt in construction and development.
SB 179 was one of many bills impacting California employers rushed through the Legislature and signed by a beleaguered Gov. Davis in the weeks leading up to and immediately after his defeat in the recall election. Although Gov. Davis vetoed identical legislation in 2002, no real explanation for his reversal of position was offered.
The Scope of the Statute
Beginning January 1, 2004, SB 179 requires developers and other users of construction contractors to police the labor and employment law compliance of their contractors.
The statute does so by making it unlawful to enter into a contract with a construction contractor or subcontractor “knowing” that the contractor or subcontractor is not being paid enough to comply with all “applicable” state, federal and local “laws or regulations governing the labor or services to be provided.” SB 179 will impute such knowledge to any “entity” or “person” who “should have known” that it had provided insufficient funding. Those violating the statute are subject to claims for damages and possibly even demands that they rectify the labor law violations of their contractors and subcontractors.
The basic obligation created by the statute is startling in its scope and simplicity:
A person or entity may not enter into a contract or agreement for labor or services with a construction, farm labor, garment, janitorial, or security guard contractor, where the person or entity knows or should know that the contract or agreement does not include funds sufficient to allow the contractor to comply with all applicable local, state, and federal laws or regulations governing the labor or services to be provided.
For purposes of the statute, the term "knows" includes – but is not necessarily limited to – “knowledge, arising from familiarity with the normal facts and circumstances of the business activity engaged in, that the contract or agreement does not include funds sufficient to allow the contractor to comply with applicable laws.”
“Should know” includes – but may not be limited to – “knowledge of any additional facts or information that would make a reasonably prudent person undertake to inquire whether, taken together, the contract or agreement contains sufficient funds to allow the contractor to comply with applicable laws.”
Moreover, the statute provides that ”failure... to request or obtain any information from the contractor that is required by any applicable statute or by the contract or agreement between them, constitutes knowledge of that information for purposes of this section.”
Thus, a developer or contractor will be deemed to have violated the statute if it “should have” realized, based on its own knowledge and experience, that it was not paying its contractor or subcontractor enough to comply with the myriad labor, employment, and other laws and regulations applicable to project employees or to performance of contractual services. And, the developer or contractor will be conclusively deemed to possess all information that “any applicable statute” or its own contract required it to obtain, whether it actually obtained the information or not.
Subject to two exceptions, SB 179’s obligations are applicable to all construction contracts “for labor or services,” regardless of whether they are public or private and regardless of the size of the contract. A “ ‘construction, farm labor, garment, janitorial, or security guard contractor’ includes any person... whether or not licensed, who is acting in the capacity of a construction, farm labor, garment, janitorial, or security guard contractor.”
Neither “person” nor “entity” is defined by the statute, but it appears that the drafters sought the broadest possible coverage.“ “Entity” could apply to public entities in addition to private corporations, general partnerships, limited liability companies and partnerships, and sole proprietorships.
By its terms, SB 179 is not limited to developers. Thus – depending upon how the statute ultimately is interpreted -- general contractors may be liable for non-compliance by their subcontractors if it can be shown that they knew “or should have known” that their subcontracts were insufficiently generous to adequately fund the subcontractors. Similarly, subcontractors could be liable for their third-tier sub-subcontractors.
Such interpretations may be inconsistent with the claimed purpose of the statute. What interpretation the courts adopt remains to be seen, but litigants surely will argue for a broad interpretation under which the statute’s obligation is imposed on contractors and subcontractors as well as on their developer customers.
What laws are “applicable” to a project also is an open issue. Besides wage-and-hour laws, the list could include safety, benefit, civil rights and workplace conduct laws. Plaintiffs may seek to expand the reach of SB 179 by claiming that building codes and environmental laws also are applicable.
The Limited Exceptions
SB 179 was sponsored by labor organizations -- which are identified as its “source” in Senate and Assembly committee reports -- and was supported by the State Building Trades Council.
As befits its origins, one of SB 179’s two exceptions to coverage applies to union contractors: “a person or entity who executes a collective bargaining agreement covering the workers employed under the contract or agreement.” The statute also contains a limited exemption for homeowners who enter into construction contracts for their homes, “provided that a family member resides in the residence or residences for which the labor or services are to be performed for at least a part of the year.”
Other than these exceptions, SB 179 applies to all construction contracts of every kind entered into in California.
The Proponents' Contentions
The proponents claim that dishonest labor contractors gain an unfair advantage by cheating on "basic labor laws," which allow them to underbid contractors that obey the laws, according to a Fact Sheet circulated by the California Rural Legal Assistance Foundation. The proponents also claim that employers of labor contractors play "a central role" in worker exploitation by bargaining down their labor contractors to a level where the contractors cannot afford to fully comply with applicable laws.
The Fact Sheet claims that in "construction... contractors and subcontractors are among the biggest employers of day laborers...." It says those workers report "non-payment of wages, use of bad checks, no breaks, and other familiar underground economy abuses." But the only hard statistics cited in the Fact Sheet involved claimed abuses of agricultural and garment workers.
Sponsors of SB 179 identified in the Fact Sheet include the California Labor Federation, AFL-CIO; Garment Worker Center; Maintenance Cooperation Trust Fund; Sweatshop Watch; California Rural Legal Assistance Foundation; Service Employees International Union; California Association of Licensed Security Agencies; Coalition of Immigration Worker Organizations; and Coalition of Humane Immigrant Rights of Los Angeles.
Vague but Broad Knowledge Requirements
Perhaps consistent with its proponents’ claims, SB 179 seems deliberately vague as to when and under what circumstances a developer or other person or entity will be deemed to “know” that its agreement provides insufficient funds to allow compliance with all applicable laws governing the services to be provided.
The Senate Labor Committee’s Floor Analysis disingenuously pretends that “the ‘know’ or ‘should have known’ terms are common legal standards by which an ordinary, reasonable person in like or similar circumstances would have known” that he was paying his contractor or subcontractor insufficiently to ensure its observance of all applicable laws.
In fact, the statute provides little explicit direction, stating only that knowledge will be deemed to have been derived from such sources as “familiarity with the normal facts and circumstances of the business activity engaged in.”
The “should have known” standard is even less certain, providing in circular fashion that a user of labor services “should have known” that its contract price was too low from “knowledge of any additional facts or information that would make a reasonably prudent person undertake to inquire” whether the “agreement contains sufficient funds to allow the contractor to comply with applicable laws.” What such “additional facts or information” would be is left for speculation and for later litigation. Whatever such “additional facts” are, the statute suggests that they impose an affirmative duty of inquiry, requiring developers and others covered to investigate whether their contract price is in fact sufficient to cover the costs of complying with labor, employment and other “applicable” laws.
In the litigation that this statute invites, one can expect defendants to protest their ignorance of the details of their contractors’ and subcontractors’ operations and plaintiffs to insist on the defendants’ sophistication. Discovery in such cases no doubt will delve deeply into bidding documents and internal developer and contractor analyses in a quest to prove that the defendant knew, or at least should have known, that its low bidder could not comply with all applicable laws at the contract price.
Moreover, there is no bliss in ignorance. The statute provides that failure “to request or obtain any information from the contractor that is required by any applicable statute or by the contract or agreement between them, constitutes knowledge of that information for purposes of this section.” It seems likely that the Legislature will be called upon in coming years to enact legislation requiring developers and contractors to obtain more and more information, which will supply the “knowledge” element for SB 179.
The Not-So-Safe Safe Harbor
To avoid its know or should have known obligations, SB 179 provides a supposed safe harbor. The statute creates a “rebuttable presumption affecting the burden of proof that there has been no violation of” the law when the contract for services contains specific terms and information. But, the kind and quantity of information is extraordinary and includes:
- The contractor’s employer identification number.
- The contractor’s worker’s compensation insurance policy number.
- The name, address and telephone number of the contractor’s worker’s compensation insurance carrier.
- The vehicle identification number of any vehicle owned by the contractor and used for transportation in connection with the contract.
- The policy number for the vehicle liability insurance covering contractor vehicles used in connection with the contract.
- The name, address, and telephone number of the contractor’s vehicle insurer for vehicles used in connection with the contract.
- The address of any real property used to house workers in connection with the contract.
- The total number of workers to be employed under the contract.
- The date or dates when wages are to be paid in connection with the contract.
- The total amount of all wages to be paid in connection with the contract.
The total number of persons who will be utilized under the contract as independent contractors.
The local, state and federal contractor identification numbers for all licenses that the independent contractors are required to have.
The amount of “commission or other payment” made to the contractor for services under the contract.
For the safe harbor to apply, the agreement must contain all of this foregoing information. In addition, the Labor Commissioner may require more information in the future.
If required information is not known at the time of contracting, the parties may provide their “best estimate.” If such an estimate is used in place of “actual figures,” the parties have a “continuing duty” to ascertain the actual number of employees to be used to perform the contract, their total wages, wage payment dates and the number of independent contractors to be needed and then to reduce this information to writing in an updated agreement once these “figures” become known.
The parties also have an ongoing duty to update in writing certain information if the contract is “materially” amended. The parties are required to keep copies of agreements and updates for four years, which coincides with the statute of limitations for Business and Professions Code §17200.
Failure to obtain or update the required information may undo the safe harbor because failure to “request or obtain” information required by the contract or statute constitutes sufficient “knowledge” to trigger the statute’s penalties.
Thus, ironically, unsuccessful or incomplete attempts to utilize the safe harbor could be worse than no attempt at all.
Even if all of the required information is included in the construction contract, the agreement creates only a rebuttable presumption that the user lacked knowledge that its contract provided “insufficient funds” to allow compliance with “applicable” laws. This presumption can be rebutted with specific information showing that the developer or contractor “knew or should have known” that it got too good a deal from the low bidder.
In addition, the last required disclosure is likely to cause the greatest concern among businesses for two reasons. First, what precisely is meant by “the amount of commission or other payment made to the contractor for services under the contract” is not explained, either in the statute or its legislative history. Presumably, the word “commission” is meant to apply only to straightforward commission arrangements. What, beyond the contract price, is required for construction contracts, which do not involve commissions, is unclear. However, litigants are likely to argue that the disclosures must include the contractor’s profit – the second major problem with the statute. Its very nature – a prohibition on underfunding a contractor or subcontractor – will prompt searching discovery requests into the finances underlying any construction contract, including profit margins and costs, even if the statute is not interpreted to require the disclosure of such information as a condition of the safe harbor. Hard-fought battles over whether such information must be produced in discovery can be expected.
Bounty Hunting Encouraged
On the surface, enforcement of SB 179 would seem to depend on actions by individual employees of contractors and subcontractors on the project that is the subject of the contract. The statute provides that “an employee aggrieved” by its violation may sue for damages. But, the damages recoverable may far exceed the harm suffered by any employee. The new law allows an aggrieved employee to recover the greater of all of his or her actual damages or $250 per employee per violation for an initial violation and $1,000 per employee for each subsequent violation.
Thus, an employee detecting a systematic labor law violation -- for example, an error in computing overtime repeated across an entire workforce -- may recover far more than his or her actually underpaid overtime. Upon prevailing in such an action, the employee may recover costs and attorney fees. But, defendants successfully defeating such claims must bear their own legal fees. SB 179 was designed to encourage litigation bounty hunting.
The statute also provides that an employee-plaintiff may sue for injunctive relief although its exact nature is not described. The statute only directly prohibits entering into a contract that provides insufficient funds for its contractor or subcontractor to comply with applicable laws. Arguably, any injunction should be limited to securing that objective. But, it is inevitable that plaintiffs will demand equitable restitution as a remedy and seek disgorgement of profits earned from a contract made unlawful by the statute.
Enforcement by Labor Commissioner, Others
While SB 179 provides that an action under this section may not be maintained unless it is pleaded and proved that an employee was injured as a result of a violation of a labor law or regulation in connection with the performance of the contract, any implication that only “aggrieved employees” can sue is misleading. It is possible that the California Labor Commissioner also will assume jurisdiction for enforcement of the statute.
SB 179 has been enacted as §2810 of the Labor Code. Labor Code §95 gives the Labor Commissioner broad jurisdiction to “enforce the provisions of this code and all labor laws of the state the enforcement of which is not vested in any other officer, board or commission.” Because SB 179 does not vest authority for its enforcement in any other official, there would appear to be no bar (other than inadequate resources) to the Labor Commissioner enforcing SB 179 so long as “an employee was injured as a result of a violation of a labor law or regulation in connection with the performance of the contract.” Nothing in the statute directly requires that a complaint to the Labor Commissioner regarding a violation of the statute even come from an aggrieved employee. Backers of the legislation may hope to enlist the Labor Commissioner in some cases.
SB 179 also may be enforceable through California’s unfair business practices statute, Business and Professions Code §17200. While private plaintiffs in §17200 actions are limited to equitable relief, such as requiring restitution to employees of amounts of wages unlawfully withheld, a single, inadvertent error in wage computations repeated over hundreds of employee for up to four years can result in large amounts of restitution.
Potential Retrospective Application
SB 179, on its face, applies only prospectively by forbidding entering into particular agreements after January 1, 2004. What is less clear is SB 179’s applicability to contract amendments entered after January 1 because the statute applies to “a material change” to the terms and conditions of a contract or agreement.
Problems with Compliance and Enforcement
The vagueness of SB 179’s key concept – knowledge or constructive knowledge that a contract price is inadequate to support compliance with applicable “laws or regulations governing the labor or services to be provided” – together with the vast number of laws and regulations to which the statute could relate will make SB 179 a substantial concern for project owners contemplating using non-union contractors and subcontractors, which are the targets of the legislation. Developers or contractors will run the risk of involvement in their contractor’s or subcontractor’s labor disputes.
For example, since 1999 the California Legislature almost annually has enlarged the scope of the state’s prevailing wage law. Amendments have expanded its reach into areas once clearly deemed to be private construction, but the boundaries still are vague and subject to often politically-influenced interpretations by appointed officials. Thus, a developer may be required to know that its project falls under the expanded coverage of the prevailing wage law and recognize that the low bid is too low to cover prevailing wages even if, at the time the contract is let, coverage by the prevailing wage law is uncertain and coverage is created only later based on a broad interpretation of the law by an official not even in office when the contract was signed.
SB 179’s vague “know or should have known” standard by which its violations will be measured does not define or limit the sources of information that supposedly put a developer or contractor on notice that an offered contract price is insufficient to ensure compliance.
It clearly is the intent of the statute’s labor union sponsors that they themselves can become a source of such information. When a project is awarded, it is foreseeable that unions and other organizations opposed to the successful bidder will come forward and allege to the developer, general contractor or contracting authority that the winning bidder is violating a law governing the service to be provided, thus creating an issue as to whether the user of the services knows or should have known that the price is too low or at least has a duty of inquiry.
Simply raising the threat of a future challenge may be enough to prompt abandonment of the contractor or subcontractor and re-bid of the project or capitulation and award of the contract to a union contractor or subcontractor, which was the ultimate goal of SB 179’s sponsors.
While the proponents of SB 179 can be expected to aggressively seek to expand its reach, enforcing the statute will involve substantial arguments over the true cause of claimed harms to workers. For example, was a contract price really too low or was the contractor or subcontractor just trying to take too much profit?
Moreover, as then-Gov. Davis recognized in vetoing SB 179’s predecessor in 2002, the statute is a solution in search of a problem in the construction industry, which has not been beset with widespread problems with non-payment or underpayment of workers. |
