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| Little-Noticed
‘Brother’s Keeper’ Law Requires
California Businesses to Police Contractors’
Labor Law Compliance |
January 26, 2004
- By
Richard A. Leasia
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.
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