BILL ANALYSIS Ó Senate Committee on Labor and Industrial Relations Senator Ben Hueso, Chair Date of Hearing: June 11, 2014 2013-2014 Regular Session Consultant: Deanna D. Ping Fiscal: Yes Urgency: No Bill No: AB 1897 Author: Hernandez As Amended: May 28, 2014 SUBJECT Labor contracting: client liability. KEY ISSUE Should the legislature require client employers that obtain workers from third party labor contractors to share liability for certain labor violations such as failure to pay wages and workers' compensation? ANALYSIS Existing California common law theory of joint employment requires a determination as to whether the entity in question has the right to direct and control the manner and means by which the work is performed, known as the "right of control" test. (S. G. Borello & Sons, Inc. v Dept. of Industrial Relations (1989) 48 Cal.3d 341. and Martinez v. Combs (2010) 49 Cal.4th 35) Existing law requires that both garment manufacturers and farm labor contractors are licensed and/or registered, and regulated by the Division of Labor Standards Enforcement. (Labor Code §1697.5 & 2675) Existing law requires that a person engaged in garment manufacturing who contracts with another person for their performance of garment manufacturing operations shall guarantee the payment of the minimum wage and overtime. (Labor Code §2673.1) Existing law states that an entity shall not enter into a contract for labor or services with a construction, farm labor, garment, janitorial, security guard, or warehouse contractor, where the entity knows or should know that the contract does not include funds sufficient to allow the contract to company with all applicable local, state, and federal laws. (Labor Code §2810) This bill establishes specified liability for client employers that obtain workers from third-party labor contractors. Specifically, this bill : 1)Defines "client employer" as a business entity that obtains or is provided workers to perform labor or services within its usual course of business from a labor contractor. This definition does not include business entities with a workforce of less than 25 workers or the state or any political subdivision of the state. 2)Defines "labor contractor" as an individual or entity that supplies, either with or without a contract, a client employer with workers to perform labor or services within the client employer's usual course of business. This does not include i) A bona fide nonprofit, community-based organization that provides services to low-wage workers ii) A bona fide labor organization or apprenticeship program iii) A motion picture payroll services company. 3)Clarifies that worker does not include an employee who is exempt from the payment of an overtime rate of compensation for executive, administrative, and professional employees. 4)Defines "usual course of business" as the regular and customary work of a business, performed within or upon the premises or worksite of the client employer. 5)States that a client employer shall share with a labor contractor all civil legal responsibility and civil liability Hearing Date: June 11, 2014 AB 1897 Consultant: Deanna D. Ping Page 2 Senate Committee on Labor and Industrial Relations for all the following: i) The payment of wages to workers provided by a labor contractor ii) The failure to report and pay all required employer contributions, worker contributions, and personal income tax withholdings iii) Failure to secure valid workers' compensation coverage. 6)Prohibits a client employer from shifting any legal duties to the labor contractor related to workplace health and safety. 7)Clarifies that these provisions are in addition to, and shall be supplemental of, any other liability or requirement established by statute or common law. 8)Specifies that this bill does not prohibit a client employer from establishing, exercising, or enforcing by contract any otherwise lawful remedies against a labor contractor for liability created by acts of a labor contractor, and vice versa. 9)Provides that, upon request by a state enforcement agency or department, a client employer or a labor contractor shall promptly provide to the agency or department any information required to verify compliance with applicable state laws. 10)Authorizes the Labor Commissioner, the Division of Occupational Safety and Health, and the Employment Development Department to adopt regulations and rules of practice and procedure necessary to administer and enforce the provision of this bill. 11)Makes a waiver of this section contrary to public policy, and is void and unenforceable. 12)Clarifies that this section shall not be interpreted to impose individual liability on a homeowner or the owner of a home based business for labor and services received at the home or to impose liability on a client employer for the use of a bona fide independent contractor. Hearing Date: June 11, 2014 AB 1897 Consultant: Deanna D. Ping Page 3 Senate Committee on Labor and Industrial Relations COMMENTS 1. The Trend Towards Temporary Work in the United States: In recent years, some workers and worker advocates have noticed an increase in the number of employers who are moving away from a traditional employment model towards a business model that utilizes "subcontracted" or "contingent" workers. In June 2013, the U.S. Department of Labor reported that the nation has more temporary workers than ever before: 2.7 billion. In a traditional employment relationship, an employer directly hires its own workers, pays their wages and provides their benefits, and controls their day-to-day work. However, a variety of other employment models have developed over the years. Numerous terms are used to describe these alternative types of work arrangements: contingent work, nonstandard work, contractual work, seasonal work, freelance work, "just-in-time" or "temp employment," or "permatemps." Contingent work can take several forms and is prominent in many industries. The garment industry for example has been reliant on subcontracting for years to manufacture, sew and press garments. The agricultural is another historical example of subcontracting work as farm labor contractors are used to hire agricultural workers to harvest and perform work on farms. However, contingent or temporary work has expanded into other sectors from professional occupations like nursing, accounting, and computer programming to warehouse work in transportation and material moving, housekeeping and landscaping, and manufacturing. 2. Subcontracting and the Potential Public Policy Challenges: According to a 2012 UC Berkeley Labor Center report, middle-class long-term jobs are shifting to include more temporary and subcontracted employment. (Temporary Workers in CA are twice as likely as non-temps to live in poverty: Hearing Date: June 11, 2014 AB 1897 Consultant: Deanna D. Ping Page 4 Senate Committee on Labor and Industrial Relations Problems with Temporary and Subcontracted work in CA, August 2012) This type of contingent work has been growing over the past two decades. The report notes that, "In California almost one-quarter of a million people worked in the temporary help services industry in 2010; another 37,000 people worked for employee leasing firms totaling 282,000 workers in these two industries." According to the report, temporary and subcontracted work present two basic public policy problems, 1) that temporary and subcontracted arrangements erode wages [leading contingent workers to rely more on the state services] and 2) temporary and subcontracted arrangements undermine existing worker protections first by allowing employer to avoid certain worker provisions, and second by making enforcement of the remaining protections difficult. The report suggests that solutions to this problem range from increasing low wages to mandating the same pay for temporary workers. In addition, the report suggests that "policies to combat retaliation and hold other actors in the supply chain accountable are promising ways to uphold existing worker protections in the face of workplace changes." This issue was the topic of an informational hearing held by the Assembly Committee on Labor and Employment on March 12, 2014, "Protecting Workers and Strengthening the Enforcement in the Subcontracted Economy." 3. Profile of Subcontracted Work in California: In March 2014, the National Employment Law Project (NELP) released a paper highlighting key facts about subcontracted work in California. The paper noted the following statistics: Subcontracted and temporary jobs are on the rise: o According to the Government Accountability Office, an estimated 31 percent of the workforce could be considered "contingent workers" in 2005. o Almost one-fifth of total job growth since the end of the recession in 2009 is in the temporary sector; according to the American Staffing Association, one in every ten workers finds a job at Hearing Date: June 11, 2014 AB 1897 Consultant: Deanna D. Ping Page 5 Senate Committee on Labor and Industrial Relations a staffing agency. Workers and communities suffer in jobs provided by labor suppliers: o Temporary workers earn lower wages, fewer benefits, and have less job security. A UC Berkeley study found that median hourly wages were $13.72 for temps, versus $19.13 for non-temporary workers in California. o California recorded the highest number of fatal occupational injuries among contractors in the United States. California's temporary workers face a 50 percent higher risk for injury on the job and are twice as likely as regular workers to be stricken by heat exhaustion. Low-income, immigrant, and communities of color workers are more likely to work for labor suppliers: o Temporary workers are twice as likely to be on government assistance. 18.8 percent of temporary workers in California lived in poverty, as compared to 8.9 percent of non-temp workers. o Temporary workers are more likely to be non-white or Hispanic and without a high school diploma or GED. 65 percent of temporary workers are non-white or Hispanic, compared to 55.6 percent of non-temp workers. 4. Joint Employment Liability - Case Law: Currently, a temporary worker can seek to hold a third party liable for certain labor obligations under the traditional common law theory of joint employment. In NLRB v. Browning-Ferris Indus., 691 F.2nd 1117 (3rd Cir. 1982), the National Labor Relations Board applied a standard enunciated by the Supreme Court in Boire v. Greyhound Corp., 376 U.S. 473 (1964) that "the question of 'joint employer' is a factual one and requires an examination into whether an employer who is claimed to be a 'joint employer' possessed sufficient control over the work of the employees -now often referred to as the 'right of control' test. The interpretations of this common law test can vary as courts and administrative agencies have adopted varying sets of Hearing Date: June 11, 2014 AB 1897 Consultant: Deanna D. Ping Page 6 Senate Committee on Labor and Industrial Relations criteria to consider and how each is interpreted. In S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341, the California Supreme Court followed the common law tradition and declared that "the principle test of an employment relationship is whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired." More recently, in Martinez v. Combs (2010) 49 Cal.4th 35, the California Supreme Court defined an employer as one who engages or permits any person to work or exercises control over the wages, hours, or working condition of any person as outlined by the Industrial Welfare Commissions' (IWC) Wage Order 14-2001. 5. Need for this bill? As the 2012 UC Berkeley Labor Center report discussed above illustrates, the prevalence of temporary work in California presents unique policy challenges as temporary or subcontracted workers face eroding wages and a lack of workplace protections. According to the author's office, the increased use of such third-party labor suppliers results in workers having to work harder for less pay while insulating the company in charge from responsibility for what is done to those workers - which then drives down wages and makes accountability difficult. AB 1897 would hold client companies liable for serious violations of workers' rights, such as failure to pay wages, necessary contributions, and workers compensation, committed by their own labor suppliers, to workers on their premises. According to the author's office, AB 1897 will incentivize the use of responsible contractors, rather than a race to the bottom by protecting vulnerable temporary workers as well as businesses that follow the law and don't profit from cheating workers. 6. Double Referral : This bill has been double referred and, if approved by this committee, it will be sent to the Senate Judiciary Committee for a hearing. Hearing Date: June 11, 2014 AB 1897 Consultant: Deanna D. Ping Page 7 Senate Committee on Labor and Industrial Relations 7. Proponent Arguments : This bill is co-sponsored by the California Labor Federation, AFL-CIO, the California Teamsters Public Affairs Council, and the United Food and Commercial Workers Union. Proponents argue that across the economy, companies are turning to labor contractors to supply workers rather than hire directly - thereby creating a workforce with no stability or security. Proponents contend that this can result in contractors competing to provide the cheapest labor and being squeezed by the company to cut corners on worker protections. Proponents argue that in this system, when workers are injured or cheated out of wages, keeping the employer accountable can be difficult when the company and contractor 'point fingers at one another.' Further, proponents bring attention to a recent report from ProPublica which found that in California, temporary workers face a 50% greater risk of getting injured on the job than permanent employees. Proponents such as the California Rural Legal Assistance Foundation specifically note that despite the protections and regulations for farm labor contractors there are still widespread labor law abuses ranging from wage theft, sexual harassment, retaliation, and health and safety abuses. Proponents argue that despite the passage of recent legislation such as the Financially Responsible Contractors Act (2003) and the expansion of the definition of employer by the California Supreme Court in Martinez v. Combs (2010), efforts to hold the users of labor contractors jointly liable for their labor law violations remains a fact intensive, expensive, case by case exercise that takes years to successfully litigate against a single employer.. Proponents maintain that this process is costly, slow, and difficult to navigate for most workers - requiring litigation rather than providing a simple and straight forward rule. Lastly, proponents contend that AB 1897 will hold companies accountable for serious violations of workers' rights committed by their own labor suppliers to workers on their premises. Proponents argue that AB 1897 will incentivize the Hearing Date: June 11, 2014 AB 1897 Consultant: Deanna D. Ping Page 8 Senate Committee on Labor and Industrial Relations use of responsible labor contractors, rather than a race to the bottom - offering workers a clear path to accountability for workplace violations and offering employers a clear path to compliance. 8. Opponent Arguments : A coalition of employer groups, including the California Chamber of Commerce, opposes this bill and argues that it forces one company to essentially insure the wage and hour obligations, workers' compensation coverage, and occupational health and safety duties of a separate employer's employees. Opponents argue that although recent amendments have exempted certain businesses, the overwhelming majority of employers in California will still be unfairly held liable for the wage and hour violations of another that they could neither control nor prevent, specifically pertaining to wages, workers' compensation, as well as health and safety requirements. Opponents contend that this liability under AB 1897 is extended to an innocent third party that did not contribute to the violations, control the working conditions, control the manner of payment, dictate the employees' schedules, or even control the work environment. Opponents bring attention to the two legal theories that could hold a third party liable for such labor obligations, joint employer liability and independent contractor misclassification. Opponents contend that the key factor for these analyses is that the third party has to exert such control over the working conditions of the contractor's employees that essentially the third party acted as the real employer. Opponents argue that AB 1897 ignores this long standing common law analysis and imposes liability despite the lack of any control exerted by the third party. Further, opponents argue that for industries in which there has been documented evidence of unlawful contracting practices and abuse of contracted labor, such as the farm labor, garment, construction, security guards, janitorial, and warehouse industries, the legislature has already enacted laws to address and prevent such abuses. Opponents argue that AB Hearing Date: June 11, 2014 AB 1897 Consultant: Deanna D. Ping Page 9 Senate Committee on Labor and Industrial Relations 1897 expands liability to all industries and all individuals who contract for labor or services, despite any evidence that there is a need beyond the industries already regulated. 9. Prior Legislation : AB 1855 (Torres), Chapter 813, Statutes of 2012 - applied the sufficient funds requirement on a labor contract from SB 179 (Alarcon) to warehouse workers SB 179 (Alarcon), Chapter 908, Statutes of 2003 - requires that that any person or entity who enters into a labor contract for construction, farm labor, garment, janitorial, or security guard services when the person or entity knows or should know that the contract does not provide funds sufficient to allow the labor contractor to comply with all applicable laws or regulations governing the labor or services to be provided under the contract, is subject to liability and specified civil penalties. AB 423(Hertzberg), Chapter 157, Statutes of 2001 - established specialized enforcement units, additional verification of valid farm labor contractor licenses, and provided for enhanced criminal penalties for failure to pay wages. SUPPORT California Labor Federation, AFL-CIO (Co-Sponsor) California Teamsters Public Affairs Council (Co-Sponsor) United Food & Commercial Workers Western States Council (Co-Sponsor) Air Conditioning & Refrigeration Contractors Association Air Conditioning Sheet Metal Association Alameda County Labor Council, AFL-CIO American Federation of State, County and Municipal Employees Asian American Alliance for Justice - Asian Law Caucus Asian Americans Advancing Justice - Los Angeles Asian Americans for Community Involvement Asian Pacific Islander Justice Coalition of Silicon Valley California Alliance for Retired Americans California Conference of Machinists Hearing Date: June 11, 2014 AB 1897 Consultant: Deanna D. Ping Page 10 Senate Committee on Labor and Industrial Relations California Conference of the Amalgamated Transit Union California Employment Lawyers Association California Faculty Association California Immigrant Policy Center California Legislative Conference of the Plumbing, Heating & Piping Industry California Nurses Association California Professional Firefighters California Rural Legal Assistance Foundation California School Employees Association California State Association of Electrical Workers California State Council of Service Employees California State Pipe Trades Council Centro Legal de la Raza Chinese Progressive Association CLEAN Carwash Campaign Community Action Board of Santa Cruz County Consumer Attorneys of California Employee Rights Center Engineers & Scientists, IFPTE Local 20 Equal Rights Advocates Garment Workers Center Interfaith Council on Economics and Justice International Longshore and Warehouse Union, Coast Division International Longshore and Warehouse Union, Southern California District Council Jockeys Guild Katherine & George Alexander Community Law Center Koreatown Immigrant Workers Alliance Legal Aid Society-Employment Law Center Latinos United for a New America Los Angeles County Federation of Labor, AFL-CIO Maintenance Cooperation Trust Fund Merced-Mariposa Central Labor Council, AFL-CIO Monterey Bay Central Labor Council, AFL-CIO Napa Solano Central Labor Council, AFL-CIO National Association of Social Workers, California Chapter National Electrical Contractors Association, California Chapters National Employment Law Project National Lawyers' Guild Labor & Employment Committee North Bay Labor Council, AFL-CIO Northern California Carpenters Regional Council Hearing Date: June 11, 2014 AB 1897 Consultant: Deanna D. Ping Page 11 Senate Committee on Labor and Industrial Relations Northern California District Council, ILWU Professional & Technical Engineers, IFPTE Local 21 San Mateo Central Labor Council, AFL-CIO SEIU Local 1000 South Bay Labor Council, AFL-CIO State Building and Construction Trades Council of California Sunrise Floor Systems LLC Teamsters Joint Council No. 42 Teamsters Joint Council No. 7 Teamsters Local 137 Teamsters Local 150 Teamsters Local 315 Teamsters Local 350 Teamsters Local 386 Teamsters Local 396 Teamsters Local 431 Teamsters Local 517 Teamsters Local 542 Teamsters Local 63 Teamsters Local 63 Teamsters Local 856 Teamsters Local 890 Teamsters Local 986 UNITE HERE United Auto Workers, Local 5810 United Farm Workers of America Utility Workers Union of America, Local 132 Warehouse Workers United Western States Council of Sheet Metal Workers Working Partnerships USA OPPOSITION Agricultural Council of California Air Conditioning Trade Association Associated Builders and Contractors - San Diego Chapter Associated Builders and Contractors of California Associated General Contractors Association of California Healthcare Districts Building Owners and Managers Association of California California Ambulance Association California Apartment Association Hearing Date: June 11, 2014 AB 1897 Consultant: Deanna D. Ping Page 12 Senate Committee on Labor and Industrial Relations California Asian Chamber of Commerce California Association of Winegrape Growers California Bankers Association California Business Properties Association California Cable and Telecommunications Association California Chamber of Commerce California Chapter of American Fence Association California Citrus Mutual California Coalition on Workers' Compensation California Communications Association California Cotton Ginners Association California Employment Law Council California Farm Bureau Federation California Fence Contractors' Association California Grape and Tree Fruit League California Grocers Association California Hospital Association California Hotel and Lodging Association California Landscape Contractors Association California League of Food Processors California Manufacturers and Technology Association California Newspaper Publishers Association California Pool and Spa Association California Restaurant Association California Retailers Association California Trucking Association Chambers of Commerce Alliance of Ventura and Santa Barbara Counties Civil Justice Association of California Consolidated Communications Inc. (formerly SureWest) CSAC Excess Insurance Authority Desert Hot Springs Chamber of Commerce & Visitors Center El Dorado County Chamber of Commerce Family Winemakers of California Flasher Barricade Association Fullerton Chamber of Commerce Greater Bakersfield Chamber of Commerce International Council of Shopping Centers International Franchise Association International Warehouse Logistics Association Marin Builders Association NAIOP of California, the Commercial Real Estate Development Hearing Date: June 11, 2014 AB 1897 Consultant: Deanna D. Ping Page 13 Senate Committee on Labor and Industrial Relations Association National Federation of Independent Business Oxnard Chamber of Commerce Personal Insurance Federation of California Plumbing-Heating-Cooling Contractors Association of California Redondo Beach Chamber of Commerce Rural County Representatives of California San Diego East County Chamber of Commerce San Gabriel Valley Economic Partnership San Gabriel Valley Legislative Coalition of Chambers San Jose Silicon Valley Chamber of Commerce Santa Clara Chamber of Commerce and Convention-Visitors Bureau Simi Valley Chamber of Commerce South Bay Association of Chambers of Commerce Southwest California Legislative Council TechNet The Chamber of Commerce of the Santa Barbara Region The United Chambers of Commerce of the San Fernando Valley Urban Counties Caucus Visalia Chamber of Commerce Visalia Chamber of Commerce Western Agricultural Processors Association Western Electrical Contractors Association Western Growers Association Wine Institute Hearing Date: June 11, 2014 AB 1897 Consultant: Deanna D. Ping Page 14 Senate Committee on Labor and Industrial Relations