BILL ANALYSIS                                                                                                                                                                                                    Ó






                             SENATE JUDICIARY COMMITTEE
                             Senator Noreen Evans, Chair
                              2013-2014 Regular Session


          SB 556 (Corbett)
          As Amended April 9, 2013
          Hearing Date: May 7, 2013
          Fiscal: No
          Urgency: No
          TW


                                        SUBJECT
                                           
                                 Agency:  Ostensible

                                      DESCRIPTION  

          This bill would provide that a person or entity, who enters into  
          a contract or agreement for labor or services with a contractor,  
          is liable for any damages caused by the contractor or  
          contractor's employee for work performed under the contract if,  
          at the time of the damage, the contractor or contractor's  
          employee wore a uniform that is substantially similar to the  
          uniform of the person or entity or the contractor or the  
          contractor's employee operated a vehicle that displayed the logo  
          of the person or entity.

                                      BACKGROUND  

          A growing trend in California's work force is the use of  
          independent contractors, who contract with another entity to  
          perform services for consumers on behalf of that entity.  Most  
          times, when an independent contractor agrees with the entity to  
          perform services, the entity is not responsible for the  
          independent contractor's performance of the work or any  
          resulting damages or injury to a consumer.  The contract itself  
          may relieve the entity from all liability for the independent  
          contractor's performance of the work.
            
          In the event a consumer is harmed by or during the services  
          performed by the independent contractor, the contracting entity  
          may be found liable to the consumer for the damage or injury  
          through ostensible agency.  Ostensible agency is created when an  
          agent (in this case, the independent contractor) represents  
                                                                (more)



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          another, called the principal (or contracting entity), in  
          dealings with third persons, and the principal intentionally or  
          negligently causes a third party to believe that the agent is  
          authorized to act on the principal's behalf.  The principal may  
          be found liable to the consumer if a court finds that the  
          principal had the right to control the manner and means by which  
          the person performing the work (independent contractor)  
          accomplishes the work.

          At times, the contracting entity may require the independent  
          contractor to wear a uniform or display a logo of the principal  
          so that the consumer receiving the services can identify that  
          the independent contractor has been sent by the principal to  
          perform the services requested by the consumer.  This bill,  
          sponsored by the California Firefighters Association and the  
          California Labor Federation, would provide that, in the event  
          the independent contractor is performing services on behalf of  
          the entity, and the independent contractor is wearing a uniform  
          substantially similar to that of the entity or operates a  
          vehicle that displays the entity's logo, the entity would be  
          liable for any injury or damages caused by the independent  
          contractor to the consumer. 

          If this bill is approved by this Committee, it will be referred  
          to the Senate Committee on Labor and Industrial Relations.

                                CHANGES TO EXISTING LAW
           
           Existing law  provides that an agent is one who represents  
          another, called the principal, in dealings with third persons,  
          and this representation is called agency.  (Civ. Code Sec.  
          2295.)  An agency is either actual or ostensible.  (Civ. Code  
          Sec. 2298.)

           Existing law  authorizes an agent to do everything necessary or  
          proper and usual, in the ordinary course of business, for  
          effecting the purpose of his agency, and, to make a  
          representation respecting any matter of fact, not including the  
          terms of his authority, but upon which his right to use his  
          authority depends, and the truth of which cannot be determined  
          by the use of reasonable diligence on the part of the person to  
          whom the representation is made.  (Civ. Code Sec. 2319.)   
          However, existing law also provides that an authority expressed  
          in general terms, however broad, does not authorize an agent to  
          act in the agent's own name, unless it is the usual course of  
          business to do so or the terms define the scope of the agency.   
                                                                      



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          (Civ. Code Sec. 2322.)

           Existing law  provides that an agent represents his principal for  
          all purposes within the scope of his actual or ostensible  
          authority, and all the rights and liabilities which would accrue  
          to the agent from transactions within such limit, if they had  
          been entered into on his own account, accrue to the principal.   
          (Civ. Code Sec. 2330.)

           Existing law  provides that an agency is actual when the agent is  
          really employed by the principal.  (Civ. Code Sec. 2299.)

           Existing law  provides that an ostensible agency is such that the  
          principal intentionally, or by want of ordinary care, causes a  
          third person to believe another to be his agent, who is not  
          really employed by him.  (Civ. Code Sec. 2300.)

           Existing law  provides that ostensible authority is such that a  
          principal, intentionally or by want of ordinary care, causes or  
          allows a third person to believe the agent to possess.  (Civ.  
          Code Sec. 2317.)

           Existing law  provides that a principal is bound by acts of his  
          agent, under a merely ostensible authority, to those persons  
          only who have in good faith, and without want of ordinary care,  
          incurred a liability or parted with value, upon the faith  
          thereof.  (Civ. Code Sec. 2334.)

           Existing law  requires an employer, in all cases, to indemnify  
          his employee for losses caused by the employer's want of  
          ordinary care.  (Lab. Code Sec. 2800.)

           Existing law  provides that any contract or agreement, express or  
          implied, made by any employee to waive the above employer  
          indemnification, or any other obligations of the employer, is  
          null and void.  (Lab. Code Sec. 2804.)  

           This bill  would provide that a person or entity that enters into  
          a contract or agreement for labor or services with a contractor  
          shall be liable for any damages caused by the contractor or the  
          contractor's employee for work performed under the contract if,  
          at the time of the damage, either of the following occurred:
           the contractor or contractor's employee wore a uniform that is  
            substantially similar to the uniform of the person or entity  
            so as to cause a member of the public to believe that the  
            contractor or contractor's employee was an agent of the person  
                                                                      



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            or entity; or 
           the contractor or contractor's employee operated a vehicle  
            with the logo of the person or entity and the vehicle had an  
            appearance that would cause a member of the public to believe  
            that the contractor or contractor's employee was an agent of  
            the person or entity.

                                        COMMENT
           
          1.  Stated need for the bill  
          
          The author writes:
          
            Employment in America is evolving from primarily full-time  
            direct hire work to temporary and contingent work.  This type  
            of employment has implications for workers' health, wages, and  
            well-being. . . . A contracted arrangement allows  
            user-employers to avoid compliance with labor laws that  
            protect workers, and makes it difficult to enforce remaining  
            protections.  In addition, consumers are caught between the  
            "user-employer" [the entity that originates the contract or  
            contracts for outside labor or services (uses temporary or  
            contingent workers)] and their contractors.

            Effective enforcement of labor laws holds employers  
            accountable for noncompliance with state labor laws and offers  
            incentives for employers to meet minimum employment standards.  
             Regulators inspect workplaces or workers file a complaint.   
            Then regulators investigate and if reported violations are  
            proven, the employer is deemed responsible.

            The contingent worker model, however, has changed the  
            enforcement equation, creating a different outcome;  
            contractors, the employer of record, are held responsible for  
            violations and damages instead of the user-employer.  When  
            non-compliance is supported, a decision against a contractor  
            or subcontractor alone can be ineffectual and is unfair to  
            other parties, if the user-employer played a substantial role  
            in causing non-compliance and damages.  In addition, when the  
            user-employer terminates a contractor for whatever reason,  
            workers are left unprotected and without work, for example,  
            when the contractor loses significant income generated from .  
            . . the contract with a user-employer, then goes out of  
            business without paying lost wages or cannot compensate for  
            damages assessed.

                                                                      



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            This measure focuses on the employer who is most able to  
            prevent abuses and increasingly, is not the employer of  
            record, who remains the entity having the greatest  
            responsibility to do so.  In addition, this measure connects  
            the user-employer to the employment conditions they create,  
            irrespective of labor law and employment regimes.
          
          2.  Ostensible agency liability of entity for contractor's use of  
            uniform and logo  

          In an employer/employee relationship, the employer may be held  
          vicariously liable to an injured third party for the acts of the  
          employee.  On the other hand, an independent contractor is not  
          considered by the entity with whom he or she contracts to  
          provide services to be an employee or agent of the entity, and  
          this lack of employee/agent relationship may be specified in the  
          service contract between the independent contractor and the  
          entity.  Accordingly, if an injured third party seeks redress  
          for injuries sustained due to the acts of an independent  
          contractor, the entity would ordinarily not be liable to the  
          third party, unless the third party could prove that the entity  
          and the independent contractor had created an ostensible agency.

          Under existing law, an agency is ostensible when the principal  
          intentionally, or by want of ordinary care, causes a third party  
          to believe that another person (who is not actually employed by  
          the principal) to be an agent of the principal.  (Civ. Code Sec.  
          2300.)  To prove an ostensible agency relationship for the  
          purpose of assigning liability to the principal, an injured  
          third party must show "(1) conduct by the [principal] that would  
          cause a reasonable person to believe there was an agency  
          relationship and (2) reliance on that apparent agency  
          relationship by the plaintiff."  (Mejia v. Community Hospital of  
          San Bernardino (2002) 99 Cal.App.4th 1448, 1456-57.)  

          This bill would make a person or entity, who contracts with a  
          contractor for services, liable for the acts of the contractor  
          or contractor's employee, who wears a uniform that is  
          substantially similar to that of the person or entity or who  
          displays the logo of the person or entity on a vehicle.  In this  
          way, this bill would effectively remove the need for a plaintiff  
          to prove the two-part Mejia test and would assign vicarious  
          liability to the person or entity if the plaintiff witnessed the  
          contractor wearing a substantially similar uniform or displaying  
          a logo of the entity.  As such, this bill would create a  
          definitive liability of the person or entity (as principal) for  
                                                                      



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          third-party injury and damages.

          The California Labor Federation and California Professional  
          Firefighters, co-sponsors, assert that with steady increases in  
          contingent work, companies are now routinely hiring through  
          third-party intermediaries, such as labor contractors, temporary  
          staffing agencies, and other subcontractors.  Further, the  
          sponsors argue that:

            All of these contingent arrangements separate the company at  
            the top from the workers at the bottom and serve to shield  
            from liability the company that is calling the shots. . . .  
            Subcontracting . . . has implications for consumers and the  
            public.  With levels of contracting comes decreased  
            accountability.  It can also impact training and supervision  
            for workers.  In many cases, consumers do not even know what  
            entity they are actually doing business with, or who is in  
            charge if something goes wrong.

            In addition, the public knows little about these employment  
            practices and how they may be impacted.  When workers enter a  
            home or have access to personal information, the consumer  
            should have the right to know if this is a city employee, a  
            known company employee, a temporary or contracted out  
            employee, or an independent contractor.  Not only could that  
            have repercussions in terms of training, supervision, and  
            experience, but it can also change the occupant's liability if  
            that worker is injured on the job.

            One factor that adds to the confusion is that subcontracted  
            workers are often required to wear the uniform of the  
            contracting entity rather than the company that actually  
            employs them.  In some situations, subcontractors drive  
            vehicles with local government logos, so the public believes  
            workers are public employees when they are actually private  
            contractors.  The result is that the public may be reassured,  
            but when things go wrong, the city or company is quick to  
            distance themselves from the worker wearing their uniform.

          As evidence of the problem this bill would address, the sponsors  
          point to a recent case heard by the Court of Appeal, Second  
          Appellate District, Monarrez v. Southern California Auto Club  
          (2012) 211 Cal.App.4th 177, in which a motorist was severely  
          injured by a negligent tow truck driver contracted by the Auto  
          Club to perform towing services.  The Auto Club disclaimed  
          responsibility for the plaintiff's injuries because the tow  
                                                                      



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          truck driver was an independent contractor.  The Monarrez court  
          disagreed and found that Auto Club maintained all necessary  
          control over the truck driver and was, therefore, vicariously  
          liable because "Auto Club trains the technicians how to do the  
          work, dispatches calls to them, then follows up with inspections  
          and customer surveys to ensure that the technicians are  
          maintaining the proper physical appearance and using Auto  
          Club-approved methods.  The work performed by the technicians is  
          Auto Club's regular business, not a one-off job or occasional  
          event.  This is full-time employment carrying out Auto Club's  
          business of providing roadside assistance, under the direction  
          of Auto Club.  [The tow truck company's] work is wholly  
          integrated into Auto Club's operations and essential to its core  
          business.  Failure to conform to Auto Club standards results in  
          termination.  If Auto Club recommends the discipline or  
          termination of a technician, failure to follow this  
          recommendation could cause the station's contract to be  
          terminated or calls directed elsewhere."  (Id. at p. 191.)  

          Importantly, the court found ostensible agency between the Auto  
          Club and the independent contracting tow truck company because  
          the "uniform of the technician bears only the logo of Auto Club.  
           Their trucks bear the Auto Club logo.  The owner of [the tow  
          truck company] testified that when technicians respond to a call  
          they are viewed by motorists as Auto Club, not as an independent  
          contractor.  When technicians approach motorists, they identify  
          themselves as Auto Club to instill confidence.  At the  
          completion of service, technicians say 'Thank you for choosing  
          the Auto Club,' thereby encouraging members to believe the  
          service was rendered by Auto Club, not an independent  
          contractor."  (Id.)  

          The Monarrez decision is currently pending review before the  
          California Supreme Court.  In the past, this Committee has  
          raised concerns about bills that interfere with pending  
          litigation.  Any such interference could result in a direct  
          financial windfall to a private party, prevent a court from  
          deciding an action based upon the laws in place at the time the  
          cause of action accrued, or create a situation where the  
          Legislative branch is used to circumvent the discretion and  
          independence of the Judicial branch.  Because this bill could  
          affect pending litigation, the author has offered an amendment  
          to address this issue.  (See Comment 4.)  

          This bill, by automatically creating an ostensible agency  
          between the entity contracting for services and the contractor  
                                                                      



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          when the contractor or contractor's employee bears a  
          substantially similar uniform or logo as to that of the entity,  
          would remove the responsibility of showing the totality of the  
          entity's control over the contractor required to be proven by  
          the injured plaintiff.  The sponsors argue that this bill "will  
          protect consumers and workers by creating accountability in  
          situations where companies or local agencies subcontract out  
          work but require contract employees to wear their uniforms.   
          Holding companies responsible when subcontracted workers appear  
          to be company employees is a basic consumer protection.  It will  
          also encourage responsible contracting practices."  Because  
          these entities are holding their independent contractors out to  
          the public as representatives of the entity, it is arguably  
          appropriate to create ostensible agency in these situations.  

          Staff notes that this bill could create liability on the part of  
          the contracting person or entity if the contractor or  
          contractor's employee wears a substantially similar uniform or  
          displays a logo of the person or entity, regardless of whether  
          the person or entity has authorized or required the contractor  
          or contractor's employee to do so.  As such, this bill could  
          create liability of the person or entity, even though the person  
          or entity is unaware that the contractor is holding himself or  
          herself out to the public as being associated with the person or  
          entity through the use of a similar uniform or logo.  In order  
          to clarify that liability on the part of the person or entity  
          should only shift away from the contractor if the person or  
          entity has authorized or required the use of the uniform or  
          logo, the author has accepted amendments to address this issue.   
          (See Comment 4.)

          It is important to note that, in situations where one entity  
          contracts with another, who in turn contracts with another, who  
          ultimately performs the services for the original entity, this  
          bill would not create liability on the part of the original  
          entity, whose uniform or logo may be displayed.  For example, a  
          hotel contracts with a cleaning service, which contracts with a  
          temp agency, which employs housekeeping workers.  The worker  
          provides cleaning services for the hotel, but since the hotel is  
          not a party to any contract directly with the worker and the  
          worker is not wearing the uniform of the temp agency or cleaning  
          service, a guest, who is injured by the acts of the worker,  
          potentially would not be able to seek liability from the worker,  
          the temp agency, or the cleaning service (the parties covered in  
          this bill) because the worker is not wearing a uniform  
          substantially similar to that of either the temp agency or the  
                                                                      



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          cleaning service.  Rather, the worker is wearing a uniform of  
          the hotel.  Yet, the hotel is not a party to the contract  
          covered by this bill.  To provide better protection for damage  
          and injury to the consumer and appropriately assign liability to  
          the proper party as intended by this bill, the author may wish  
          to amend this bill to provide for liability on the part of the  
          entity ultimately receiving the services of the worker.

          3.  Indemnity clauses in service contracts
           
          Existing law requires an employer to indemnify an employee for  
          losses caused by the employer's want of ordinary care.  (Lab.  
          Code Sec. 2800.)  Existing law provides that any contract or  
          agreement, express or implied, made by any employee to waive  
          this indemnification, or any other employer obligation under the  
          Labor Code, is null and void.  (Lab. Code Sec. 2804.)  This bill  
          would add a new employer obligation, and, thus, a new obligation  
          the employer could not require the employee to waive.  Although  
          existing law voids contract provisions that waive negligence  
          indemnification by the employer, the author may wish to amend  
          this bill to provide a concise prohibition on indemnity waivers  
          in employment contracts for the new employee immunity provided  
          in this bill.

          4.  Author's amendments  

          In order to appropriately conform the liability provided in this  
          bill to other immunity exceptions, as well as to address the  
          issue of appropriate entity liability for the use of the uniform  
          and logo and the potential impact of this bill on pending  
          litigation, the author has accepted the following amendments, to  
          be taken in the Senate Committee on Labor and Industrial  
          Relations:
             Author's amendments  :

             1.   On page 1, in line 3, delete "A" and insert:  "Except  
               for damage or injury resulting from gross negligence or a  
               willful act, a"
             2.   On page 2, in line 3, after "damage" insert "or injury"
             3.   On page 2, in line 4, delete "wore" and insert:  "was  
               authorized or required by the individual or entity to wear"
             4.   On page 2, in line 9, delete "with" and insert:  "that  
               was authorized or required by the individual or entity to  
               display"
             5.   On page 2, between lines 12 and 13, insert:  "(c) This  
               section shall only apply to contracts entered into on or  
                                                                      



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               after January 1, 2014."

          5.  Opposition concerns  

          A coalition of business groups are opposed to this bill and  
          assert that the bill would undermine the legal significance of  
          the independent contractor relationship and impose liability  
          against the contracting entity for damages caused by the  
          contractor or the contractor's employee, solely on the basis  
                                                            that the contractor or its employee bore a uniform that was  
          substantially similar to that of the contracting entity or drove  
          a vehicle with the contracting entity's logo on it.  The  
          opposition argues that the Employment Development Department,  
          Franchise Tax Board, and Division of Industrial Relations each  
          have tests with which to determine the proper classification of  
          an independent contractor for purposes of the liability of a  
          contracting entity for the independent contractor's wages,  
          taxes, and insurance.

          The opposition argues that the contract arrangement between the  
          independent contractor and contracting business each benefit  
          from the contractual arrangement.  The independent contractor is  
          able to control his or her profits, losses, and schedule, while  
          the business manages its costs.  Furthermore, the opposition  
          argues that "[a]side from the tort liability for the negligent  
          acts of the independent contractor as an agent of the entity,  
          the liability for any other willful conduct or labor violations  
          of the independent contractor with respect to his/her employees,  
          is borne by the independent contractor (who employs the  
          individuals), not the contracting entity. . . . To our  
          knowledge, it is unprecedented to extend liability for wage and  
          hour violations or intentional conduct to a third party solely  
          on the basis of appearances.  Rather, . . .the main inquiry is  
          whether that third party exerted sufficient control over the  
          duties, performance, and conduct of the contracting party to  
          justify extension of liability."  The opposition also argues  
          that the placement of the bill language in the Labor Code, in  
          addition to implicating contracting entity liability for wages,  
          penalties, statutory fines, and attorney's fees, would also  
          trigger the Private Attorney General Act, which allows an  
          individual to bring a representative action and would expand the  
          threat of frivolous litigation against any entity that utilizes  
          independent contractors.

          The opposition asserts that "there is no evidence that any  
          member of the public is confused, harmed, or damaged in any way  
                                                                      



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          based upon a specific belief that the independent contractor is  
          an employee of the company[, and] no proof that a company has  
          refused to stand behind the services provided or resolve a  
          customer complaint on the basis that the individual performing  
          the services was an independent contractor versus an employee."


           Support  :  California Conference Board of the Amalgamated Transit  
          Union; California Conference of Machinists; California Teamsters  
          Public Affairs Council; Consumer Federation of California;  
          Engineers and Scientists of California; International Longshore  
          & Warehouse Union; Professional & Technical Engineers, Local 21;  
          UNITE HERE!; United Food and Commercial Workers Union, Western  
          States Council; Utility Workers Union of America, Local 132

           Opposition  :  Associated General Contractors; Building Owners and  
          Managers Association of California; California Ambulance  
          Association; California Business Properties Association;  
          California Chamber of Commerce; California Hospital Association;  
          California Trucking Association; International Council of  
          Shopping Centers; Messenger Courier Association of America;  
          NAIOP of California, the Commercial Real Estate Development  
          Association; National Federation of Independent Business;  
          Western Electrical Contractors Association

                                        HISTORY
           
           Source  :  California Labor Federation; California Professional  
          Firefighters

           Related Pending Legislation  :  None Known

           Prior Legislation  :  AB 2389 (Lowenthal, 2012) would have  
          prohibited the use by a contractor, who provides services on  
          behalf of a contracting entity in a residence or place of  
          lodging, of the name or logo of the contracting entity on a  
          uniform or vehicle unless specified conditions were satisfied.   
          AB 2389 was vetoed by Governor Brown.

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