Contractor Liability for Subcontractor Wage and Hour Violations

A 2003 statute makes those who contract with another for certain services liable for the other's wage and hour violations if they know or should know that the contract did not include funds sufficient to allow the other to comply with wage and hour laws. As explained in a State Assembly Report, Labor Code section 2810 was enacted after hearings into the effects of the underground economy. Those hearings established that the failure of some employers in the janitorial, garment and agricultural industries to comply with wage and hour rules gave them an unfair advantage over law-abiding employers, and deprived employees of millions of dollars in wages.

Section 2810 applies to those who contract for labor or services with construction, farm labor, garment, janitorial or security guard contractors. An aggrieved employee of the contractor who suffers actual damages as a result of the insufficiency of the funds provided for under the contract may sue for whichever is greater of the actual damages or a statutory penalty. If the aggrieved employee prevails, he or she may recover costs and reasonable attorney's fees.

A recent decision by the First District Court of Appeal in San Francisco addresses four issues about the application of section 2810:

1. Determining sufficiency. Whether the funds are sufficient should be determined by whether the contract provides sufficient funds to pay the minimum wage. Although the plaintiffs argued that the determination should be based on the contracting party's understanding of the wages actually paid by the contractor, the court could find no support for the argument in the language of the statute or the legislative history.
2. Knows or should know. Whether the contracting party has constructive knowledge sufficient to trigger application of the statute should be determined by estimating the likely cost of performance based on knowledge typical in the industry about cost.
3. NLRA Preemption. Although the statute exempts those contracting parties who have collective bargaining agreements with the workers employed under the contract, there was no preemption under Machinists v. Emp. Rel. Comm'n, 427 U.S. 132 (1976), because that provision did not have a sufficiently substantial effect on collective bargaining. Although the statute required sufficient funds to comply with all applicable federal laws , there was no preemption under San Diego Building Trades Council v. Garmon, 359 U.S. 236 (1959), because the plaintiffs were not attempting to enforce the NLRA in the action.
4. Causation. The plaintiffs do not have to prove that the contractual insufficiency actually caused the direct employers to violate the wage and hour laws. It is enough to show that the funds were insufficient.

Castillo v. Toll Bros., Inc., Case No. A128605 (Cal.Ct.App. Jul. 28, 2011).