Starting January 1st, employers in California will be on the hook when labor contractors (including temporary staffing agencies) they use fail to follow the law. Before, the employer was responsible if it was deemed a joint employer or it was paying the contractor so little that it should have known laws were being violated. That’s about to change.

If an employer gets employees from a labor contractor for use “within the client employer’s usual course of business,” the employer will share with the labor contractor “all civil legal responsibility and civil liability for all workers supplied by that labor contractor” who are paid incorrectly or are not provided workers comp insurance. (We described AB 1897 more generally here.) So if, for example, the contractor deems workers to be independent contractors and a government agency deems them employees, the client employer will be jointly responsible.

Under this law, what the client employer knew or did is irrelevant. Apparently, it isn’t enough to create a maze of legal requirements that is almost impossible to navigate. Now just being an employer doing business in California is sufficient to justify imposing liability.

Here are 6 steps employers can take to try to mitigate this risk:

1. Include a provision in the contract allowing the employer to audit the contractor’s records regarding compliance with wage and hour laws and workers’ comp insurance coverage. At the very least, require the contractor to prove that it has workers’ compensation insurance and who’s covered.
2. Pay close attention to whether the contractor is and remains financially viable.
3. Include strong indemnification language. The contractor should acknowledge that it is solely responsible for compensating its employees correctly and for providing their workers’ compensation coverage and that it will hold the client employer harmless if it fails to do so.
4. If you have contracts going back years with the same labor contractor, they often become a mass of agreements, amendments, and addendums that make it hard to determine what terms apply. Clean those up so that someone can determine each party’s obligations more easily.
5. Consider requiring the contractor to purchase employment practices liability insurance and name the client employer as an additional insured.
6. Consider requiring the contractor to be bonded.

Since the client employer will be strictly liable for the labor contractor’s mistakes, it will be vitally important to try to (1) ensure that the contractor is following the law and (2) require the contractor to indemnify the client employer against these types of claims.