Erick Becker
Many companies seek to avoid the costs of direct employment by contracting with outsource providers to perform work, sometimes alongside regular employees, at company facilities. One advantage of using outsourced labor is insulating the company from employment related claims – but a recent California District Court decision may signal that companies are no longer insulated from potential liability.
The case involves a contractor who provided logistics services to Wal-Mart in Southern California. The contractor operated warehouses that received and processed shipments bound for Wal-Mart stores. The employees alleged various wage and hour violations, and brought suit against both the contractor and Wal-Mart, who sought dismissal on the grounds that it was not responsible for any violations committed by the contractor.
In a groundbreaking decision, the District Court judge refused to dismiss Wal-Mart, holding that the company had a duty to refrain from using contractors “it knew or should have known would violate applicable wage and hour laws.” The judge went further in opining that Wal-Mart could be liable if it paid the contractor low rates that virtually guaranteed wage and hour violations by the contractor. The importance of this ruling is that plaintiffs will now be able to conduct extensive discovery of Wal-Mart’s practices in an effort to find evidence of knowledge or imputed knowledge of the contractor’s practices.
Although this is only a decision by a single court, and may be subject to limitation or reversal on appeal, it opens up an enormous new avenue for plaintiff’s attorneys to pursue for wage and hour litigation. Employers must therefore use prudent due diligence in screening and monitoring their outsourced labor providers, and should seek to insert appropriate labor compliance and indemnification language in their outsourcing agreements.
