By: Philip A. Toomey, Esq.

The California Labor Commissioner announced yesterday that it was fining Cheesecake Factory, and its janitorial contractor, Americlean Janitorial Services, and Magic Touch Commercial Cleaning (Americlean’s subcontractor) $4,206,351. A copy of the fines are available here.

Rather than onboarding employees to perform all functions necessary for the successful running of a business, many companies utilize skilled contractors to contract out selected services that can be performed in a more cost-effective manner. Common contract types include janitorial, security guards and delivery services. In most states (and under federal law), the duty to comply with wage and hour laws can be contractually limited to the contractor. However, in California, Labor Code section 238.5 imposes joint liability for wage and hour violations of the contractor if its services are integral to the master business operations. That same section also prevents the contracting party from delegating to the contractor responsibility for compliance with Cal-OSHA.

This case shows that, once again, California’s approach can be a trap for the unwary. If a contract permits subcontracting of services, the master contracting company may find itself liable for subcontractors with which it has no privity, and may not even know exist. Since wage and hour violations are not covered by any available insurance and can carry with them successor company liability, there may be unknown contingent exposure in merger and acquisition transactions.

While the details of the Cheesecake/Americlean/Magic Clean audit have not been made public, it can be safely assumed that Cheesecake had an excellent contract with iron-clad indemnification provisions. Americlean is also a legitimate contractor in the market, and it can be safely assumed that it contractually was permitted to subcontract the actual performance of janitorial work to Magic Touch. It may also be assumed that once the contract was in place, Cheesecake Factory was not in the practice of checking Americlean or Magic Touch employees’ timecards, punch records and payroll reports, or verifying which companies were doing what. Nevertheless, the Labor Commissioner had no difficulty determining that the maintenance of a clean restaurant is an integral part of a business model to attract consumers, and imposing liability on all three companies. What was announced yesterday is another unfortunate example of that which a business does not know, and thinks it safely contracted away, may come back to haunt them.

Leech Tishman’s Employment Practice Group can help clients ensure compliance with California’s complex and technical employment laws and can assist clients with defending against civil or administrative actions.

If you have any questions regarding California’s unique employment laws or these employment law updates, please contact Philip Toomey. Phil serves as Leech Tishman’s West Coast Business & Employment Client Relations Partner and practices in the firm’s Employment, Corporate, Litigation and Real Estate Practice Groups. Phil is based in the Leech Tishman’s El Segundo, CA office. He can be reached at 424.738.4400 or ptoomey@leechtishman.com.

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Leech Tishman Fuscaldo & Lampl is a full-service law firm dedicated to assisting individuals, businesses, and institutions. Leech Tishman offers legal services in alternative dispute resolution, aviation & aerospace, bankruptcy & creditors’ rights, construction, corporate, employee benefits, employment, energy, environmental, estates & trusts, family law, government relations, immigration, insurance coverage & corporate risk mitigation, intellectual property, international legal matters, litigation, real estate, and taxation. Headquartered in Pittsburgh, PA, Leech Tishman also has offices in El Segundo, CA, Chicago, Los Angeles, New York, Sarasota and Wilmington, DE.

 

 

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