GIBBS, GIDEN, LOCHER & TURNER LLP NEWSLETTER

"NEWEIGHTHOURDAYLAW" REQUIRESPAYMENT

OFDAILYOVERTIMETOALLNON-EXEMPTWORKERS
by Gary E. Scalabrini, Esq.

SUBCONTRACTORINSURANCE
&INDEMNITYOBLIGATIONS
by Eric L. Troff, Esq.

      On July 20, 1999, Governor Davis signed Assembly Bill 60, which requires payment of daily overtime compensation to all non-exempt employees for work in excess of eight hours in a workday and forty hours in a workweek. By amending Section 510 of the California Labor Code, the bill not only reinstates the daily overtime pay requirements eliminated in 1998  for employees subject to wage orders pro-mulgated by the Industrial Welfare Commission (“IWC”), but also extends overtime pay to all employees in California not specifically exempted. Consequently, employees whose in-dustry was not previously subject to a wage order, such as those engaged in on-site construction, will be subject to the state’s daily overtime requirements for the first time.

Exemptions Retained for Qualified Executives,
Administrators and Professionals

      The bill retains exemptions for qualified executives, administrators and professionals. In order to fall within an exemption, the employee must earn a monthly salary equivalent to no less that two times the state minimum wage for full-time employment and must also perform “exempt” duties for more than one-half of the employee's work time. The bill does not define the duties that characterize exempt work.  Rather, it assigns the task of “reviewing the duties which meet that test of exemption” to the IWC.  If the IWC chooses, it may subsequently convene public hearings to adopt and modify regulations pertaining to these duties.  Employers,  therefore, should evaluate those employees cur-rently treated as “exempt” to ensure that they fall within the present guidelines, and subsequently reevaluate such employees if and when the IWC promulgates new regulations.  GGL&T can assist employers in this evaluation and provide recommendations for pro-cedures to be followed in the workplace.

Alternative Workweek Schedules

      The bill further provides exemptions for employees working pursuant to an “alternative workweek schedule.” The bill adds Section 517 to the Labor Code, which sets forth a detailed procedure for establishing an alternative schedule. The IWC must adopt wage orders no later than July 1, 2000 which include procedures for conducting elections to implement and repeal alternative work week schedules, procedures for imple-menting the alternative schedules, and conditions under which an employer may unilaterally repeal an alternative schedule. Until such procedures are adopted, employers must comply with the procedures found in pre-1998 IWC wages orders, to the extent that such procedures are not inconsistent with the bill.

      The bill invalidates any presently existing alternative workweek schedule that was adopted pursuant to Wage Orders 1, 4, 5, 7 or 9, unless the alternative workweek meets the following conditions: (i) the workweek provides for no more than 10 hours of work in a workday (except for 12-hour workdays that are allowed in the health care industry); (ii) the workweek was adopted by two-thirds vote of the affected employees in a secret election; and, (iii) the election was held pursuant to wage orders of the IWC in effect prior to 1998.  Consequently, the bill nullifies any alternative workweek schedules that were unilaterally established by employers pursuant to the 1998 wage orders, unless an election was subsequently conducted prior to January 1, 2000 in accordance with all of the procedures provided in the applicable pre-1998 wage order.

      The bill permits an exemption for alternative workweek schedules adopted by a collective bargaining agreement if the union employees are paid at least thirty percent more than the state minimum wage and receive premium wage rates for overtime work.  The bill also allows individual employees, with their employer’s consent, to take time off to attend to personal needs, and then to make up that time on a different day without payment of overtime compen-sation under certain conditions too numerous to list here.

Penalties

      Finally, the bill adds Section 558 to the Labor Code, which provides penalties for violations of the statute. In particular, any employer who violates the overtime compensation require-ments is subject to civil penalties: (i) for an initial violation, $50 for each underpaid employee per pay period for which the employee was underpaid, in addition to the unpaid wages; and, (ii) for any subsequent violation, $100 for each underpaid employee per pay period for which the employee was underpaid, in addition to the unpaid wages.

Impact

      The new law will have its greatest impact on industries, such as the construction industry, which were not previously subject to daily overtime requirements. The construction indu-stry, which was not included in any industry-specific pre-1998 wage order, was subject only to the federal standard of paying overtime for work in excess of forty hours per week. Hence, unless the contractor was subject to a private labor agreement or collective bar-gaining agreement requiring daily over-time pay, construction workers could work in excess of eight hours in a day without receiving overtime compen-sation. With the enactment of AB 60, construction workers are now entitled to overtime pay of time-and-a-half for work in excess of eight hours, and double-time for work in excess of eleven hours in a workday.

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      Two recent California appellate court decisions illustrate a judicial trend permitting parties to shift risks through contract provisions and insurance.  Accordingly, it is more important than ever to carefully negotiate, draft and review contract provisions concerning insurance and indemnity obligations and to review insurance endorsements and policies procured during and after construction.

Insurer's Duty to Defend Subcontractor's Completed Operations

      General contractors typically require their subcontractors to name them as additional insureds on the subcon-tractors’ comprehensive general liability insurance policies.  Many additional insured endorsements provide coverage for damages arising out of the opera-tions performed by a subcontractor on a job. This coverage, also known as “completed  operations” coverage, generally means that if a general con-tractor is sued for the work of a subcontractor, the general contractor will be provided with defense and indemnity by the subcontractor’s insurer, subject to the terms of the policy.

      In this context, the following question arises: Does an insurer have a duty to defend a lawsuit against a general contractor named in a sub-contractor’s policy as an additional insured when the policy was not issued until after the construction project giving rise to the lawsuit was completed?  The issue is of particular importance in the development of condominium and tract homes, where a project is often built in several phases and lawsuits for construction defects are frequently filed well after completion of the project.  The California Court of Appeal recently ruled that a duty to defend does, in fact, exist under one commonly issued endorsement.

      In Pardee Construction Co. v. Insurance Company of the West, et al., 77 Cal.App.4th 1340 (February 2000), a general contractor, acting as a developer, began construction of a six-phase condominium project in 1985 near San Diego.  The general contractor hired subcontractors and required them to obtain general liability insurance naming the general contractor as an additional insured on all policies per-taining to work performed on the project, including “completed opera-tions” coverage.

      After phase 2 of the project was completed, a homeowners association brought suit against the general con-tractor in 1995, to recover damages for construction defects.  The general contractor tendered its defense to four of the subcontractors’ insurers.  Each of the subcontractors had obtained general liability insurance, including coverage for completed operations, under policies that had been issued after the subcontractors had completed their work on phase 2 of the project.

      Each of the insurers denied and/or failed to accept the general contractor’s tender on the ground that phase 2 of the project had been completed well before the effective dates of the policies. The general contractor then sued the insurers.

      The insurers argued that although the general contractor was to receive coverage for work completed by the subcontractors during the time the policy was in force and effect, their intent was not to provide coverage to the general contractor for operations that were completed by the subcontractors prior to inception of the policy dates.  The Court of Appeal disagreed.

      The Court examined the language of the additional insured endorsement, which provided coverage arising out of “your [the subcontractor’s] work.”  The Court noted that the term “your work” was further defined as being “work or operations performed by or on your behalf.”  Because this language used the past tense, the Court concluded that coverage was to be afforded to the general contractor for both past and ongoing operations of the subcon-tractors performed for the benefit of the general contractor, regardless of policy dates.  The Court emphasized the availability of various additional insured endorsements which specifically excluded insurance coverage for work completed prior to issuance of the insurance policy. Absent such an explicit exclusion, the Court ruled that the insurers had a duty to provide a defense to the general contractor for those claims asserted against it arising out of the subcontractors’ allegedly defective work on phase 2 of the project.

      Because damage resulting from a subcontractor’s work often does not arise until years later, the issue whether there will be coverage for a subcon-tractor’s  completed work, or only for its current work, is of paramount impor-tance.  Insurers, general contractors and subcontractors must be aware of the language on the different endorsements available and the different coverage provided by each. Only with this knowledge will the parties be capable of negotiating and placing the risks of subsequent lawsuits on the appropriate party.

Subcontractor Negligence Not Necessary to Trigger Duty to Indemnify

      On most construction projects, the general contractor will require each sub-contractor to indemnify and defend it from any claim arising out of the subcontractor’s work.  Depending on the precise indemnity language, the subcontractor may be called upon to indemnify a general contractor against a nonmeritorious claim arising from the subcontractor’s work – even if the subcontractor was not negligent in any respect.

      In the recent decision of Centex Golden Construction Co. v. Dale Tile Co., 93 Cal.Rptr.2d 259 (March 2000), a general contractor was responsible for the construction of a commercial building. The general contractor entered into a subcontract with a tile company. Under the terms of the subcontract, the subcontractor agreed to indemnify the general contractor against all claims arising from or incidental to the work of the subcontractor.

      Following completion of the construction project, the owner made a number of claims against the general contractor, including a claim that the tile work was defective. The general contractor settled the claims made by the owner and demanded indem-nification from the subcontractor. When the subcontractor refused to provide indemnification, the general contractor filed an action against the tile sub-contractor seeking reimbursement for money paid to the owner related to the tile and for attorney’s fees.

      A jury concluded the subcontractor was not negligent, but the trial court ordered the subcontractor to indemnify the general contractor, nonetheless. On appeal, the tile subcontractor argued that it should not be required to indemnify the general contractor under its indemnity clause because the jury had found that the subcontractor was not negligent.  The Court of Appeal rejected this argument.

      The Court examined the language of the indemnity provision and found no requirement that the general contractor prove that the subcontractor was negligent before it could be indem-nified. The Court focused on the language in the indemnity provision that stated that work of the subcontractor would be “at the risk” of the sub-contractor “exclusively.”  The indem-nity clause also stated that the subcontractor had to indemnify the general contractor against claims which involved only the alleged negligence of the general contractor.  The Court ruled this language included the “obvious risk” that the subcontractor would have to indemnify the general contractor against unmeritorious claims made by third parties.

      The Court was careful to delineate that although the tile subcontractor had a contractual duty to indemnify the general contractor for claims arising out of the subcontractor’s work, the indemnity language was not so broad as to require indemnity for claims that were wholly unconnected with the subcontractor’s work on the project.  The Court noted that the subcontractor would never be required to indemnify the general contractor for the sole negligence or willful misconduct of the general contractor, as such indemnity would have been against public policy and precluded by statute (i.e., Civil Code Section 2782).

      Subcontractors cannot assume that if their work is within the applicable standard of care on a construction project, they will not have to indemnify a general contractor for a non-meritorious claim arising out of their work.  Accordingly, as with Additional insured endorsements, parties should review the indemnity language in their subcontracts carefully to determine its scope and possible risks. Should a subcontractor wish to be responsible for indemnity only if it is found that the subcontractor’s work was below the standard of care, such a provision must be specifically bargained for and expressed in the indemnity provision in its subcontract.

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The information contained in this Newsletter should not be relied upon as legal advice or opinion regarding any specific matter.
All readers should contact professional legal counsel to obtain advice on specific projects or issues.

SPECIAL NOTICE:  The State Bar of Nevada does not certify any lawyer as a specialist or expert.
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