Articles Posted in Case Notes

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On December 9, 2014, the U.S. Civilian Board of Contract Appeals (“CBCA”) decided Kiewit-Turner, a Joint Venture v. Department of Veterans Affairs, in which general contractor Kiewit-Turner (“KT”) scored a major victory against the Department of Veterans Affairs (“VA”). The CBCA ruled that a change order required the VA to deliver a design that could be built for costs that were capped at a specified amount — shifting risk to the owner from the contractor.
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Recently, the National Labor Relations Board (NLRB), in a 3-2 decision, in Purple Communications, Inc. and Communications Workers of America, AFL-CIO. Cases 21-CA-095151, 21-RC-091531, and 21-RC-091584, considered the right of employees under Section 7 of the National Labor Relations Act (Act) to effectively communicate with one another at work regarding self-organization and other terms and conditions of employment. Ruling on this question, the NLRB concluded that “employee use of email for statutorily protected communications on nonworking time must presumptively be permitted by employers who have chosen to give employees access to their email systems.” In doing so, it overruled the NLRB’s divided 2007 decision in Register Guard, 351 NLRB 1110 (2007), to the extent it holds that employees can have no statutory right to use their employer’s email systems for Section 7 purposes because its “analysis fails ‘to adapt the Act to changing patterns of industrial life'”; the NLRB majority in Register Guard accepted the employer’s contentions there that an email system is analogous to employer-owned equipment and that prior cases had established that employers could broadly prohibit nonwork use of such equipment. It further found it appropriate “to apply our new policy retroactively.
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New Jersey’s Appellate Division recently reversed a trial court’s dismissal of a general contractor’s claim against a performance bond, holding that the bond must cover the general contractor as the intended obligee, even though the general contractor was not expressly named in the bond.

In Allied Building Products Corp. v. J. Strober & Sons, LLC, et al., A-1113-12T4 (NJ App. Div., September 5, 2014), Dobco, Inc. (“Dobco”) was the general contractor for a science hall renovation project at William Paterson University. J. Strober & Sons, LLC (“Strober”) bid for and was awarded a roofing subcontract on the project. The subcontract between Dobco and Strober required Strober to obtain payment and performance bonds, in the form annexed to the Dobco-Strober subcontract (which required that Strober be named obligee on the bonds).

Strober was awarded the subcontract with Dobco, but in accordance with the company’s procedure, Colonial did not review the actual subcontract. Nevertheless, an underwriter approved issuance of the performance bond, and Strober paid for the bond.

However, when the performance bond was issued, it named William Paterson University as the obligee, rather than Dobco. Dobco advised Strober that it rejected the bond, because it was required to name Dobco as obligee. As a result, Strober issued payment and performance bonds naming Dobco as obligee, using a power of attorney and Colonial’s seal. Colonial asserted that the bonds were a nullity, because Strober was only authorized to issue bid bonds using Colonial’s seal and power of attorney, in accordance with its “partnership account.” Nevertheless, Dobco rejected these bonds as well, and demanded that Colonial issue the bonds with various documents that ordinarily accompany payment and performance bonds. Strobco did not procure the bonds, but nevertheless began its work on the project.

During the project, Dobco became concerned with Strober’s performance, and requested the bonds that had not been delivered. Strober repeatedly contacted Colonial, but was advised several times that the bonds were “still in underwriting,” even though Colonial had already accepted the premium. Eventually, Dobco terminated Strober, and Strober filed for bankruptcy protection. Dobco filed a claim against the bond, but it was denied because Dobco had rejected both sets of bonds, and Colonial maintained, therefore, that they were not in effect.

On cross-motions for summary judgment, the trial court dismissed Dobco’s claim against the bond, citing established New Jersey law that a surety is “chargeable only according to the strict terms of its undertaking and its obligation cannot and should not be extended either by implication or by construction beyond the confines of its contract.” Since Dobco rejected both bonds, the trial court found that there was no valid contract between Colonial and Dobco.

The Appellate Division reversed, noting that, when a bond incorporates a contract by reference, the bond and the contract must be considered as one integrated document in ascertaining the meaning of the bond’s provisions. The Appellate Division held that “strict construction” should have only applied after the extent of the surety’s undertaking was determined; it should not have been used to interpret the language creating the surety’s obligations under the bond. Thus, the Court held that the bond was intended to secure Strober’s contractual obligation to Dobco, which required Strober to obtain a performance bond, naming Dobco as obligee. In so holding, the Court stated, “[W]hen Colonial agreed to bond [Strober’s] performance, it undertook the obligation to do so in the form required by the contract. That Colonial chose not to review the contract it bonded cannot relieve it of obligations voluntarily undertaken.” The Court was unmoved by Colonial’s argument that Dobco rejected both bonds, and ordered the bond reformed, consistent with the Dobco-Strober subcontract.

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On August 26, 2014, the D.C. Circuit Court of Appeals decided the case of Sierra Club, et. al. v. Jewel, a case involving the National Register of Historic Places (Register), which is administered by the Department of the Interior. The Court of Appeals held, over the dissent of Senior Circuit Judge Sentelle, that the plaintiffs, a coalition of environmental groups and historic preservation organizations, have standing to challenge the decision of the Keeper of the Register that the “Blair Mountain Battlefield”, the scene of a historic and violent encounter between coal miners and coal companies in the 1920’s, and located in Logan County West Virginia, should not be included in the Register because the initial listing process was defective.

It appeared that the consent of the majority of property owners of the proposed listing — the Battlefield area is privately-owned by members of the Coal Association — was not obtained, and they objected to the listing. When the Battlefield was removed from the Register, the Sierra Club, the Ohio Valley Environmental Coalition, and other organizations (collectively, the Coalition) filed a lawsuit in the U.S. District Court of the District of Columbia, arguing that the Keeper’s decision was arbitrary and capricious. The district court granted the Department of Interior’s motion for summary judgment, agreeing that the Coalition did not have standing to bring the action.

The majority of the Court of Appeals reversed, holding that the Coalition indeed had standing because they were able to demonstrate an injury in fact in that their aesthetic interests in the Battlefield’s history was concrete and particularized, and this interest would be injured if the existing coal mining permittees exercised their permit rights and began coal mining operations. (Apparently, a listing in the Register would substantially rule out any additional coal mining in the area of the Battlefield.) The Court of Appeals agreed that the members of the Coalition had no legal rights to enter the area of the Battlefield, but this fact did not disqualify their interests. Also, there was a substantial probability of injury to their interests since coal mining operations are currently being conducted in the area today, and could be expanded (a number of coal mining permits have been issued by the State of West Virginia).

Judge Sentelle’s dissent is rather pungent. He states that the coalition is asserting an interest “in viewing the property of others. I know of no legal protection for that interest”. Indeed, none of the cases cited by the majority “would lead me to suppose that my neighbor has a legally protected right that I have invaded when I trim the grass and behead the clovers which he enjoys seeing”. According to Judge Sentelle, therefore, the plaintiffs do not have a legally protected interest.

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Last month, in its decision in Transtar Electric, Inc. v. A.E.M. Electrical Services, Corp., Slip Opinion No. 2014-Ohio-3095, the Ohio Supreme Court ruled that the inclusion of term “condition precedent” in a contractual payment provision was an explicit statement of the parties’ intent to transfer the risk of the project owner’s non-payment from the general contractor to the subcontractor. This decision is significant for Ohio, a state that enforces the validity of pay-if-paid provisions, unlike other states that have found them void as against public policy.

Transtar involved a contract between a general contractor and an electrical subcontractor for the construction of a pool at a Holiday Inn. The subcontractor fully performed its work under the subcontract, but the general contractor failed to pay the last three of the subcontractor’s invoices because the owner had not paid the general contractor for the work reflected in those invoices. The subcontractor filed suit alleging both breach of contract and unjust enrichment, and both sides moved for summary judgment. While the general contractor did not dispute the facts asserted by the subcontractor, it argued that, under the contract, it did not have to pay the subcontractor until it received payment from the owner. The trial court agreed with the general contractor, but the appeals court reversed, stating that the contract’s payment provision was not sufficient to shift the risk of non-payment by the owner to the subcontractor. The Ohio Supreme Court then reinstated the judgment of the trial court.

The contract between the general contractor and the subcontractor contained the following language:

RECEIPT OF PAYMENT BY CONTRACTOR FROM THE OWNER FOR WORK PERFORMED BY SUBCONTRACTOR IS A CONDITION PRECEDENT TO PAYMENT BY CONTRACTOR TO SUBCONTRACTOR FOR THAT WORK

The Ohio Supreme Court acknowledged that, for a pay-if-paid clause to be valid, the parties’ intent to transfer the risk of owner non-payment must be clear. The court held that the language in the contract at issue satisfied this standard because the use of the term “condition precedent” negates the need for additional language to demonstrate the parties’ intent to transfer the risk.

For parties contracting in Ohio – and perhaps other jurisdictions that enforce pay-if-paid provisions – the Transtar opinion makes clear that special attention should be given to the term “condition precedent” when negotiating a payment provision. And going forward, understanding this bright-line rule announced by the Ohio Supreme Court could simplify payment disputes between contractors and subcontractors.

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In an opinion filed July 3, 2014, the California Supreme Court provided some clarification to California law concerning an architect’s liability to foreseeable third-party purchasers of residential units for design errors and omissions. In Beacon Residential Community Association v. Skidmore, Owings & Merrill LLP (July 3, 2014) ____Cal.4th ____; 2014 WL 2988058, Cal. July 03, 204 (NO. S208173), the Court held that a principal architect (defined by the Court as an architect who in providing professional design services is not subordinate to other design professionals) of a residential project owes a duty of care to future homeowners.

Beacon concerned a dispute over a residential condominium project in San Francisco. The original developers of the project engaged two architects to provide architectural and engineering services. Although the finished units were rented out for two years after construction, a condominium association had been created prior to construction, and eventually the finished units were sold as condominiums.

The condominium association sued the original developers of the condominiums, along with the architects, alleging numerous design defects. As against the architects, the association asserted causes of action in negligence and violations of California’s Right to Repair Act (Cal. Civil Code sections 895 et seq.). The architects, who had allegedly been paid more than $5 million for their work, demurred on the basis that they owed no duty of care to the association or its individual members. The trial court agreed with the architects that they owed no duty of care, as final design decision authority rested in the developers.

The appellate court reversed the trial court, applying the multi-factor test set out in California’s principal duty of care case, Biakanja v. Irving (1958) 49 Cal.2d 647, to determine that the architects owed the association a duty of care.

On review, the California Supreme Court affirmed the appellate decision. In California, the existence or absence of a duty of care in negligence in the absence of privity is governed primarily by a multi-factor test set out in Biakanja. The Beacon court found that the Biakanja factors demonstrated a duty of care if the facts as alleged in the condominium association’s complaint were proven:

(1) [The architects’] work was intended to benefit the homeowners living in the residential units that [the architects] designed and helped to construct.
(2) It was foreseeable that these homeowners would be among the limited class of persons harmed by the negligently designed units.
(3) [The association’s] members have suffered injury; the design defects have made their homes unsafe and uninhabitable during certain periods.(4) In light of the nature and extent of [the architects’] role as the sole architects on the Project, there is a close connection between [the architects’] conduct and the injury suffered.
(5) Because of [the architects’] unique and well-compensated role in the Project as well as their awareness that future homeowners would rely on their specialized expertise in designing safe and habitable homes, significant moral blame attaches to [architects’] conduct.
(6) The policy of preventing future harm to homeowners reliant on architects’ specialized skills supports recognition of a duty of care. Options for private ordering are often unrealistic for typical homeowners, and no reason appears to favor homeowners as opposed to architects as efficient distributors of loss resulting from negligent design.

The Beacon court further found that a negligence action against the principal architects was permitted by the Right to Repair Act. The architects had argued, in the face of language in the Act addressing “design professionals,” that nevertheless the Right to Repair Act was not intended to impose a duty greater than that imposed under common law. The Beacon court noted that even if the architects were correct regarding the intent of the Act, a duty of care existed at common law.

Beacon is a win for condominium associations and individual homeowners in these circumstances, in that it allows them potential recourse for design defects against the principal design professionals engaged by the developers.

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In late March, a trial court in Bergen County, New Jersey dismissed a condominium association’s construction defect claims against several construction entities for failure to comply with the applicable statute of limitations. This decision’s appellate aftermath will be interesting to follow, because the trial court stripped away some of the protection that New Jersey’s discovery rule affords to property owners who become aware of latent defects well after a project is substantially completed.

Pursuant to the discovery rule, “a cause of action will be held not to accrue until the injury party discovers, or by an exercise of reasonable diligence and intelligence should have discovered that he may have a basis for an actionable claim.” Lopez v. Swyer, 62 N.J. 267, 272 (1973). And unlike some states, New Jersey’s discovery rule applies in contract cases involving latent construction and design defects. Torcon, Inc. v. Alexian Bros. Hosp., 205 N.J. Super. 428, 432 (Ch. Div. 1985). What this means is that the statute of limitations for design deficiencies and construction defects begins to run upon substantial completion. Mahoney-Troast v. Supermarkets General, 189 N.J. Super. 325, 329 (App. Div. 1983).

In Palisades at Fort Lee Condo. Ass’n v. 100 Palisade, 2014 N.J. Super. Unpub. LEXIS 743, *3 (Law Div. Mar. 31, 2014), construction was deemed substantially complete on May 1, 2002. The Association hired a consultant to perform inspections in November 2006, and in May 2007, the consultant issued a report identifying various construction and design defects. The Association, however, did not file a Complaint until March 2009, almost seven years after the date of substantial completion. The trial court held that although the Association’s claims may not have accrued until May 2007, when it received the report, it still had until May 2008 to file suit. The trial court stated, “[i]t has been well established in New Jersey case law that if the plaintiff has sufficient knowledge of its claim and there remains a reasonable time under the applicable limitations period to commence a cause of action, the action will be time barred if not filed within that remaining time.” Id. at *8. One of the reasons the court dismissed the Complaint is because the Association had one year to file suit after becoming aware of its potential claims.

The Palisades court cited to Torcon (another trial court opinion) for this proposition, although the Torcon court’s holding in this regard related to application of equitable estoppel in the context of a contractor’s misrepresentation or concealment of material facts. By contrast, the intent of New Jersey’s discovery rule is to toll the accrual of the statute of limitations, and the Association’s six-year statute of limitations should have commenced in May 2007, if that is the date when it knew or should have known that it may have claims arising out of defective construction.

Nevertheless, the Palisades decision should give pause to property owners and their attorneys to carefully monitor early signs of faulty workmanship, and to not assume that the discovery rule will automatically extend the six-year time period to bring claims for construction defects. A Notice of Appeal has been filed in Palisades and it will be interesting to see how the Appellate Division handles this issue.

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Protecting communications disclosed to third-parties under the common interest doctrine can be an uphill battle. Was the communication reasonably necessary for the purposes for which the attorney was consulted? Was there a reasonable expectation the communication would remain confidential? Was the content of the communication of the type that should be afforded protection? In the context of construction defect litigation, homeowners associations are often placed in a “common interest” predicament:

Association bylaws and the California Civil Code require the association to keep individual homeowners abreast of details regarding construction defect litigation. The individual homeowners are not the clients of the association’s lawyer – the association is. Does complying with pertinent statutory and association-specific requirements result in a waiver of privileged information?

This issue was dealt with by the California Court of Appeal in Seahaus La Jolla Owners Ass’n v. Superior Court, 224 Cal. App. 4th 754 (2014).

In Seahaus, petitioner and plaintiff, a homeowner’s association (the, “Association”) brought a construction defect action alleging various damages to the common areas of a common interest development. The Association sued the developers and builders of the complex (“Defendants”). The Court of Appeal conducted a mandamus proceeding to address the Association’s contention that the trial court erred in overruling its claim of attorney-client privilege in a discovery dispute over Defendant’s efforts to depose individual homeowners regarding disclosures made at an informational meeting regarding the litigation.

After the Association filed its litigation against the Defendants, in July of 2009, it held litigation update meetings pursuant to the Association’s governing documents. By this time, a subgroup of individual homeowners had filed its own companion action seeking damages for defects in their private, individual units.

Defendants sought to inquire into the content and disclosures made at the litigation update meetings during the depositions of certain individual homeowners. The Association objected, invoking the attorney-client privilege and the “common interest” doctrine under Evidence Code section 952.

The Association argued section 952 applied because the individual homeowners were “third persons. . . to whom disclosure is reasonably necessary for the accomplishment of the purpose for which the lawyer is consulted.” Evid. Code § 952. Several rulings by the trial court declined to allow for such a privilege to be asserted regarding the communications received at the meetings by individual homeowners who are not the actual clients of the counsel retained by the Association.

The Court of Appeal held that, under the circumstances specific to this dispute, the communications were protected by attorney-client privilege and the common-interest doctrine. In making that determination, the court outlined relevant attorney-client privilege and common interest doctrine authority.

With regard to attorney-client privilege, the court relied on Evidence Code sections 912 and 952, which, together, “permit sharing of privileged information when it furthers the attorney-client relationship; not simply when two or more parties might have overlapping interest.” McKesson HBOC, Inc. v. Superior Court, 115 Cal. App. 4th 1229, 1237 (2004). Evidence Code section 912 provides further guidance for when disclosures operate to waive privilege; in pertinent part, this section provides:

“A disclosure in confidence of a communication that is protected by a privilege provided by [attorney-client privilege, § 954], when disclosure is reasonably necessary for the accomplishment of the purpose for which the lawyer … was consulted, is not a waiver of the privilege.”

With regard to the common interest doctrine, the court reiterated that unlike attorney-client privilege, the protection afforded by the common interest doctrine is qualified, because it depends on the content of the communication. The court found important the multiple communications between the Association’s counsel and the individual homeowners in evaluating the “content” of the subject communications. The Association’s counsel sent the 5 separate letters containing litigation update information and information concerning further defects and their investigations regarding those defects. These letters were sent in accordance with the Association’s governing and Civil Code requirements (which places certain obligations on an association to communicate with individual owners about any proposed construction defect litigation). See Civil Code § 6150.

Lastly, the court analyzed the Association’s statutory obligations to its individual homeowners. Notably, Civil Code section 5980 grants a common interest development’s homeowners association standing to sue in its own name, on matters concerning damage to the common area, or damage to separate interest that are affected by damage to the common areas. Civ. Code § 5980. The subgroup’s separate action did not affect the Associations ability to seek regress for damage to separate interests affected by damage to the common areas.

The court concluded that, in accordance with its governing documents and the Civil Code, the Association’s duties and powers included communicating with individual homeowners who have closely aligned common interests. The circumstances of these disputes indicated, on balance, that the there was a “reasonable expectation” that the information disclosed regarding the status of the litigation was confidential in nature. Further, the court held that the relationship between the Associations action and the subgroup of homeowner’s action was “close enough” so that the subgroup had common interests in the legal status of the Association’s action.

This decision only informs a homeowners association’s ability to comply with internal and statutory requirements regarding construction defect litigation without waiving attorney-client privilege. It is worth noting the limited nature of this court’s holding (the court turned only to the “specific questions presented about the application of the common interest doctrine in this situation.”) As such, this decision does not carve into stone a bright line rule easily applied by all common interest developments in all factual scenarios. Instead, it stands as an example of the fact intensive analysis that accompanies common interest doctrine disputes. This territory is murky; here, the clarity provided is as informative as it is limited.

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One of the first tactical lessons most litigators learn is not to overstate your position. Another lesson is to always remain civil, even in the face of an un-civil opponent. These lessons are sometimes difficult for young lawyers, brimming with aggression, to digest. Most of the time when one of those lawyers inserts unfortunate language in a brief–say, openly mocking the opponent’s argument–cooler heads prevail and a sage senior lawyer excises the offending language.

Most of the time. But not all of the time. This short Sixth Circuit opinion, Bennett v. State Farm Mutual Insurance is a good lesson to young lawyers. I can’t deliver a judicial bench slap any better than the court, so let me just quote Judge Kethledge:

“There are good reasons not to call an opponent’s argument “ridiculous,” which is what State Farm calls Barbara Bennett’s principal argument here. The reasons include civility; the near-certainty that overstatement will only push the reader away (especially when, as here, the hyperbole begins on page one of the brief); and that, even where the record supports an extreme modifier, “the better practice is usually to lay out the facts and let the court reach its own conclusions.” Big Dipper Entm’t, L.L.C. v. City of Warren, 641 F.3d 715, 719 (6th Cir.2011). But here the biggest reason is more simple: the argument that State Farm derides as ridiculous is instead correct.”

Ouch. Whatever feeling of satisfaction that lawyer had when he wrote “ridiculous” in his brief must have felt worlds away when he read that opinion.

There’s another lesson here: Always carefully review defined terms in your insurance policy. In Bennett, “The question presented is whether Bennett was an “occupant” of the Fusion–as that term is defined by State Farm’s policy–at the time she was on the vehicle’s hood. If she was, then she is entitled to coverage for the injuries she sustained there; if not, then not.” The policy defined “occupying” as “in, on, entering or alighting from.” Since Mrs. Bennett was “on” the car, she was “occupying” it as defined by the policy.

One last lesson for insureds: Don’t give up too easily. It would have been very easy for Mrs. Bennett to hang her head when State Farm denied her claim because she was on the hood, and wasn’t an “occupant” of the car. But she stuck with it and pressed her case. Good for her.

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UPDATE: The Sacramento Bee, E-cigarettes face restrictions as cities update smoking ordinances (Mar. 10, 2014)

Recently, the California Office of the Attorney General (“AG”) issued its Opinion No. 12-901 (Dec. 20, 2013), answering the question: “Under what circumstances does an owner-operated business with no employees nevertheless constitute a ‘place of employment’ under Labor Code section 6404.5, which prohibits smoking in a workplace?” Section 6404.5 provides, in relevant part: “No employer shall knowingly or intentionally permit, and no person shall engage in, the smoking of tobacco products in an enclosed space at a place of employment.”

Smoking

The AG confirmed that “[a]n owner-operated business with no employees nevertheless constitutes a ‘place of employment’ under [S]ection 6404.5 when employment of any kind is carried on at the business location — that is, even when such employment is carried on by persons who are employed by someone other than the business owner.” As a result, “if employment is being carried on in an owner-operated business, then the owner-operator and all other persons are forbidden from smoking in any enclosed space therein, whether or not the owner-operator is the direct employer of those carrying on the employment.”

In its analysis, it noted that the term “employee” means “every person who is required or directed by any employer to engage in any employment or to go to work or be at any time in any place of employment” (Cal. Labor § 6304.1(a)) and the term “employer” uses the same broad definition used in the workers’ compensation context, i.e., “[e]very person including any public service corporation, which has any natural person in service” (Cal. Labor Code § 6304). Like these terms, the phrase “place of employment” is broadly defined and means “any place, and the premises appurtenant thereto, where employment is carried on … ” Cal. Labor § 6303(a).

Applying these definitions, the AG first found that “where, for example, a business owner-operator performs all of his or her own services–without utilizing the services or assistance of any compensated employees on any occasion–that owner-operator would fall outside the definition of ’employer’ because he or she does not have ‘any natural person in service,’ and that business location would similarly fall outside the definition of “place of employment” because no “employment is carried on” there. Under these narrow circumstances, then, the Section 6404.5 smoking prohibition would not apply.

It went on, however, to consider whether individuals directly employed by someone else may be carrying out their employment on the owner-operator’s premises. The AG noted that the Occupational Safety and Health Appeals Board (“OSHA”) previously ruled that both primary and secondary employers must provide a safe workplace to the employees, relying on California Labor Code § 6400 which requires that “[e]very employer shall furnish employment and a place of employment that is safe and healthful for the employees therein,” citing In the Matter of the Appeal of: Labor Ready, Inc., Employer, 2001 WL 575152 (Cal. O.S.H.A., May 11, 2001); In the Matter of the Appeal of: Strategic Outsourcing, Inc., Employer, 2011 WL 5016849, at 3 (Cal. O.S.H.A., Sept. 16, 2011); see also In The Matter of the Appeal of: Kelly Services, Employer, 2011 WL 2881536 (Cal. O.S.H.A., June 15, 2011), at 2. It was persuaded that, for purposes of Section 6404.5, “the owner-operator of a particular business need not be the primary employer of persons working on the business premises for those premises to be characterized as a ‘place of employment.’ It is enough that the business location is a ‘place . . . where employment is carried on,’ even if the workers are directly employed by someone else and only secondarily employed by the owner-operator.”

Other Sources: O.S.H.A.
Photo: Fried Dough, Taken December 3, 2011 – Creative Commons