Independent Contractors & Consultants Acting on Government Contracts May be Subject to Conflict of Interest Laws
By Gary W. Schons and Michael Maurer
Independent contractors and consultants who engage in or advise on public contracts may be subject to the conflict of interest laws under Government Code section 1090, the California Supreme Court ruled last month. Section 1090 prohibits public officers and employees from having a financial interest in the government contracts they act on. The Court’s ruling expands the class of individuals to whom section 1090 applies to include independent contractors.
In People v. Superior Court (Sahlolbei), Palo Verde Hospital, a public hospital, contracted with a surgeon, Hossain Sahlolbei, to serve as co-director of surgery and on the hospital’s medical executive committee. Sahlolbei recruited and negotiated a contract with an anesthesiologist, Brad Barth, for $36,000 per month and a $10,000 relocation fee. Sahlolbei subsequently pressured the hospital board to hire Barth for $48,000 per month and a $40,000 relocation fee. He allegedly threatened to have the medical staff stop admitting patients if the board did not approve the contract. Sahlolbei then instructed Barth to deposit the payments into Sahlolbei’s bank account and paid Barth the negotiated $36,000 monthly salary and the $10,000 relocation fee, but retained the difference. The Riverside County District Attorney charged Sahlolbei with grand theft and violating section 1090.
In Sahlolbei, the trial court dismissed the Government Code section 1090 charges and held that independent contractors cannot be held criminally liable under section 1090 because an independent contractor does not meet the definition of “employee” under the common law test. The Court of Appeal affirmed the dismissal.
The Supreme Court reversed the lower court decisions and held that independent contractors may be subject to section 1090. The Court concluded that the Legislature did not intend to categorically exclude independent contractors and consultants from the scope of section 1090. Since section 1090 is designed to prohibit public officials from becoming personally financially interested in the contracts they form, the courts, when reviewing conflict statutes, should have looked beyond “[l]abels and titles.” Thus, the form of employment – whether an individual is an employee or independent contractor – is irrelevant for determining whether conflict of interest laws apply.
The Supreme Court held that “independent contractors come within the scope of section 1090 when they have duties to engage in or advise on public contracting that they are expected to carry out on the government’s behalf.” Whether section 1090 liability for independent contractors applies depends on the function and extent of involvement in contracting decisions. A contractor is involved in the “making” of a contract when it includes “planning, preliminary discussions, compromises, drawing of plans and specifications and solicitation of bids.” The Court rejected any distinction between civil and criminal cases when applying section 1090. The Court also declined to adopt a “considerable influence” standard that appellate courts had previously applied. Under that standard, independent contractors fall within the scope of section 1090 when they hold positions that can exert “considerable influence” over public contracts.
As a result of Sahlolbei, public agencies must now assess and reassess whether independent contractors and consultants are subject to section 1090. In addition, independent contractors and consultants may be precluded from “additional work” on projects under a contract they were involved in “making” due to a financial conflict of interest arising under Sahlolbei.
Originally published on PublicCEO.com on July 25, 2017. Republished with permission.
Note: This article originally appeared on the now-defunct BBKnowledge blog, where Best Best & Krieger authors shared their knowledge on emerging issues in public agency law.
