California Supreme Court Rules That Independent Contractors Are Not Excluded From Section 1090’s Conflict Provisions

August 15, 2017

The California Supreme Court ruled on June 26, 2017 in People v. Superior Court of Riverside County that the Government Code prohibition against a public employee or officer’s participation in contracts in which that person has a financial interest also implicates independent contractors who have duties to engage in or advise on public contracts. Government Code section 1090 prohibits public officers or employees from having a financial interest in contracts they made in their official capacity. A violation of that rule can result in contracts being held invalid, as well as liability for the financially interested party. This California Supreme Court decision resolved a split among California courts on the question of whether independent contractors are subject to section 1090.

This case arose when the District Attorney of Riverside County sought to prosecute Dr. Hossain Sahlolbei, an independent contractor surgeon at Palo Verde Hospital, for a violation of section 1090. Palo Verde Hospital is a public entity under California law, and so its officers and employees are subject to Government Code section 1090 limitations. In his capacity as a surgeon for the hospital, Dr. Sahlolbei also served on the hospital’s medical executive committee, advising the board of governors of the hospital on the hospital’s operations. It was undisputed that Dr. Sahlolbei, an independent contractor, was never an employee of the hospital. However, the District Attorney alleged that Dr. Sahlolbei had used his position on the medical executive committee of the hospital to force the hiring of an anesthesiologist at an inflated wage, part of which he pocketed. Dr. Saholbei was charged with grand theft and violations of section 1090. The trial court and appellate court rejected the section 1090 claims, and the issue was taken up by the California Supreme Court to determine whether, as a matter of law, section 1090 was applicable to independent contractors.

Putting great emphasis on past case law and legislative history, the Court determined that an independent contractor falls 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.” In other words, whether a person is called an officer, an employee, or an independent contractor does not matter as much as the actual power he or she holds. Accordingly, the court held that an independent contractor is not by law beyond the reach of section 1090.

The opinion has some important limitations. First, the Court clarified that not all independent contractors are covered by section 1090. Section 1090 liability extends only to independent contractors who have been entrusted with the power to transact on the government’s behalf. For example, a vendor selling paper to a public entity is not barred from advising such entity to buy pens from one of its subsidiaries, since the vendor has no power to contract on behalf of the government. The critical question is whether the independent contractor “was in the position to influence how a public entity spends the public’s money.”

This case resolves an important issue under section 1090, and also provides examples of the types of activities that may fall under the purview of section 1090: outside attorneys, independent contractors providing waste management services, corporate consultants, and, as established by this case, independent contractors providing physician services.

Public entities in California should be mindful of any conflicts that may exist not only for their board members and employees, but also for outside consultants.  Please reach out to us with any questions or concerns about what this means for your entity.