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This is an often discussed topic, but one that bears repeating periodically.  One result of the recession was not only less work, but less money and thus less capacity to slug out disputes.  Now with the improvem ent of the economy and more work - hence more money in circulation - we are also seeing more litigation. 

The Law.  By California state law, employers are required to carry workers' compensation insurance for employees - even if you only have one employee or a "temporary" employee (such as in a day worker from the curb).  For those contractors who do not have any employees, they are required to submit an Exemption from Workers' Compensation form to the Contractors State License Board.  (But note contractors with a C-39 roofing classification are not eligible for any exemption from workers' compensation.)

This Exemption (which is noted on the CSLB website for each contractor who files one) certifies that under penalty of perjury the licensee does not employ anyone in a manner that is subject to the worker's compensation laws of California.

Civil Dispute Perils.  Here is where it can get tricky.  If you really have employees who should be covered by your workers' compensation but are not, you are considered an unlicensed contractor by operation of law - see Business and Professions Code Section 7125.  "By operation of law" means no notice, no warning; it is an almost metaphysical occurrence.  You are unlicensed.

And it only gets worse.  Once unlicensed, under the separate Business & Professions Code Section 7031 an unlicensed contractor not only does not have standing to be in court ("...to bring or maintain any action, or recover for collection...") but:

"a person [the contractor's client] who utilizes the services of an unlicensed contractor may bring an action in any court....to recover all compensation paid to the unlicensed contractor for performance." [emphasis added]

This means that if you are found to be unlicensed for any part of the work - even one day - you could lose automatically in a lawsuit, regardless of how good your work was.  And even worse, you would be required to pay back any monies previously paid by the client. 

This "disgorgement" can be and is draconian.  I have seen this requested in a $500,000 job that, with the exception of a dispute over a $3,000 change order went well.  While in this case, the client did not get $497,000 back from the contractor, he might have. 

And State Sanctions Also.  Not only can you be found as an unlicensed contractor by operation of law in civil disputes, but you can also be faced with penalties for 1) not having coverage, and 2) premium fraud.  In addition, your license can be suspended. 

And Even More State Action.  The CSLB is now also taking action by issuing Stop Orders to contractors that are found to not have workers' compensation insurance or falsely claimed to be exempt from the insurance requirement. 

In addition to administrative citations for filing false exemptions, local District Attorney offices are also issuing licensees Notices to Appear in Superior Court to answer to criminal charges.  (Failure to comply with a Stop Order is a misdemeanor.)

The Moral.  While admittedly there is only so much one can do in this life, be knowledgeable and proactive about your legal rights and responsibilities.  Use labor pools.  And should you find yourself in homeowner/contractor dispute and have this kind of problem, immediately inform your attorney of any concerns you may have regarding workers' compensation. 

A New Twist Regarding Subcontractors.  A general contractor client of mine - licensed, properly exempt - was recently involved in a variation of the above theme.  His subcontractor on the job claimed to be exempt but in fact had employees.  Thus, by operation of law, the subcontractor was an unlicensed contractor.

If the subcontractor was unlicensed, he then automatically becomes an employee of the general contractor.  Because of this, the ax fell on the neck of the general contractor.  He had also - and properly - claimed exemption from workers' compensation.  But he now had "employees" but no workers' compensation insurance.  Like a falling domino, now he too was operating as an unlicensed contractor.

The Moral.  When working with subcontractors (new or old ones) be sure to check their license status online.  If they claim to be exempt, be sure there are no employees showing up on the job!  Otherwise, something wicked that way comes.

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2012 Annual SFBA NARI Golf Tournament

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