Contractor Who Fails To Obtain Workers’ Comp Insurance Is Legally Unlicensed
July 17, 2007
All employees of contractors in California are required to be covered by workers’ compensation insurance (“WCI”); California Business and Professions Code Section 7125 et seq. A residential remodeling contractor was found to be legally unlicensed because he failed to obtain WCI for his employees during a contract. His failure to pay WCI resulted in an automatic suspension of his license, and as a result, he had to pay back all monies that he had been paid by the homeowner for the contract, even though there was nothing wrong with his work.
A contractor on a residential remodeling contract filed suit against a homeowner for breach of contract for payments owed. The homeowner counter-sued that the contractor was unlicensed, because he failed to pay WCI when required to. The result is that not only could the contractor not recover for compensation he claimed he was owed, but was also required to reimburse to the homeowner all payments already made; California Business and Professions Code Sections 7031(a) and (b).
The (Santa Cruz County) trial court found that the contractor’s license was automatically suspended during the period of the contract work because he failed to obtain WCI. Specifically, during the period he was working on the house and using five employees, the contractor underreported payroll to the State Compensation Insurance Fund, thereby failing to obtain WCI for those employees. The trial court held this failure to obtain WCI resulted in the automatic suspension of the contractor’s license under California Business and Professions Code Sections 7125.2.
CA B&P 7152.2 states in pertinent part: “…The failure of a licensee to obtain or maintain workers’ comp insurance coverage, if required, shall result in the automatic suspension of the license by operation of law…” An unlicensed contractor is not allowed to collect on a construction contract. Moreover, an unlicensed contractor is required to pay back all monies paid to a consumer under a contract, no matter how well or how poorly the contractor’s work was done.
The contractor appealed the decision. The California Court of Appeal, Sixth District, in Wright v. Issak No. H030399, 2007 (Mar. 20, 2007) WL 831716 agreed with the lower court decision under the following rationale. The statute (CA B&P 7152) contemplates two grounds for license suspension: failure to obtain compensation WCI or failure to maintain WCI. The Court of Appeal stated that a case about underreporting payroll is, by definition, a failure-to-obtain case, and by operation of law, the contractor was effectively unlicensed the day that he failed to obtain WCI after he was required to, or the day any employee worked on the job without WCI.
An important side issue of Wright v. Issak illustrates a common risk that homeowners seemingly take on without understanding the full ramifications. A homeowner who hires an underreporting contractor whose employee is subsequently injured at the homeowner’s property may be liable for that employee’s injuries. The small amount of money saved by a homeowner using an underreporting contractor seems obviously absurd for the potential huge risks of paying a person a lifetime of compensation for injuries suffered on one’s property.
Wright v. Issak once again illustrates the importance for people to be careful about whom they are referring to their clients. The temptation to underreport payroll to save money for the bottom line is a common problem within the construction community. The only way to protect yourself and your clients is to perform due diligence and carefully review the contract and the background of the contractor prior to execution.
Tags: Contractor Laws, Contractor Licensing, Real estate
February 9, 2007
Unlicensed contractors have the riskiest of occupations. That is, they risk the legal ability to collect compensation for work they perform, and more importantly, they risk the ability to keep the money they have been paid. Why is this you say? Well the California legislature has made a point to prevent unlicensed individuals from doing business in this state by not offering them any judicial help to recover compensation even if the consumers strategically were lying in wait to prey on the unlicensed individuals. California Business & Professions Code Section 7031(a) prevents an unlicensed contractor from collecting on debts owed to them by consumers under contracts due to their unlicensed status. Similarly, B&P Sec. 7031(b) gives consumers who have contracted with unlicensed contractors the ability to sue for restitution or reimbursement of all monies paid to the unlicensed contractor for ‘any act or contract.’ This harsh and draconian rule applies even if the unlicensed individual has perfectly built you the Taj Mahal.
The California Supreme Court has a long history of consistently supporting the legislative determination that unlicensed contractors ‘work for free in this state.’ California courts have consistently held that the licensing status of all contractors and subcontractors is a condition precedent to recovering compensation for contracted work in this state.
Most recently the California’s Highest court held in MW Erectors v. Neiderhauser (2005) 36 Cal. 4th 412, that a sub-subcontractor (MW Erectors) who sued a subcontractor (Neiderhauser) for non-payment of more than $1.3 million for steel work performed under two sub-contracts on a private hotel project (California Grand Hotel at Disneyland) was barred from recovering their compensation because they were unlicensed when they entered into the subcontracts. Neiderhauser argued that MW’s payment claims were barred under 7031(a), because MW was unlicensed when the sub-contracts were signed and was not licensed for the first eighteen days of the year-long project in which it was involved under one of the contracts. MW performed their obligations proficiently but was barred from recovering their $1.3 million by the Court because they failed to abide by B&P Sec. 7031. Sound unfair? Write your state senator or assemblyperson and tell them you think so.
Recently, my firm represented a homeowner in a binding arbitration with this issue dominating the outcome. The homeowner stopped paying his contractor because he felt the contractor was not properly building his house, i.e., a number of defective components began to manifest themselves during construction which were denied by the contractor. The contractor filed a mechanic’s lien and sued our homeowner client for breach of contract and foreclosure of the lien. Our client cross-complained for defective construction and breach of contract. We began investigating the contractor’s background and found that he had obtained and maintained his contractor’s license by fraud. In essence, he had obtained his license by the use of sham RMOs (Responsible Managing Officers) – other licensed individuals who have an ownership interest in a construction corporation and who supervise the day-to-day operations of the contracting business. Needless to say, the RMOs this contractor had vouch for him never set foot on his projects; which is a violation of the statute. Thus, we were able to prove that he did not have a valid license, and we successfully prevailed under a B&P Sec. 7031(b) claim. Our client received approximately $400,000 in reimbursement of monies paid to the contractor and another $200,000 in attorney’s fees from this unlicensed individual. Ouch!
The lesson here is that it’s important to recognize this body of law when referring individual contractors to your clients, especially if they end up in a dispute with a contractor. A quick check of a contractor’s license may give you or your client a significant upper hand in a contract dispute if the facts show the contractor is not validly licensed. B&P 7031(b) is ultimate remedy against an unlicensed contractor and will give a consumer a judicial windfall by enabling them to collect all of the money paid to the contractor as a penalty for them not being licensed. (The status of a contractor’s license can be viewed at the California State Licensing Board’s website at www.cslb.ca.gov.)
Tags: Contractor Laws, Contractor Licensing, Legal, Real estate