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
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3 responses so far ↓
1 Kevin Boer, Realtor, Alain Pinel Realtors // Jul 17, 2007 at 8:34 pm
Hi David,
It’s fairly straightforward to check if a contractor is licensed. It’s also fairly straightforward to check if a contractor pays workman’s comp. How in the world do you check, however, if a contractor is underpaying workman’s comp?
2 blanca // Oct 31, 2007 at 8:39 am
What happens when the contractor’s license loses his bond in the when he is working on your home. His license is now suspended because he has no bond. In the meantime, when we signed the contract, everything in the Contractor’s website was fine. We have been pressured to pay in advance, although we have not, this contractor now has citation pendings on the Contractor’s website. He want us to let him complete the job under another license, but that other license shows several pending citations
3 TJ // Nov 22, 2007 at 9:33 pm
I know a landscaper who has been using his Dad’s license number for almost 20 years, and uses illegal workers to avoid payroll taxes and workers comp insurance. Who can I report his activites to?
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