California Appellate Court Holds That A General Contractor Is Responsible For Paying Its Unlicensed Subcontractors Employees Wages

California Appellate Court Holds That A General Contractoris Responsible for Paying Its Unlicensed Subcontractors Employees Wages
By William C. Last, Jr.

Attorney at Law

In a case entitled Sanders Construction Co. Inc. v. Cerda (June 2009), a California Appellate Court held that the employees of an unlicensed subcontractor are “statutory employees” of the general contractor. As a result, the general contractor was liable for the unpaid wages that were due to the unlicensed subcontractors employees.

In this case Sanders Construction Co., Inc. (Sanders) entered into a subcontract with Humberto Figueroa Drywall Company (Humberto). During the course of construction Sanders learned that Drywall was not a licensed contractor. After learning that Drywall was not licensed Sanders allowed Drywall to complete its subcontract scope of work. Martin Cerda was an employee of Drywall who was not paid his wages. Cerda and five other employees of Humberto filed claims against Sanders with the state Labor Commissioner, seeking wages, interest, and waiting-time penalties.

The hearing officer found that Humberto had told the claimants they would be paid by Sanders while Sanders considered Humberto, who was being paid for labor and materials, responsible for paying the claimants. The hearing officer ruled that under section 2750.5 of the Labor Code, Humberto and the six employees were deemed to be employees of Sanders. The Labor Commissioner awarded the employees their wages and interest but denied waiting time penalties. The Labor Commission denied Humberto’s claim on the grounds that he was acting as an independent contractor and was barred from recovery by Business and Professions Code section 7031.

Sanders filed appeals in the superior court, challenging the six awards by the Labor Commissioner for wages and interest. The superior court found in favor of the employees adopting the reasoning of the Labor Commissioner. The superior court awarded respondents their wages, interest, and waiting-time penalties. Sanders then appealed to the appellate division of the Superior Court which modified the judgment to eliminate the waiting time penalties. The case was then reviewed by the Court of Appeals.

The Court of Appeals Sanders primarily reviewed one appellate court decision and three statutes. The primary statute is Labor Code section 2750.5 which provides in applicable part:

“There is a rebuttable presumption affecting the burden of proof that a worker performing services for which a [contractors'] license is required ... or who is performing such services for a person who is required to obtain such a license is an employee rather than an independent contractor...

“... any person performing any function or activity for which a [contractors'] license is required ... shall hold a valid contractors' license as a condition of having independent contractor status.

“For purposes of workers' compensation law, this presumption is a supplement to the existing statutory definitions of employee and independent contractor, and is not intended to lessen the coverage of employees under Division 4 and Division 5 [concerning workers' compensation (§ 3200 et seq.) and safety in employment (§ 6300 et seq.) ].”

The other applicable statutes concern the contractor licensure. The first statute is Business and Professions Code section 7031, subdivision (a), prohibits legal action by an unlicensed contractor:

“(a) ... no person engaged in the business or acting in the capacity of a contractor, may bring or maintain any action, or recover in law or equity in any action, in any court of this state for the collection of compensation for the performance of any act or contract where a license is required by this chapter without alleging that he or she was a duly licensed contractor at all times during the performance of that act or contract, regardless of the merits of the cause of action brought by the person, ...”

The second statute is Business and Professions Code section 7053 which limits the application of section 7031: “... this chapter does not apply to any person who engages in the activities herein regulated as an employee who receives wages as his or her sole compensation, does not customarily engage in an independently established business, and does not have the right to control or discretion as to the manner of performance so as to determine the final results of the work performed.”

Sanders asserted that Labor Code section 2750.5 only applied to workers’ compensation and unemployment benefit cases. The Sanders court held, however, that it also applied to unpaid wages. The court noted that one of the aims of the statute was to discourage off-the-books arrangements. The Sanders court relied on an earlier appellate court decision (Hunt Building Corp. v. Bernick (2000) 79 Cal.App.4th 213, 220, 93 Cal.Rptr.2d 883) which held that “pursuant to the plain language of Labor Code section 2750.5, an unlicensed subcontractor may not be an independent contractor but is instead deemed a statutory employee of the general contractor. (State Compensation Ins. Fund v. Workers' Comp. Appeals Bd. (1985) 40 Cal.3d 5, 15, 219 Cal.Rptr. 13, 706 P.2d 1146.)”

Conclusion

This case makes a general contractor responsible for the wages of his unlicensed subcontractors. Earlier cases imposed liability for workers’ compensation coverage and unemployment insurance for such employees on the general contractor.

Clearly, a general contractor must review the license status of every prospective subcontractor and of their subcontractors. Subcontracts should include the subcontractor’s license number. If a subcontractor’s license is terminated or suspended, the subcontractor and its employees must be immediately barred from the job.

Doing so is particularly important if the general or upper-tier contractor does not carry workers compensation insurance. Recent California appellate and Supreme Court cases have rendered decisions that make it clear that the current public policy is that unlicensed contractors will not be compensated for their work. Under Business and Professions Code section 7125.2 a contractor’s license is automatically suspended if he is required to but does not have workers’ compensation insurance. Wright v. Isaak (2007) 149 Cal.App.4th 1116, 58 Cal.Rptr.3d 1. Arguably at least, this statute can be triggered by having an unlicensed subcontractor.

While the Labor Commission rejected Humberto’s claim for wages as a statutory employee, that rejection was based on a finding that he had held himself out as a licensed contractor. If he had never made that representation, he might well have recovered wages. In State Compensation Insurance Fund v. Workers Compensation Appeals Board (1985) 40 Cal.3d, 219 Cal.Rptr 13, the California Supreme Court held that an unlicensed subcontractor was deemed an employee and entitled to workers’ compensation coverage from the person who engaged him at least so long as the subcontractor had not represented that he was licensed.