Contractor License And Workers Compensation Insurance – Form Over Substance?

One issue which is arising more regularly in litigation involves otherwise licensed contractors who, do not have Workers’ Compensation Insurance. This pitfall can have disastrous consequences to the contractor party. Unless the contractor is exempt from having Workers’ Compensation Insurance, its failure to maintain such insurance results in an automatic suspension of its license (California Business & Professions Code Section 7125.2).

California Business & Professions Code section 7125.2 states in pertinent part:

“The failure of a licensee to obtain or maintain workers’ compensation insurance coverage, if required under this chapter, shall result in the automatic suspension of the license by
operation of law in accordance with the provisions of this section…”

The key elements here are (1) obtain or maintain, basically requiring the contractor to provide workers’ compensation insurance and then a duty to maintain the coverage. The other important element noted above is (2) the fact that the suspension of the license occurs by “operation of law,” meaning that the contractor does not have to be caught. If/when a contractor is caught without workers’ compensation insurance, the suspension of the license will occur automatically, retroactive to the date of non-coverage.

There are two key cases involving a contractor’s failure to maintain workers’ compensation insurance that illustrate the need to obtain and maintain such insurance. Wright v. Isaak (2007) 149 Cal.App.4th 1116 and Loranger v. Jones (2010) 184 Cal.App.4th 847.

Wright involved the automatic suspension of a contractor’s license for failure to obtain workers’ compensation insurance. The court in Wright concluded that a contractor intentionally and significantly underreported payroll to the State Compensation Insurance Fund to avoid the obligation to obtain workers’ compensation insurance, thus triggering the automatic suspension under Section 7125.2 by operation of law.

In Loranger, the court considered whether a licensed contractor who had unknowingly used an unlicensed subcontractor was subject to Section 7031 sanctions because of an automatic suspension under Section 7125.2. Unlike Wright, the court concluded that under its set of facts there was no automatic suspension of the contractor’s license.

Loranger, the contractor, had sued the homeowners for failure to pay Loranger for construction work at their home. The homeowners cross-complained for breach of contract, arguing the work was not performed in a good and workmanlike manner. At trial, it was determined Loranger did not check the license status of the electrical subcontractor who had been unlicensed for a time. It was also determined Loranger used unlicensed individuals to help with some construction work at the residence.

At the close of Loranger’s case, the homeowners moved for directed verdict, citing Wright. The homeowners argued Loranger hired unlicensed subcontractors, these subcontractors were de facto employees and, because workers compensation was not afforded for those subcontractors, Loranger’s license was therefore automatically suspended. The homeowners further argued this barred Loranger from recovery and required Loranger to disgorge the monies already paid to Loranger for the construction work. The trial court concluded there were insufficient grounds for directed verdict because Loranger had testified he was licensed and insured and thus, denied the homeowners’ motion.

The homeowners argued on appeal Loranger’s use of an unlicensed subcontractor caused its license during construction to be automatically suspended, and Loranger therefore forfeited the right to maintain an action for damages. Finding Wright distinguishable, the appellate court rejected the homeowners’ arguments, stating “the limited facts before the court strongly suggest the contractor in Wright did not have and never had a policy of workers’ compensation insurance, that he intentionally underreported the wages he was paying and that he did so to be excluded from the requirement of obtaining such insurance.”

Contractors need to abide by and closely adhere to the requirement for Workers’ Compensation Insurance. This type of compliance can be complicated and contractors should get legal advice when making such decisions.

ABOUT THE AUTHOR: David Ramirez is a Senior Counsel at TYSON & MENDES, LLP, and primarily represents clients in complex litigation, including construction defect, insurance law, property disputes, and product liability. Mr. Ramirez was recently named as a “Top Lawyer” in California for “Litigation” in the March 2014 issue of American Lawyer Media.

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