GENERAL CONTRACTOR MAY BE HELD DIRECTLY LIABLE TO THE EMPLOYEES OF ITS UNLICENSED SUBCONTRACTORS FOR THEIR UNPAID WAGES AND INTEREST

The penalties for hiring an unlicensed contractor just became much steeper.  Under the new decision of Sanders Construction Company, Inc. v. Cerda, 09 C.D.O.S. 8357 (2009), the Court of Appeal ruled that the employees of an unlicensed subcontractor were the general contractor’s statutory employees, which obligated the general contractor to pay their wages plus interest.  Thus, the consequences of hiring an unlicensed subcontractor now include:

1. Payment of wages (including interest) of the unlicensed subcontractor’s employees;
2. Worker’s compensation liability for the subcontractor’s employees;
3. Liability to the EDD for unpaid contributions and withholding taxes for its unlicensed subcontractor’s employees;
4. Potentially waiting-time penalties equivalent to up to 30 days’ wages (Labor Code § 203)

"A General Contractor Is the Employer of Not Only Its Unlicensed Subcontractors
But Also Those Employed By the Unlicensed Subcontractors"

Citing a long line of cases, the Sanders court determined that Labor Code § 2750.5 operates to determine conclusively that a general contractor is the employer of its unlicensed subcontractors and their employees.

The general contractor argued that Labor Code § 2750.5 only applies to cases involving worker’s compensation and unemployment benefits.  It also argued that it would be prejudiced because it was unable to verify the unlicensed subcontractor’s employees’ wage claims since the general contractor had no way to verify the wages claimed to be owed, no right to control the hours, rate of pay or any other relevant factor.  The court rejected this argument and found that public policy would not allow "a general contractor to escape liability for the obligations of an unlicensed subcontractor."

The trial court awarded the unpaid employees wages, interest and waiting time penalties.   The penalties were eliminated by the appellate division of the trial court.  However, neither party challenged the elimination of the waiting-time penalties on appeal.  Thus, a contractor who does not pay the wages of its unlicensed subcontractors may potentially be subject to such penalties in the future, particularly given that plaintiffs may argue that Sanders puts contractors on notice that they will be considered the employer of persons who work for an unlicensed subcontractor.

Although a contractor may sue to recover all compensation paid to its unlicensed subcontractor for performance of any construction work,  the subcontractor may "disappear" or have insufficient assets to satisfy a judgment.  It is therefore important for all contractors regularly to check the license status of their subcontractors, particularly in this difficult economy.

This update is intended to provide general information about a new Court decision and should not be relied upon as legal advice.  Copyright 2009 Janette G. Leonidou, Esq., A. Robert Rosin, Esq., Patricia Walsh, Esq. and Lisa D. Wright, Esq., Leonidou & Rosin Professional Corporation (650) 691-2888.