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| General Contractor Required to Pay Employees of an Unlicensed Sub
July 6, 2009
Last Monday, June 29, a California Court ruled that general contractors are liable for the obligations of their unlicensed subcontractors and ordered a general contractor in San Bernardino County to pay wage claims filed by six laborers employed by its unlicensed subcontractor, Sanders Construction Company v. Cerda, et al.
The Facts
A general contractor hired a subcontractor to install drywall in the construction of a hotel. The subcontractor hired six laborers to perform the work. The GC agreed to pay the sub a contract price, including labor and materials, and the subcontractor was to then pay its laborers. After a few months of work and payments by the GC to the sub, the GC then discovered that the subcontractor's license had expired before the work had begun. The GC nonetheless continued to work with the sub to complete the drywall work, and believed it had no obligation to pay the workers because it was paying the sub.
Later, after the workers (and the sub) stopped working on the project, the six workers filed claims with the state Labor Commissioner for wages, interest, and waiting-time penalties. The hearing officer decided that by hiring the unlicensed sub, the GC effectively became the "statutory employer" of the sub's workers under Labor Code Section 2750.5, and awarded wages and interest to the laborers.
The Law
The general contractor appealed to the San Bernardino Superior Court, and then to the California Court of Appeal. Despite the GC's argument that it had no ability to verify the wages paid or owed and no way to control hours or rates of pay, the general contractor lost in all courts. The courts relied on precedent set by previous cases in determining that the employees of an unlicensed subcontractor are the statutory employees of the general contractor who hires the unlicensed sub. The appellate court disagreed with the GC's legal argument that Labor Code Section 2750.5 only applies to cases involving worker's compensation and unemployment benefits, and it cited public policy reasons underlying application of Section 2750.5 to claims involving unpaid wages. In the end, the appellate court decided that the general contractor owed the six laborers their unpaid wages, plus interest and waiting-time penalties.
Impact on Contractors
This case is a stark reminder of the importance for contractors to take steps to ensure that the subcontractors they hire are duly licensed to perform the work. In addition to the obligation to pay unpaid wages to an unlicensed subcontractor's workers, the court's decision advises that the general contractor essentially becomes responsible for all of the unlicensed sub's obligations, including the payment of employment taxes, employee social insurance contributions and employee pension funds. This case makes it clear that the failure to hire a licensed subcontractor can be a costly mistake, even where the general contractor dutifully pays the subcontractor.
When hiring subcontractors, make sure they have a proper license. This seemingly minor oversight can create future liability and be incredibly costly if disputes later arise.
Contact:
David Van Dam
Orange, California
714.634.2522
dvandam@wfbm.com
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Related Practice Areas: Construction Litigation
Related Attorneys: David Van Dam
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