Regulations

Unlicensed contractors are a hidden risk for California homeowners

Vet your network before referring contractors to your clients

Real estate agents are often advised to create a network of contractors that they can share with clients. In California, however, that referral network could cause problems for new homeowners.

When a California homeowner hires a contractor to work on a home, the contractor is ordinarily considered an independent contractor. This legal status means the homeowner generally will not be liable for accidents or injury to the contractor or any workers, unless the homeowner directly contributed to the incident.

However, a homeowner may be tempted to hire an unlicensed contractor to save money on a home construction project. This is risky. The interplay between several sections of the California Labor Code may result in the inadvertent transformation of the contractor or its worker into an employee of the homeowner. This change to the employment relationship opens up the homeowner to a potential lawsuit for personal injuries. Here’s how this can happen, and how your clients can avoid it.

An appropriate contractor’s license

The California Contractors’ State License Law (“License Law”) was enacted to protect the general public from incompetence and dishonesty by those who provide construction services in this state. The law provides a comprehensive licensing scheme that requires all contractors doing business in California to possess a valid contractor’s license unless they meet a few narrow statutory exceptions. There are more than 40 types of licenses, primarily dealing with electrical, roofing or plumbing issues. A contractor must have the license appropriate to the work to be done. A contractor with one license cannot use that license for an activity that requires a different license. A “contractor” is broadly defined and determined by the conduct, activity or work that a person undertakes or offers to undertake. An inquiry to the Contractors State License Board may confirm whether a contractor is appropriately licensed.

The License Law applies to the provision of “home improvement goods.” These are goods that are to be so affixed to real property as to become a part of real property. Examples include carpeting, fencing, air conditioning and heating equipment, and termite extermination. The law applies to gardeners, including tree trimmers and those who perform tree removal. The law also applies to interior decorators, painters and an installer of sprinkler systems. The License Law is not limited to the structure of the home itself. It extends to work on driveways, swimming pools, hot tubs, porches, garages or land that is adjacent to the home.

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The License Law does not apply to any construction, alteration, improvement or repair of personal property. Therefore, the repair of televisions and computers does not require a license. The law also does not apply to the sale or installation of items that are finished products, materials or merchandise and that will not become a fixed part of the home. For example, a supplier who sells a patented prefabricated kitchen will not be required to have a contractor’s license. Similarly, a supplier who delivers finished cabinets to a home and performs no installation work is not required to have a license. The law also does not apply to those who engage in cleaning work, such as residential cleaning and chimney sweeping.

The homeowner’s liability

Generally, all businesses in California that have employees must purchase a workers’ compensation insurance policy or be self-insured. The policy provides covered employees with medical and wage replacement benefits for injuries that arise from workplace accidents.

Ordinarily, a worker who sustains an on-the-job injury may only seek damages within the workers’ compensation framework. It is a no-fault system, meaning that injured employees need not prove the injury was someone else’s fault in order to receive workers’ compensation benefits for an on-the-job injury. In exchange for these benefits, the worker relinquishes his right to sue his employer for the tort of negligence.

For example, a homeowner hires a cleaning company to clean a home. A worker hired by the contractor injures his back while lifting a heavy object on the job. That worker will be covered for medical expenses and lost wages through the contractor’s workers’ compensation. The worker will be unlikely to prevail in any claim against the homeowner. This is because the cleaning company is an independent contractor of the homeowner, and the injured worker is an employee of the cleaning company. Generally, when an employee of an independent contractor is injured on the job, that employee cannot sue the entity that hired the contractor for work (Privette v. Superior Court). The rationale for this is that workplace injuries are covered by workers’ compensation insurance, the cost of which is included in the contract price paid by the hiring entity. The cleaning company compensates its employee for his injury by way of the workers’ compensation system, and that worker has no recourse against the landowner.

But what if the homeowner hires an unlicensed contractor to perform work that requires a license, and the contractor or its worker is injured? There is a rebuttable presumption that an unlicensed person who performs work for which a license is required is an employee and not an independent contractor. The unlicensed person may claim benefits as an employee under the workers’ compensation statute. But an employee may not be covered for workers’ compensation because they have not worked a certain minimum number of hours, or because the employer has not secured appropriate insurance coverage.

In that case, the worker is no longer limited to workers’ compensation for his damages. He may sue the employer (homeowner) directly for significant medical costs and a lifetime of inability to work. (Rosas v. Dishong (1998) 67 Cal. App. 4th 815.)

The employer (homeowner) carries the burden of determining whether a worker is licensed. The homeowner may be liable even if he or she was unaware the contractor was unlicensed. Homeowners often are uninformed about the consequences of hiring unlicensed contractors and assume their homeowners insurance policy covers injury to unlicensed contractors. A homeowner should confirm he has sufficient homeowners insurance to protect against an unlicensed contractor.

Better yet, the homeowner should hire only a contractor who holds a license appropriate to the work to be performed. That way, the homeowner avoids unwittingly becoming an employer, and a target of a personal injury lawsuit.

If you sell real estate in California and refer contractors to your clients, make sure that any contractors you recommend are fully licensed.

Julian Pardo de Zela is an attorney in the San Jose, California, office of Ropers Majeski Kohn & Bentley.

Email Julian Pardo de Zela.