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Who is an “Employee”, and Who May Be Hired, Paid and Treated as an “Independent Contractor” or a “Subcontractor”, Under Labor Code § 2750.5 and California Contractors License Statutes

Employers, including very often Construction Contractors and Subcontractors, often try to classify their workers as “independent contractors” or “subcontractors”, in order to avoid payroll taxes, workers compensation premiums, and avoid other labor law workers’ rights and employer obligations.

However, this is generally very difficult to do under both Federal and State Law.

And, in California, it is especially difficult to do this under State laws specifically governing the construction industry, which has had a history of hiring day laborers and others and trying to avoid treating them as employees.

California Labor Code § 2750.5 contains two presumptions that a worker is an Employee, and not an Independent Contractor, one of which is a Rebuttable Presumption, and one of which is a Conclusive Presumption - or precondition to the existence of independent contractor status - which may not be overcome by any evidence.

“There is a rebuttable presumption affecting the burden of proof that a worker performing services for which a license is required pursuant to Chapter 9 (commencing with Section 7000) of Division 3 of the Business and Professions Code, 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. Proof of independent contractor status includes satisfactory proof of these factors:

  1. That the individual has the right to control and discretion as to the manner of performance of the contract for services in that the result of the work and not the means by which it is accomplished is the primary factor bargained for.
  2. That the individual is customarily engaged in an independently established business.
  3. That the individual's independent contractor status is bona fide and not a subterfuge to avoid employee status. A bona fide independent contractor status is further evidenced by the presence of cumulative factors such as substantial investment other than personal services in the business, holding out to be in business for oneself, bargaining for a contract to complete a specific project for compensation by project rather than by time, control over the time and place the work is performed, supplying the tools or instrumentalities used in the work other than tools and instrumentalities normally and customarily provided by employees, hiring employees, performing work that is not ordinarily in the course of the principal's work, performing work that requires a particular skill, holding a license pursuant to the Business and Professions Code, the intent by the parties that the work relationship is of an independent contractor status, or that the relationship is not severable or terminable at will by the principal but gives rise to an action for breach of contract.

In addition to the factors contained in subdivisions (a), (b), and ( c), any person performing any function or activity for which a license is required pursuant to Chapter 9 (commencing with Section 7000) of Division 3 of the Business and Professions Code shall hold a valid contractors' license as a condition of having independent contractor status. . . . .” (Emphasis added)

Labor Code § 2750.5.

The penultimate paragraph of Section 2750.5, which is the last paragraph of the text quoted above, effectively states that if you hire someone to perform any “function or activity” for which a Contractors License is required by the Contractors State License Law, the employer must prove or establish that the employed person or worker(s) hold a “valid” license legally to perform required that “function or activity” “as a condition of having independent contractor status.”

In other words, if the workers are doing work for which a Contractor’s License is required, and they do not hold - or are not proven by the employer to hold - a “valid contractors license” required to perform that “function or activity”, then as a matter of law those persons are employees, and not independent contractors.

“In other words, under the statute, the presumption of employee status can be rebutted only as to persons who hold a valid contractor's license; the presumption cannot be rebutted as to persons who do not hold a valid contractor's license. (See Mendoza v. Brodeur (2006) 142 Cal.App.4th 72, 77 [47 Cal. Rptr. 3d 310] [presumption that a person who hires an unlicensed contractor is an employer is conclusive].)” (Emphasis added)

Chin v. Namvar (2008) 166 Cal. App. 4th 994, 1004.

The term “valid contractor’s license” is not defined in the statute, but by the law’s reference to Bus. & Prof. Code § 7000 et seq, the Contractor’s State License Law, this presumably means the license must meet all the requirements of the provisions of that Law to be a “valid contractor’s license.”

The statute does not define the term “valid contractor’s license”, but because the law twice references the Contractor’s State License Law _- “Chapter 9 (commencing with Section 7000) of Division 3 of the Business and Professions Code” - it is reasonable to conclude that the alleged independent Contractor’s “License” must be “valid” under all the terms of and meet the requirements and conditions of Chapter 9 (commencing with Section 7000) of Division 3 of the Business and Professions Code, the Contractor’s State License Law.

This interpretation is furthered by the fact that the phrase “valid contractor’s license” has been used repeatedly by the Courts over the preceding decades as meaning one who complies with all the various licensing requirements of “Chapter 9 (commencing with Section 7000) of Division 3 of the Business and Professions Code” . See, e.g. Latipac, Inc. v. Superior Court (1966) 64 Cal. 2d 278, 283-284; Montgomery Sansome LP v. Rezai (2012) 204 Cal. App. 4th 786, 801, fn 12; WSS Industrial Construction, Inc. v. Great West Contractors, Inc. (2008) 162 Cal. App. 4th 581, 593; Wright v. Issak (2007) 149 Cal. App. 4th 1116, 1121-1122, among many others.

If this were not the law, then, for example, a welding subcontractor working as an “independent contractor” doing electrical work could be held to hold a “valid contractor”s license” under Labor Code § 2750.5, simply because he or she holds a valid C-60 Welding Contractor’s license, but not the required C-10 Electrical Subcontractor’s License. Calif. Code Regs. § 832.10.

Or someone holding a valid C-21 Demolition Contractor’s license could be found to hold a “valid contractor’s license” sufficient to independently contract for the installation of fire suppression systems and sprinklers for which a C-16 Fire Protection Contractor’s license would otherwise be legally required! Calif. Code Regs. §§ 832.21, 832.16. Or an “A” Engineering Contractor (Bus. & Prof. Code § 7056) could perform glazing work or install steam boilers. 16 Calif. Code Regs. §§ 832.17, 832.04.

Bus. & Prof. Code § 7055-7059 and 16 Calif. Code Regs. §§ 830-834. .

Consequently, no one without the license required for the particular type of construction being performed by him or her can claim to have “a valid contractor’s license” without having the type of licensure required by these and other provisions of the Contractor’s State License Law, and meeting other requirements for a license in good standing under this statute.

Where a contractor contracts with an unlicensed “independent contractor” or an unlicensed “subcontractor”, or one without a “valid” license for that kind of work, the persons who worked on the job for the unlicensed subcontractor are the employees of both the unlicensed subcontractor and of the general contractor that hired the unlicensed subcontractor, as a matter of law.

“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].)”

“Labor Code section 2750.5 operates to conclusively determine that a general contractor is the employer of not only its unlicensed subcontractors but also those employed by the unlicensed subcontractors. (Neighbours v. Buzz Oates Enterprises (1990) 217 Cal.App.3d 325, 328 [265 Cal. Rptr. 788] (Neighbours); Nick Hagopian Drywall v. Workers' Comp. Appeals Bd. (1988) 204 Cal.App.3d 767, 771–772 [251 Cal. Rptr. 455]; Rinaldi v. Workers' Comp. Appeals Bd. [(1988)] 199 Cal.App.3d [217,] 226–227 [244 Cal. Rptr. 637]; Blew v. Horner (1986) 187 Cal.App.3d 1380, 1384, 1390 [232 Cal. Rptr. 660]; but see Furtado v. Schriefer (1991) 228 Cal.App.3d 1608, 1616–1617 [280 Cal. Rptr. 16] [statutory employee presumption found in Lab. Code, § 2750.5 supplements but does not override the statutory definitions of employee and independent contractor].) Thus, where a ‘subcontractor is unlicensed, . . . liability for the subcontractor's employees will be imposed on the general contractor as a matter of law.’ (Rinaldi v. Workers' Comp. Appeals Bd. (1987) 196 Cal.App.3d 571, 574 [242 Cal. Rptr. 895].) Similarly, a general contractor is liable to EDD for unpaid contributions and withholding taxes for its unlicensed subcontractor's employees. (See Neighbours, supra, 217 Cal.App.3d at p. 328; Tieberg v. Superior Court (1966) 243 Cal.App.2d 277, 280 [52 Cal. Rptr. 33].)” (Hunt Building Corp. v. Bernick, supra, 79 Cal.App.4th at p. 220 Building Corp. v. Bernick, supra, 79 Cal.App.4th at p. 220.)

“Sanders persistently argues that section 2750.5 only applies to cases involving workers' compensation and unemployment benefits. Sanders relies on the public policy considerations expressed in Hunt: “The California Legislature enacted Labor Code section 2750.5 in 1978 … . The Assembly Committee on Labor, Employment and Consumer Affairs reported that the portion of the bill containing Labor Code section 2750.5 would ‘provide criteria for determining whether employers are avoiding payment of their social insurance tax obligations by treating their employees as independent contractors.’ [Citation.] This committee further reported that the enactment of Labor Code section 2750.5 would help end the ‘subterranean economy’ where contractors hire unlicensed subcontractors and pay them in cash, resulting in the ‘loss of large sums in taxes, employee social insurance contributions, and employee pension funds.’ [Citation.]” (Hunt Building Corp. v. Bernick, supra, 79 Cal.App.4th at p. 222 Building Corp. v. Bernick, supra, 79 Cal.App.4th at p. 222.) These same public policy considerations concerning the subterranean economy could apply in the present circumstances. For example, an unscrupulous general contractor could collude with an unlicensed subcontractor to cheat workers hired by the subcontractor out of their wages, plus all the related benefits.

“ [A]lthough we agree that one reason for section 2750.5 is to insure compensation for injured workers, we also recognize it is fundamental that workers be paid. We discern no meaningful distinction exists between being paid wages and receiving other benefits based on wages. In both instances, the same policy reasons militate against allowing a general contractor to escape liability for the obligations of an unlicensed subcontractor. Therefore, we reject this argument by Sanders.” (Emphasis added)

Sanders Construction Co., Inc. v. Cerda (2009) 175 Cal. App. 4th 430, 434-436.

Employers are required to pay wages to employees for labor or services provided, and civil and criminal penalties apply if they are not paid under public policies embodied in other sections of the Labor Code. See Labor Code §§ 201.3, 206, 210, 216, and others.

“Wages” are defined by the Labor Code to mean amounts owed for labor performed by employees, and labor includes “work, or service whether rendered or performed under contract, subcontract, partnership . . . or other agreement if the labor . . . is performed personally by the person demanding payment.” Labor Code § 200(a)&(b).

A minimum wage is provided in Labor Code §§ 1197, 1182.11, et al.

San Francisco also has a minimum wage. San Francisco Administrative Code, Chapter 12R. As do other California cities.

Other California statutes also attempt to address the “underground economy” in the construction industry, and the practices of some contractors to underpay or avoid other obligations to their workers.

Contractors’ subcontracts thus must be in a sufficient amount to provide legally required compensation and other obligations as to the subcontractor’s workers that are established by Local, State and Federal wage laws and regulations. Labor Code § 2810.

This latter statute, like Section 2750.5, was aimed at the “underground economy” and “those lawless enterprises” and “unscrupulous contractors and the entities which employ them” “which has resulted in widespread sub-minimum wages and working conditions”. Castillo v. Toll Bros., Inc. (2011) 197 Cal.App.4th 1172, 1193-1194.

And Labor Code § 1021.5 - adopted in 1982 - prohibits any licensed contractor from entering into contracts with persons as an “independent contractor” for work for which a contractors license is required under Bus. & Prof. Code §§ 7000 et seq, where the employer does not overcome the presumptions of employee status in Labor Code § 2750.5.

Contractors are also subject to possible mandatory license suspension or other disciple under the Contractors State License Law for violating wage and hour laws. Bus. & Prof. Code §7110.5

While a worker himself probably may not sue a private property owner to recover his wages. Workers Compensation remedies and other compensation due under the law and Labor Code § 2750.5 (the law on this point is not yet clear) , he may sue the contractor who hired him for those wages.

Therefore, where the employer improperly treats a worker as an “independent contractor” or unlicensed “subcontractor”, rather than an employee under the presumptions of Labor Code § 2750.5, the contractor/employer potentially subjects itself to government Civil and Criminal penalties and a private lawsuit by the worker for violations of the Labor Code, such as minimum wages, wage and hour laws and numerous other statutes.

Also, a contractor who uses such an unlicensed “subcontractor”, even if the hiring contractor is itself properly licensed, may not use the courts - either in a breach of contract case or in a mechanics lien action, etc. - to recover payment for sums/charges attributable to the work of a “subcontractor” that lacked proper licensure. MW Erectors, Inc. v. Niederhauser Ornamental & Metal Works Co., Inc. (2005) 36 Cal. 4th 412, 422; Loving & Evans v. Blick (1949) 33 Cal.2d 603, 612–613; Holm v. Bramwell (1937) 20 Cal. App. 2d 332.

Furthermore, in addition to possible prison terms, civil suits and penalties and restitution orders, grossly under-reporting or failing to report wages for the “independent contractor” or unlicensed “subcontractor” to the contractor’s Worker’s Compensation insurer can also result in the automatic suspension of the builder’s contractor’s licence under section 7125.2 (a) of the Contractor’s State License Law.

And if the license is so suspended by operation of law, the person who hired the contractor or subcontractor can bring a legal action per Bus. & Prof. Code § 7031 (b) for a refund of all money paid to that Contractor or subcontractor!

Thus, the potential consequences are quite serious for a builder who hires unlicensed construction workers and fails to treat and pay them as the employees that the law presumes them to be.

N.B. The contents of this Article do not constitute legal advice or create an attorney-client relationship, and you may NOT rely on it without seeking legal advice regarding your particular, unique situation from a competent California Construction lawyer or Employment Law attorney. Please also note that factual situations vary, and statutes, regulations and case law are frequently changing and evolving, and these materials thus also may be or become outdated or incorrect. For further information on this topic and how the current law may apply to your particular contract, job and issues, Contact Us via email, by phone at (415)788-1881, or visit our website at www.wolfflaw.com for other contract information. © 2014, George W. Wolff , all rights reserved