There is a very strong public policy in favor of employers maintaining workers’ compensation insurance. This has become even more prominent in the construction industry, where construction by its very nature is dangerous, no matter what the trade.
Recognizing this, the legislature enacted Business & Professions Code Section 7125, which requires contractors to purchase workers’ compensation insurance and provide proof to the Contractors State License Board (CSLB) at the time a license is issued or renewed. Section 7125.2 of the B&P Code provides that failure of a licensee to obtain or maintain workers’ compensation insurance coverage will result in the automatic suspension of the license.
Recently, the CSLB concluded that many contractors must not be in compliance with this requirement, noting that more than 50 percent of licensees claim to have no employees and therefore claim an exemption. To increase compliance, the board announced it would conduct random checks of licensees who bid on public works projects in classifications most likely to require employees, but who hold workers’ compensation exemptions.
The board’s purpose is to encourage contractors who are improperly claiming an exemption to obtain workers’ compensation coverage. But the potential pitfall for the contractor, who is found to be improperly claiming an exemption, is that the contractor’s license is suspended by operation of law.
The impact could be devastating. If the contractor is actively working on a public works contract, that contract is voided as a matter of law and the contractor cannot sue for payment. More importantly, the public entity or general contractor could force the contractor or subcontractor to disgorge everything it has been paid on the project, regardless of how good the contractor’s work was or how much labor and materials were provided.
If you’re in the 50 percent of contractors claiming workers’ compensation exemptions, beware. The CSLB is looking. You may believe you’re in compliance, but the penalties for being wrong could be catastrophic. If you have questions about the CSLB requirements, feel free to contact me via email at firstname.lastname@example.org or call me at (949) 852-1800.