False Reports To Worker's Compensation Equals An Unlicensed Contractor

Law Talk

Sam K. Abdulaziz
Attorney at Law

A case that just came down from the Court of Appeal demonstrates the importance of maintaining worker's compensation insurance, which according to this ruling of the Court of Appeal, includes truthful and complete reporting of employee wages to the worker's compensation carrier.

As any person who maintains worker's compensation knows, the rates are based upon your payroll. The employer must report its hours and wages to the carrier, who will then bill the contractor accordingly. As every contractor knows, to be licensed, the contractor must either have no employees or must carry worker's compensation insurance. In a case that came down from Santa Cruz County, a contractor sued homeowners for breach of contract arising from an incomplete home remodeling job. The homeowners answered the complaint and filed their own cross-complaint, alleging fraud against the contractor, and arguing that the contractor was not licensed and therefore not only cannot recover for the work performed, but must repay the amounts received from the homeowners because he was not licensed.

The evidence before the trial court was that the contractor was "licensed" at all times simply looking at the Contractors' State License Board records. The contractor purchased a worker's compensation policy from State Compensation Insurance Fund to satisfy the Contractors' State License Board requirements. On the project at issue, it is reported that he paid three to five employees approximately $15,000 for approximately 4,000 man hours. However, the records from the carrier demonstrated that for a 16-month period, from November 2003 through August 2004, the contractor reported, under penalty of perjury, payroll of only $312, though his actual payroll at that period of time was $135,000. The contractor reported zero or next to zero payroll for every period between his initial application for insurance in May 2002 and the end of 2004. The court found this was not inadvertent, but it was his pattern and practice.

It was undisputed and cannot be disputed based upon recent cases, that a contractor that is not licensed not only cannot collect, but can be required to repay monies received for services performed while not licensed. The cases are so harsh that a contractor that is unlicensed for any day during the performance of the work, without lawful excuse, cannot collect for any of their work performed on a project. The issue in this case was whether Business and Professions Code section 7125.2 automatically rendered the contractor's license of the plaintiff "suspended" because of his misrepresentations to the insurance carrier.

The statute at issue states:

"The failure of a licensee to obtain or maintain workers' compensation insurance coverage, if required under this chapter, shall result in the automatic suspension of the license by operation of law in accordance with the provisions of this section… (a) the license suspension imposed by this section is effective upon the earlier of the following: (1) on the date that the relevant workers' compensation insurance coverage lapses. (2) on the date that workers' compensation coverage is required to be obtained..."

The statute goes on to provide that a licensee who is subject to suspension shall be provided with a notice by the Registrar of Contractors that includes the reason for the license suspension and the effective date, and the procedures required to reinstate the license, among other things.

The contractor argued that the suspension for not having worker's compensation insurance occurs upon an act of the Registrar of Contractors, which includes the notice from the Registrar. The Court of Appeal first stated that the plaintiff failed to prove a lack of notice, though it is likely that notice was never given based upon the fact that the contractor maintained a policy, though apparently not truthfully. The more important statement from the court was their determination that the failure to "maintain worker's compensation insurance" includes under reporting payroll.

Accordingly, the contractor was "unlicensed" and therefore could not collect. The contractor was not only ordered to repay the owners approximately $27,000, but he was hit with punitive damages of $10,000 and almost $100,000 in attorney's fees and costs, all arising from the plaintiff's original claim of $11,000.

The moral of the story is that if you maintain worker's compensation insurance, you must be truthful in your reporting of your payroll. Following the recent cases that have come down from the Court of Appeal and the Supreme Court, every defendant will likely subpoena worker's compensation insurance records, as well as certified license history from the Contractors' State License Board. Except in the instance where there was an inadvertent lapse in licensure that was unknown to the contractor, and quickly corrected when known, any lapse in licensure could very well mean that the contractor cannot collect for any work performed on a project.