Family Waivers & Employee or sub contractor?

Are you positive you know the specific difference between an employee, working ‘for’ you and a subcontractor working ‘with’ you? It’s an important distinction for ‘worker’s compensation’. Keeping it all in the family is the aim of one licensed contractor whose brother wants to take over the business…

Q: My brother-in-law wants to give his Class “B” License to his brother (my husband.) I contacted the CSLB and they said that he could apply for a Family Waiver. They said just submit the Application; write ”Family Waiver” across the top; send in $400; and include two letters – one from each brother – stating that one wants to give and the other wants to receive it.

In reading your column I see that most Family Waivers are given if the family members have worked with the company for 5 out of the last 7 years. This may be hard to prove. Are there other rules that I should be aware of? There isn’t much information on the CSLB website about Family Waivers.

A: From my experience, a “Family Waiver” is not that simple. The key is first and foremost that the family member (your husband) must have worked full time for the contractor (your brother-in-law). This work must have been as an employee for 5 of the prior 7 years. This means your husband would need to show proof of being paid (such as a W-2). The CSLB will also look at a company’s Worker’s Compensation history when reviewing these applications. In other words, if your brother-in-law did not carry Worker’s Compensation insurance, required by law when employees are at work, it will be hard to claim that your husband was employed.

Q: I am the owner of a small construction corporation. I receive a paycheck from my corporation, but my pay is exempt from Worker’s Compensation coverage. I employ a few full time carpenters, and go through a couple part time helpers per year. These guys are covered under my companies’ Worker’s Comp policy with State Fund.

Occasionally I hire other contractors (sole owners) who are out of work. I have been just “1099’ing” them, as though they were any other subcontractor. I know this is a gray area and try to give them ‘direction and control’ over certain tasks, rather than put them next to my employees.

They bill me on an hourly basis, and at times their pay is much higher than my employees because there is no labor burden (comp, state or fed tax, social security). Consequently, if I were to be retroactively charged for premiums and withholdings on their higher pay, I would be bankrupt. Should I just insist that everybody who works for me goes on payroll? Furthermore, I suspect that some of my competitors cheat on their comp reports or cancel comp altogether. Sign me “barely afloat in California”.

A: Anyone who works for you is either an employee or licensed subcontractor. There really is no middle ground. In other words, these “other (sole owner) contractors” must be licensed or they are essentially your employees for Worker’s comp or tax purposes.

I do not know what would happen if you were retroactively charged; however, in the future, make sure the sole owners are licensed or put them on the payroll. This would protect you and your customers.

The CSLB is concentrating its enforcement efforts on going after contractors who under report or fail to carry Worker’s Compensation but in fact have employees. Hopefully, this might level the playing field a little.

I know things are rough throughout the state. I wish you well and hope you’re able to stay ‘afloat’ until our huge ‘ship-of-state’ turns around.

CSLB Legal & License Opinions

Keeping an eye on CSLB policy and practice is part of my work. Sharing those developments with you, and commenting on important changes for contractors are other parts of my job. My work also takes me to meetings where discussion and decisions are made that may impact all contractors, like this one…

The CSLB held it’s quarterly meeting in Berkeley on November 12th. Due to a lack of gubernatorial appointments, a quorum was barely present. Issues discussed during the 4+ hour meeting included legislative proposals for 2010; proactive enforcement by the Statewide Investigative Fraud Team (SWIFT); a report of upcoming enforcement ‘stings’ throughout CA; an update on the Board’s “Check-The-License-First “ media campaign; and last, but far from least, a policy review regarding classification Determinations on matters with Pending Litigation.

Regarding this last item, the CSLB’s Chief of Licensing sought a legal ruling from the Department of Consumer Affairs (DCA) regarding the issuance of staff opinions on matters that are currently the subject of litigation. Say for instance, a contractor had a case in Superior Court where the primary question was whether the contractor held the proper classification. My understanding is that in years past the Board issued class determination opinions regardless of whether the issue was in court. It may prove unfortunate this policy will not be maintained.

DCA Legal Affairs Division recently advised (and the Board adopted) a policy that it “should refrain from issuing interpretive “opinion”, “guidance”, “advise” or any other type of directive to the public or licensed community on those matters which are subject of litigation”. According to legal council, a number of factors contributed to this opinion including: limited Board resources; potential bias towards the litigant who is asking the question; and the potential that a Board opinion may lead to an unintended “underground regulation”.

My primary concern is that in an effort to refrain from issuing SOME opinions, the Contractors Board will end up adopting a more restrictive future policy where they issue ONLY LIMITED guidance. Take for instance the above example. If the Board related the question to potential litigation, a bid protest or any other type of outside administrative act, would they decide a “NO OPINION” letter might be in order? I broached this subject with Board personnel and was assured the Board will continue to provide general guidance and opinions on matters related to classification and licensing requirements.

This was good to hear since my concern stems from discussions I have had with applicants, contractors and other interested parties (i.e. attorneys) who believe (as do I) that this ruling could have adverse consequences if expanded to cover issues related to public bids and non-litigated disputes.

The Board decided that if the issue were a subject of litigation it would be inappropriate to weigh in on the matter outside of the legal hearing. According to CSLB staff, they are often asked for an opinion without benefit of all pertinent information and only receive the facts from one side — which tend to favor that litigant’s position. Legal counsel felt that since both parties have the ability to subpoena expert testimony as deemed necessary – and at their expense rather than the Board’s –this is the more appropriate manner in which to handle these matters.

I can understand that with limited resources, it is difficult to weigh in on all issues; yet, my experience is that CSLB “opinions” most always indicated it is based solely on the information presented and if other information were available, might change their guidance.

It remains to be seen if this policy benefits contractors or the general public. For a copy of the entire October 13th Memorandum, please call or email my office.

Worker Comp in CA & AZ Application

I get excited knowing the questions and answers in this column can improve life for contractors. All most contractor’s want in competitive bidding is a level playing field. Unfortunately, some place bids knowing they are exposing their workers to danger on the job and that’s unfair to all…

Contractor Update: Many months ago, I responded to a caller who was having difficulties with the AZ Contractors License Application. After assisting him with his problem, I corresponded with the Registrar of Contractors office regarding these issues. After a few months, a representative who was sympathetic to the issues raised contacted me.

I am happy to report that the newly released Application For Contractors License in AZ has been amended thereby clarifying several confusing questions. The ultimate result for contractors: fewer delays with processing!

Q: I am unfamiliar with the procedure but I have a question. How do I choose between an RMO and RME? Once I decide, what’s the fastest way to make it official? Can we operate until everything is completed? Thanks for the quick response.

A: The RME (Responsible Managing Employee) and RMO (Responsible Managing Officer) are designations for the qualifying individual on a corporation contractor’s license. You’ll need to decide if you want the qualifier to be an officer (RMO) of your corporation, which in turn will dictate the designation. There should be no time difference applying with either one. If you’re applying for a sole owner or partnership license “RMO” by definition is not an option.

Q: Some of my competitors have employees but have no Worker’s Comp. Obviously if I have this insurance and they don’t, I’ll lose out on some jobs. In fact, I have already lost two jobs to contractors who bid lower. What could happen if I do not carry this insurance? I only have two employees.

A: All contractors that have one or more employees must file proof of Worker’s Compensation coverage with the CSLB (Roofing contractors must file even when they have NO employees). In a recent press release, the CSLB urged its 315,000 licensees to “make sure all employees are covered by the appropriate amount of Worker’s Compensation insurance.”

As you have observed, some employers file Exemption forms with the CSLB when in fact they have employees. Other contractors may under report payroll to cut down on insurance costs. According to CSLB Register Steve Sands, “We understand why businesses try to cut expenses, but cheating on Worker’s Compensation insurance is illegal.” It’s also a real danger to anyone who works for you should they be hurt on the job.

The State knows that contractors who break the law have an unfair business advantage over those who follow the rules. Therefore, in the coming months, the CSLB and other state government agencies will be concentrating some of their enforcement efforts on companies that either don’t carry insurance or misrepresent the number of employees they have.

If you decide to work without the proper insurance you may get caught up in one of the State’s sting or sweep operations. The penalty for a first offence can be up to one year in jail and a $10,000 fine. Further, according to the CSLB, a stop order can be issued on projects and fines of $1000 per employee can be levied on your company. Then there are the legal and medical costs for anyone who does get hurt without coverage. Better pay a little now and be legal, than get caught and pay a lot more.