Morgan Miller Blair

The recent case of Sanders Construction Company, Inc. v. Martin Cerda presents a harsh reminder to general contractors of the importance of verifying their subcontractors’ licensed status.  Failure to do so puts general contractors at risk of having to doubly pay unscrupulous subcontractors’ employee’s wages in addition to interest and penalties.   
 
In Sanders Construction Company, Inc. v. Martin Cerda, filed on June 29, 2009, the Court of Appeal held that a general contractor can be held liable for wage and hour claims brought by its unlicensed subcontractor’s employees even after the general contractor had already paid the subcontractor for that labor. 

The facts of the case are as follows: Sanders Construction Company (“Sanders”) was the general contractor for the construction of a hotel.  Sanders hired a subcontractor, Humberto to supply and install the drywall.  For four months, from June to September 2006, Sanders paid Humberto for the drywall work, who was in turn supposed to pay its own workers.  Around September, Sanders discovered that Humberto’s license had expired in June 2006 but continued to allow Humberto to work on the project.  Sanders believed that because it was paying Humberto (and the subcontract included drywall labor) that Sanders was not responsible for paying Humberto’s workers.  In January of 2007, Humberto stopped work on the project.  Humberto’s workers had stopped work in January 2007 or the month prior. 

To Sanders’ surprise, Humberto had not paid its drywall laborers and six of those employees made wage claims against Sanders with the State Labor Commissioner and sought wages, interest, and waiting time penalties.  The workers all stated that Humberto told them that Sanders would pay them.  The Labor Commissioner decided that Sanders was the statutory employer of Humberto’s employees, and granted the workers their wages and interest. 

Sanders appealed the Labor Commissioner’s decision to the superior court, which found again in favor of the employees and awarded additional waiting time penalties.  On appeal of the superior court’s decision, the Court of Appeal once again sided with the drywall workers. 

The heart of the case turned on the application of Labor Code section 2750.5 which had been previously applied to make employees of unlicensed subcontractors the general contractors’ statutory employees in unemployment and workers compensation cases.  In reviewing the unlicensed subcontractor’s employees’ wage claims, the Appellate Court reasoned, “Labor Code section 2750.5 operates to conclusively determine that a general contractor is the employer not only of its unlicensed subcontractors but also those employed by the unlicensed subcontractors.”  (emphasis added).  The import this holding was to allow the six drywall employees to bring their wage claims directly against the general contractor. 

The Court rejected Sanders’ arguments that Labor Code section 2750.5 only applied to cases involving workers’ compensation and unemployment benefits.  The Court also rejected Sanders’ contentions that it would be unfair and prejudicial to Sanders to award liability since the general contractor had no way to verify wages, no right to control hours, rates of pay or other relevant factors.  While the Court recognized that Humberto, as the unlicensed subcontractor itself, was prohibited by Bus. & Prof. Code Section 7031 from prevailing on a direct wage claim against Sanders, the Court did not apply those prohibitions to the drywall laborers because there was no evidence that the drywall employees acted as independent contractors (they received wages as their sole compensation, they did not engage in an independent business, and they did not control how the work was performed). 

Without a doubt, has always been important for a variety of reasons that the subcontractors you do business with are currently licensed and in good standing.  The lesson of Sanders is that you may pay a heavy unanticipated price for failing to demand verification.  Sanders showed that even though the general contractor had already paid for the labor, it was hit again by the subcontractors’ employees wage claims when the subcontractor absconded with the money, and had to doubly pay for those services.  To avoid the bind in which Sanders found itself, your purchasing department should require proof of license by a verified certificate of licensure from the Contractors’ State License Board before finalizing any subcontracts and then regularly demand verification updates for the life of the project (for example prior to making payments).  It is not enough to require the subcontractor’s licensed status in the terms of your written subcontracts – that only arms you with ammunition against a subcontractor - for protection against any subcontractors’ employees (who may become presumptively your employees) you should obtain up to date proof of all your subcontractors’ license in your files and be vigilant on checking on their status for the life of the project.