Advisory Against Using "Independent Contractors"

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By Bruce D. Rudman, Abdulaziz, Grossbart & Rudman

For years, contractors and other employers have designated persons as “independent contractors” while performing tasks for them.  Some have done so legitimately, and others to save the costs of employment.  The most common in the construction industry is a contractor that employs salespeople.  Although the Employment Development Department and the IRS have factors to determine whether one is truly an independent contractor, the Contractors’ Board has taken the position that a salesperson must be an employee of the contractor.  While there could be circumstances where the Contractors’ Board’s position is wrong, many contractors we deal with use their salespeople for more than just selling the project, such as coordinating trades or project management, and once those tasks are undertaken, their role is well beyond that of a salesperson and they must be employees of the contractor, unless they are also licensed contractors.

The Legislature is currently amending certain Labor Code provisions, and one of their proposals is to add a section to the Labor Code that will make it unlawful for any person to willfully misclassify an individual as an independent contractor.  The penalty will be not less than $5,000 nor more than $15,000 for each violation of this section.  Further, if there is evidence of a pattern of violations, the fines can escalate.

In addition, the new Labor Code section proposes that when someone does hire an independent contractor, they must provide that person with the notice regarding his or her independent status, the impact on his or her tax obligations and eligibility for labor and employment protections, provide notice that they have the right to seek advice from the Employment Development Department or the Labor Commissioner, and then the statute also provides requirements regarding retaining records regarding these people.

One thing that the Labor Code provisions don’t provide, but which case law has recently demonstrated, is that if you employ people that are not on your workers’ compensation insurance when they should have been, that is grounds for a court to determine that you did not comply with the workers’ compensation laws and are therefore not a validly licensed contractor.  Being unlicensed has significant ramifications including the ability of the person contracting with the unlicensed contractor to seek a full reimbursement of all monies paid for the entire project.

If in doubt, discuss your actions with an employment lawyer before using anyone you consider to be an independent contractor.

Bruce Rudman has been practicing construction law for 15 years.  He has garnered a great reputation in the construction field not only as a litigator but on licensing issues with the CSLB, particularly disciplinary proceedings.  Abdulaziz, Grossbart & Rudman provides this information as a service to its friends & clients and it does not establish an attorney-client relationship with the reader. This document is of a general nature and is not a substitute for legal advice.  Since laws change frequently, contact an attorney before using this information.  Bruce Rudman can be reached at Abdulaziz, Grossbart & Rudman: (818) 760-2000 or by E-Mail at, or at