The Real Danger of Working With an Unlicensed Contractor

The Real Danger of Working With an Unlicensed Contractor

unlicensed contractors beware sign

Published June 20, 2014   •   3 minute read

In a tough economy, companies and individuals look for ways to save money. Unfortunately, for some contractors this means not meeting the qualifications to be properly licensed and bonded. As an individual or company hiring a contractor, its important to remember not only the real reason you never want to hire an unlicensed contractor, but also make sure you know what to look for when hiring one.

A recent sting by the California State Licensing Board arrested 75 unlicensed contractors soliciting services from individuals and homeowners’ associations. Not only were none of the 75 contractors properly licensed, several of them were identified as registered sex offenders, convicted felons, and even had open warrants out for their arrest. Clearly, these are things you want to know about a contractor before inviting them into your home or business.

But to focus on only the salacious criminal elements of a few caught unlicensed contractors misses the bigger point. There are extremely important reasons why you only want to work with a licensed contractor, and should always collect and review the insurance and license of any contractor your company hires.

For starters, working with licensed contractors means there is a clear and established avenue of resolution if a dispute arises. Using the California sting operation example as reference, lets look at the protections in-place for individuals and companies who hire licensed contractors. The California Contractors State License Board requires mandatory arbitration for disputes under $12,500, the same amount required for the mandatory bond. A licensed contractor must participate in mandatory arbitration in an attempt to resolve the dispute. With disputes up to $50,000 the licensed contractor can opt for voluntary mediation. This mediation process can be a much cheaper and less time consuming than litigation. Additionally, if a licensed contractor has enough complaints lodged against them in the state they can lose their license, providing a powerful incentive to at least meet a baseline standard of competence in performing their work.

In addition to the benefit of having an established dispute resolution process established, the other paramount reason to hire only licensed contractors is that licensed contractors are required to carry Workers’ Comp insurance if the contractor’s business meets state requirements. A licensed contractor must have workers compensation insurance for its employees, or show the State Licensing Board that the contractor does not have any employees. In California under Insurance Code §2750.5 an unlicensed worker performing services for which a license is required is not an independent contractor, meaning when an unlicensed contractor is hired by a homeowner or homeowners' association, that contractor, and potentially any worker in their employ is considered an “employee” of the homeowner or homeowners' association, so in the event of a Workers’ Comp claim, the hiring party would be liable.

And finally, its one thing to know that you should only be working with licensed contractors, but how do you establish a practical system to ensure that you know with certainty that any contractor you hire is not only licensed but also properly insured? The reality is, you need to collect and review that contractor’s license and insurance certificates to ensure you are protected before letting them onto your property to begin work. This is a core part of a certificate of insurance tracking program, but one sometimes overlooked.

Individuals and companies hire unlicensed contractors for usually a simple reason, they are less expensive than a licensed contractor. Or they hire a licensed contractor, only check their license a single time to put it on-file, and never subsequently check to make sure the contractor has renewed their insurance policies and license with the state.

To ensure you are working only with safe, reliable contractors, you should collect, scan and review their license and insurance documents, and record the occupational license type, license number, issue and expiration dates, and have a system in place to collect renewal documents in a timely fashion to guarantee there is no lapse in licensing or insurance coverage while the contractor is working on your property. This is an important aspect of any competent insurance certificate tracking program.

BCS helps Fortune 500 Companies across the world by ensuring they only work with reliable, licensed and bonded contractors. And we can do the same for your company.

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