Employees of Unlicensed Subcontractor are Employees of General Contractor

In Sanders Construction Co, Inc. v. Cerda (2009) 175 Cal.App.4th 430, the Court of Appeal held that a general contractor ("GC") who hires an unlicensed subcontractor ("sub") is responsible for the wages of the sub's employees.

In Sanders, the GC’s contract with the sub included the costs of labor and materials: the GC paid the sub, and the sub paid its employees. When the GC stopped paying, the sub's employees filed DLSE wage claims against the GC for wages, interest, and “waiting time” penalties. 

The DLSE hearing officer looked to worker’s compensation law by analogy and held that the GC was the employees’ statutory employer because “Labor Code Section 2750.5 operates to conclusively determine that a general contractor is the employer of not only its unlicensed subcontractors but also those employed by the unlicensed subcontractors.” Section 2750.5 provides: “There is a rebuttable presumption affecting the burden of proof that a worker performing services for which a [contractors'] license is required... or who is performing such services for a person who is required to obtain such a license is an employee rather than an independent contractor.” 
The Court of Appeal agreed and determined that, for public policy reasons, employees can bring wage claims against GCs even if they were hired by an unlicensed sub: 

These same public policy considerations concerning the subterranean economy [applied in the worker’s comp context] could apply in the present circumstances. For example, an unscrupulous general contractor could collude with an unlicensed subcontractor to cheat workers hired by the subcontractor out of their wages, plus all the related benefits...We discern no meaningful distinction exists between being paid wages and receiving other benefits based on wages. In both instances, the same policy reasons militate against allowing a general contractor to escape liability for the obligations of an unlicensed subcontractor.

The GC argued that the employees, as unlicensed persons performing work for which a license was required, lacked standing to bring their claims, pursuant to Business and Professions Code Section 7301. The court rejected this argument, noting that Section 7503 limits the reach of Section 7301, excluding employees who do not have independent businesses and who do not have the right to control the manner of their work.

Thanks to Leonard H. Sansanowicz for his contribution to this post.