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ECHO JOURNAL - MAY, 1998 - By Beth A. Grimm

WHAT IF YOU DON'T CARRY WORKER'S COMPENSATION INSURANCE ...
... And you find out you should have! OUCH!!

Can you imagine something like this happening in your association?

The board votes to pay a retired civil engineer homeowner $25.00 per month to change light bulbs; he (or she) stands on a ladder, tries to change a light bulb, receives a shock and falls off of the ladder breaking their back?

Your board hires a maid to clean the clubhouse once a week, she trips over the vacuum cord and falls down a flight of stairs, and she (or he) breaks her (or his) vacuuming arm in several places, and is never able to vacuum again?

A board member, receiving a dues waiver or partial dues waiver for serving on the board of directors, has a car accident on the way to pick up the bank signature card for the board members to sign and can never walk again?

Would your association likely be treating any of these folks as employees and deducting payroll taxes? Does your association carry workers compensation insurance coverage?

These questions are worth asking. At least one of these scenarios is based on an actual case, and there were serious consequences for the association.

A number of articles have appeared in past ECHO publications about people who perform services for the association and who should be treated as employees but are treated instead as independent contractors. If an association hires and treats a worker as an independent contractor who should be considered an employee, there are a number of potentially serious problems that can arise for the association. If the association should be withholding payroll taxes and is not, then there are potential costly ramifications in payment of back taxes and penalties from the governmental taxing agencies. If the association fails to carry worker's compensation insurance, and a worker is injured that was or should have been treated as an employee, the association could be held liable for

All benefits that would normally be available under worker's compensation coverage, AND damages in a civil suit, AND 10% extra above all those damages, AND could also be found guilty of a misdemeanor and subject to severe punitive governmental penalties.

Perhaps knowing this may cause you to take a second look at the situation in your association.

Here are some other tidbits:

Did you know that if you hire an "independent contractor" who does not carry their own workers compensation insurance, the association could end up being fully responsible for the contractor and/or any of his or her subcontractors or employees in the event of an injury on the job, because the State Workers Compensation Board will closely examine the working relationship and seek to find employee status?

Did you know that if you hire an independent contractor who is unlicensed (and hired to do work that would otherwise qualify them for a license), your association could be responsible for his or her injuries if hurt on the job, because there is a presumption under California law that the unlicensed contractor is an employee of the association?

Did you know that it the association allows the board of directors to enjoy "dues waivers" or receive any compensation, those directors could conceivably be considered employees, and subject to workers compensation benefits?

If you are looking to save a buck in contractor or insurance costs, consider the fact that it may catch up with you 100 fold. All it takes is one little mishap.

Good sense, common knowledge, understanding and acceptance of the [state] "rules" in place to protect workers hired to perform services for the association, and fiscal responsibility should be combined with a serious balancing of the risk vs. benefit as hiring and insurance procurement decisions are made. The board of directors is charged with fiduciary responsibility to spend the money of the association prudently and wisely, and cost is always a factor in any given expenditure. However, cost must be weighed against risk in choosing vendors, especially if the association is not going to pay for workers compensation coverage. There is something to be said for paying a little extra for a contractor who provides proper insurance and benefit for his or her principals, subcontractors and/or employees.

HOW DO YOU DETERMINE WHETHER A WORKER IS AN EMPLOYEE OR INDEPENDENT CONTRACTOR?

The threshold question in considering hiring a person to do work for the association is whether the person should be treated as an independent contractor or employee. There are a number of tests, more than 20 in fact. In order to try and give some reasonable perspective to the question, there are a number of fairly obvious factors indicated by the State Employee Development Department to consider, and some seem to get more attention than others in the cases I reviewed.

The often discussed characteristics that indicate probable employee status are:

Is paid by the hour. Has a continuing relationship with the association. Works the hours established by the association. Works on the association's premises and uses the association's equipment to do the work. Is reimbursed for business and travel expenses. Has no significant investment in any facilities or equipment used in performing services for the association. Could be fired by the association at any time. Has a right to quit at any time without incurring a liability.

Labor Code section 3351 defines an employee as "every person in the service of an employer under any appointment or contract of hire expressed or implied, oral or written, whether lawfully or unlawfully employed" Labor Code section 3352 provides an exception for any employee who has worked less than 52 hours in the 90 days preceding an injury or who earn less than $100 during that period. That is the only exception listed. Otherwise, it would take a determination that the person is an independent contractor to overcome the presumption of employee status.

Characteristics of an independent contractor are:

The worker/contractor is paid, by the job, rather than by the hour. The worker/contractor utilizes own equipment to perform the job. The worker/contractor has more than one client for whom they do work. The worker/contractor is under contract for a specific job, and there is not a continuing working relationship.

Labor Code Section 3353 defines an independent contractor as "any person who renders service where specified [recompense] for a specified result under the control of his principal as to the result of his work only and not as to the means by which said result is accomplished." What that means is a person who is paid compensation to achieve a certain result without regard to how and when the work is done qualifies as an independent contractor.

If you are having a problem determining whether a worker/contractor should be an employee or independent contractor, the State of California Employment Development Department (EDD) has a offers a seven page form. If you would like to obtain a copy of it, you could call (916) 654-8203 and ask for a copy of form DE 1870 REV. 7 (4/94). EDD suggests that this form be used by any business who would like to get a determination from the EDD to find out whether a worker is an employee for purposes of California unemployment insurance, employment training tax, disability insurance, and personal income tax withholding. The form has 78 questions about the specifics of the business structure, the nature of the business, and what the person will be doing within the business, and it suggests the many criteria considered. As a rule of thumb though, if it is a close question, it may be wise to opt in favor or treating the worker as an employee. The EDD and the State Compensation Board will - their purpose is to protect workers, not employers. So, what should you do?

WHEN HIRING AN "INDEPENDENT CONTRACTOR", THE ASSOCIATION SHOULD PAY CLOSE ATTENTION TO THE FOLLOWING:

Does the Work Require a License, and If So, Is the Contractor Licensed?

The Business and Professions Code in California specifies some of the categories that require licensing, or for which a license is available. Licenses are required for jobs that require working on scaffolds, maintenance and repair of HVAC systems if the unit is a fixture, working on carpet if it is affixed to the floor, pruning or cutting trees higher than 15 feet, working on irrigation systems, etc. If there is a license required for the type of work that is being performed, and the person is unlicensed, the worker will be considered an employee rather than an independent contractor, if they are injured. (Labor Code Sections 3351 and 2750.5).

Is the contractor licensed, bonded and insured?

1. Ask for the state contractors license number. Call the State Contractors License Board in Sacramento (916 - 255-3900) and ask for the status of the license and the bond. (Contractor must purchase a bond to be licensed.) The Board will tell you if the license has been or will be suspended, and whether there are any claims against the bond.

2. Require certificates of workers compensation AND commercial liability insurance coverages.

3. Provide security in the contract with the contractor. Make sure there is an "out" if numbers 1 and 2 above are not satisfied and also provide that the contractor indemnifies (protects and accepts responsibility for) any damages suffered by the association in the event of any accidents - involving the workers or any third parties.

WHEN THERE IS A CLOSE QUESTION AS TO WHETHER THE WORKER IS AN EMPLOYEE OR AN INDEPENDENT CONTRACTOR - TREAT THEM AS AN EMPLOYEE AND MAKE SURE TO OBTAIN WORKER'S COMPENSATION COVERAGE.

If a worker is injured, he or she should have access to workers compensation benefits - that's the way the WCAB sees it. Since the California Labor Code definition of employee is so expansive, and the exceptions are so minimal, it follows that the definition of employee will be liberally construed. Since the workers compensation system in California is bound by the State Constitution to liberally interpret the provisions of the Labor Code, it follows that where there is a question as to whether a person with no outside compensation benefits could qualify as an employee, they will be found to be an employee. The whole scheme of workers compensation insurance legislation in place to protect workers and assure that if they are hurt on the job, they will receive needed treatment and rehabilitation.

WHAT ABOUT BOARD MEMBERS WHO PERFORM SERVICES FOR THE ASSOCIATION?

Volunteer Board members are not automatically covered under workers compensation coverage, because they are volunteers not employees. Some associations claim to have obtained a rider for their workers compensation coverage by asking for an addendum to their policy. Others claim that workers compensation insurance is not available for volunteer directors. You need to check with your carrier to see what is available for your association, to cover volunteer board members who may be injured performing services as volunteers. Obviously, they deserve protection, and don't assume it without clarifying the exact nature of it with your agent (hopefully you are using an agent knowledgeable about coverages available to community associations).

If your association pays compensation to board members (reimbursement of expenses doesn't count), or allows an assessment waiver or partial assessment waiver for services, the board members could probably be considered employees for purposes of making a workers compensation insurance claim if they are hurt on the job. The reason is that the definition of "wages" is extremely loose. The directors perform services for the association by serving on the board, and if they receive a "dues waiver" they are receiving compensation as described in the EDD specifications, which includes "other reasonable cash value of compensation other than cash." I know of no cases on this - yet - but I believe it could happen in the event of a serious injury.

So big deal - we'll call our handymen independent contractors, stick to our penny pinching and wait for something to happen - what are the chances of that anyway? And besides, if there is an accident - we get it in the ______ anyway, don't we?

What if in dealing with any vendor you simply executive a contract that calls them an independent contractor and exempt them from workers compensation benefits paid by you as an association? This practice is disfavored in the case of Borello and Sons, Inc. v. Dir (1989) 49 Cal.3d 341.

Labor Code Section 3700 requires "every employer except the state" to "secure the payment of compensation." Arguments of a good intention or good faith failure (there is no such thing though) to get the insurance will probably fail. There is no authority for excusing an employer for failure to carry the necessary coverage. (Hicks v. Ocean Shore R.R. (1941) 18 Cal. 2d 773, 778, 6 Cal. Comp. Cases 275.)

Labor Code Section 5000 disfavors exempting workers compensation benefits in a contract.

Labor Code Section 3706 entitles an injured worker to bring an action in both civil court and before the Worker's Compensation Appeals Board (which would be pursued by the Uninsured State Fund group and subrogated against the employer) if there is no compensation protection, providing an exception to exclusivity of the processes, i.e., the general rule that the worker is limited to consideration through the WCAB.

Labor Code Section 3708 creates a presumption (strong legal bias) of negligence when a valid claim is made by a worker and employer is uninsured (no workers comp coverage). This means that defenses that can commonly be used to defend against negligence charges (like the other side was also at fault or assumed the risk) cannot be asserted in these cases to negate or offset liability. (Soria v. Cowell Portland Cement Co. (1929) 99 Cal. App. 108.)

A willful failure to procure compensation insurance coverage exposes the employer to a 10% increase in benefits. Labor Code Sections 3700 and 4554. Benefits include temporary disability (LC 4650), permanent disability (LC4452), rehabilitation (California Code of Regulations Section 10003, et seq.), and medical treatment (LC 4600). You do the math!

Labor Code Section 3700.5 provides that failure to secure workers compensation insurance by one who is reasonably expected to have known of their duty is a misdemeanor. I have been told that penalties for willful failure to carry workers compensation when it is determined that an employer should have can be up to a $1000 per day.

DON'T LET THIS HAPPEN TO YOUR ASSOCIATION:

In an unpublished workers compensation case called Villa de Fanta and Ins. Co. N. America v. WCAB (Garcia). (1988) 53 Cal.Comp.Cases 44, a landscaper performing services for a homeowners association was injured. The landscaper was hired by the president of the association. He worked 24 hours a week in 1980 and the rest of the week he worked for others. The landscaper asked for a raise and the homeowners association declined the request. The landscaper asked to bring in helpers to complete the work and the homeowners association denied the request. When the landscaper objected to being commanded to paint a fence, he was told that he could be fired. This amount of control was asserted as sufficient to determine that the landscaper was an employee and not an independent contractor.

In another unpublished case, Williams v. WCAB ((1994) 59 CCC 559), apartment building owners hired an unlicensed contractor whose employee was injured on the job. The owners had asked their insurance agent for "full coverage" and they believed they were protected for all accidents. Although the carrier that denied the owners claim ultimately lost the battle, the case is an example of a situation where one could become embroiled in costly and expensive litigation for years (8 years in this case).

Picture this possibility: you hire a gardener as an independent contractor who does not need a license to mow the grass. But in the course of his or her duties, he or she is asked and does (or voluntarily accepts responsibility for, unbeknownst to the association) cut limbs higher than 15 feet off the ground or to repair sprinkler heads. The worker is injured and seeks workers compensation benefits. Because the worker is performing tasks that require a license, and is unlicensed while working for you, he or she is considered an employee. If you don't carry workers compensation coverage - you're in trouble.

Think again.

By Beth A. Grimm, Attorney practicing common interest development law in the Bay Area and throughout California, and author of several publications, articles, and books including Finding the Key to Your Castle. Please be advised that the information in this article does not constitute legal advice. You need to consult an attorney for specific advice related to your association situation.

By Beth A. Grimm, Attorney. A "service oriented" attorney and member of ECHO and CAI and various other industry organizations in California and nationally, host of the website www.californiacondoguru.com; two Blogs: California Condominium & HOA Law Blog, and Condolawguru.com Blog, and author of many helpful community association publications which can be found in the webstore on her site.

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