California Contractors Are Abusing Workers' Comp Rules. A New Bill Would Change That

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worker carrying lumber precariously on roof of building under construction
A construction worker carries lumber as he builds a new home in Petaluma in 2015. A new state Senate bill would close a loophole that has allowed thousands of contractors to avoid buying insurance to cover workers injured or killed on the job. (Justin Sullivan/Getty Images)

A state Senate bill that would require all of California's quarter million contractors to carry workers' compensation insurance is moving ahead with strong support from both parties — and backing from regulators, industry and workers groups.

State officials and industry leaders say the bill is aimed at closing a loophole in state law. They say thousands of companies lie to regulators by telling them they do not employ anyone when they actually do. That allows them to avoid buying insurance that's crucial to helping workers who get injured on the job.

"The bill will greatly curb the underground economy," Skip Daum, a lobbyist for the the American Subcontractors Association of California, told lawmakers this month.

Currently, there are more than 230,000 contractors with active licenses in California, according to the agency that regulates the state's construction industry. The Contractors State License Board says more than half of those firms — 53% — say they are exempt from carrying insurance because they have no employees.

"Many contractors are falsely making that claim," state Sen. Bill Dodd, D-Napa, the bill's author, said at a committee hearing in early March.

Many contractors who claim to be exempt actually have employees, state regulators say. When those workers are injured or killed on the job, that exemption leaves them and their families unprotected.

"This drives up the cost of workers' compensation insurance for the good actors and puts workers at risk," Dodd said.

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Those abuses are at the heart of a series of KQED stories on the deaths of bulldozer operators and water tender drivers employed by contractors hired by Cal Fire to help fight wildfires.

Among those cases were the deaths of three heavy equipment operators killed during wildfires in 2016, 2017 and 2018. After their deaths, state officials learned that the contractors who sent them to fight the fires lacked workers' comp insurance.

Every year the Contractors State License Board issues hundreds of stop-work orders to companies that are found to have employees and an workers' compensation exemption on file with the agency, according to Mike Jamnetski, the board's chief of legislation.

But that disciplinary action "has not moved the proverbial needle," Jamnetski said at the March 8 hearing before the Senate Business, Professions and Economic Development Committee.

The contractors board does not have enough staff to audit the 123,000 contractors who claim they do not employ people, Jamnetski said.

Dodd's proposal, Senate Bill 216, is sponsored by the state contractors board. It would require all concrete, heating, air conditioning and tree service contractors to buy workers' comp right away. By 2025, all licensed contractors in California would be required to purchase coverage.

The bill faces no apparent opposition in the Legislature.

The committee passed the bill in a 14-0 vote after members of nine associations representing contractor groups, unions and lawyers who handle workers' comp cases voiced support.

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Daum, the lobbyist with the subcontractors association, said contractors who try to hide the fact they have employees and neglect their responsibility to get workers' comp have an unfair advantage over those who follow the rules: Without paying for insurance, their costs are lower, allowing them to make lower bids on project contracts.

The bill does not require a set level of workers' comp coverage. Currently, about half of California's construction companies that have the benefit have chosen what are called minimum policies.

Many contractors who have not claimed employees in the past are expected to choose such plans, which range from $500 to $5,000 a year, according to the State Compensation Insurance Fund, one of California's leading providers of the benefit.

The cost range depends on the industry in which the contractor works, how many people they employ and their claims history, the fund's chief risk officer, Ken Van Laar, said in an email.

"As we've seen, failure to carry workers' compensation has had devastating impacts for workers (and their families) who are injured on the job," said Veena Dubal, a UC Hastings College of the Law professor specializing in employment law.

If the bill passes and contractors do not get workers' comp, the state could suspend their license and they could be charged with a misdemeanor.

Dubal raised concerns that not complying with the potential new rules could lead to criminal prosecution.

"I think it's really troubling," Dubal said. "Addressing workplace violations through criminal law is a trend that, I'm afraid, will be used to disproportionately impact small business, racial minorities and immigrant contractors."

In response to Dubal's concerns, Natalie Watmore, a CSLB representative, noted that the bill does not change the existing criminal penalties for contractors who lack workers' comp. It just expands the existing regulations to more industries and cuts out exemptions for companies that do not claim employees.

Watmore said the agency does not expect to refer a significant number of cases for criminal enforcement. She emphasized that the proposed regulations apply to all contractors regardless of their background.

SB 216 was recently placed in the Senate Committee on Appropriations' suspense file and is expected to face its next hearing in late May.

If it passes, state officials say they plan to make sure contractors are aware of the new rules by posting them on a CSLB newsletter, industry bulletins, social media posts and workshops for firms to get contractors' licenses.