As part of our ongoing series on insurance coverage for Limited Liability Companies (LLCs), we wanted to tackle the topic of contractor LLCs. Many states do not allow contractors to operate as LLCs due to the ease of terminating the corporate structure. However, California has recently begun allowing contractors to form LLCs, but are requiring additional safeguards for these businesses.
The first was increasing the contractor licensing bond amount from $12,500 to $15,000 in 2016. The second was the requirement of an additional bond for contractor LLCs. This bond is the called the Employee/Worker Bond.
What Is The Employee/Worker Bond?
The California Contractor State Licensing Board (CSLB) now requires the Employee/Worker Bond for all contractor LLCs in order to remain in good standing with the state. The minimum bond amount is $100,000, though higher amounts may be required.
This bond is required by LLCs to protect employees and workers of those companies against payroll fraud: underpaying employees and workers or not paying them at all. How prevalent is this problem?
Between 2013-2015 a group of companies working on the Pacific Amphitheater in Costa Mesa failed to pay prevailing wages (or to pay workers at all) to the tune of $200,000.
A construction company in Paramount is accused of shorting workers payroll or not paying them at all, in addition to other allegations involving workers compensation.
These are just two examples in a sea of thousands, with more stories coming out every week.
Why Is This Bond Required?
For LLCs the ability to cut-and-run becomes easier: they can just shut down the LLC and start a new one if things start to go sideways. This makes it easier for employers to short or stiff workers.
The bond aims to protect contractor employees and workers who may find themselves without a paycheck when their employer “disappears”.
Why Wouldn’t Employees Get Paid?
There are many reasons employers would not pay their employees:
- They don’t know the laws regarding prevailing wages, overtime and sick leave.
- They choose to ignore the laws.
- They don’t have the money to pay the employee due to cash flow issues or bankruptcy.
Unfortunately, payroll can be difficult to recoup when a company goes out of business. This bond is one way to help.
How Can I Get An Employee/Worker Bond?
Please note that these bonds are heavily underwritten, and are typically based on the credit rating and other financial information about the members of the LLC. Premiums can be much higher than the contractor licensing bond, as well.
Hayes Brokers offers a wide range of bond services for every type of business, including contractors. They have carriers willing to write Employee/Worker Bonds for LLCs to satisfy the state’s requirements.