California LLC Bonds for Contractors
Every construction business registered as an LLC (Limited Liability Company) must have a $100,000 LLC surety bond. This bond primarily protects a contractor’s employees from wage disputes and financial obligations as stipulated in the Business and Professions Code section 7071.6.5. According to the California Constitution, the introduction of this bond is necessitated by the lack of case law governing limited liability companies. In turn, this meant that LLCs were categorized and treated as S or C corporations. Unfortunately, this allowed LLCs to operate in a legal gray area where they could exploit workers financially — in paying wages and associated fringe benefits. With this in mind, acquiring an LLC employee worker bond is conditional on satisfying several closely related qualifying criteria. These include:
• Liability insurance of at least $1,000,000.
• Personnel records
• Business licenses/permits
• Business name registration records
These are criteria important because businesses that do not satisfy them cannot operate legally meaning they would not be eligible for LLC workers employers bond.
According to California’s Contractors State License Board (CLSB), contractors in the construction industry must have a valid LLC employee workers bond before applying for an active license, renewing an active license, or reactivating an inactive license. This means it is illegal for building contractors to operate without this bond. Below is some more information on this topic.
An LLC employee workers bond is simply a contract issued by a surety company promising the State of California that its client (building contractor) will comply with the state’s licensing and construction laws. Contractors who violate the applicable regulations could face claims filed against their California contractor’s bond. Take note; license bond claims could be filed by different aggrieved parties including property owners, fellow contractors, and even employees. However, this type of bond is quite different from an insurance policy because it requires contractors to repay losses incurred by the surety company.
Moreover, the CSLB does not process claims filed against building contractors. It is up to surety companies, complainants, and contractors to resolve the underlying financial and legal issues. Nevertheless, the CSLB investigates claims filed against licensed construction contractors and effects bond cancellation 30 days after receiving a cancellation notice from a surety company.
Categories of Contractors
The CSLB recognizes the following types of contractors:
• General engineering contractors
• General building contractors
• Specialty contractors
General engineering contractors handle construction projects that require specific civil engineering knowledge and skills such as the construction of sewage systems, overpasses, flood control barriers, and water distribution systems. On the other hand, general building contractors focus on commercial and residential structures, storage facilities, and animal enclosures, whereas specialty contractors undertake construction work that requires specialized skills and tradecraft.
People protected by LLC workers employers bond
According to the CSLB, this type of bond is for the benefit of several individuals or entities including:
• Contractor’s employees who have not been paid.
• Property owners whose residences sustained damage due to a contractor’s violation of state building laws.
• Entities or individuals that are harmed due to a contractor’s failure to pay fringe benefits.
• Any person, other than property owners that is harmed due to a contractor’s failure to observe/comply with the relevant construction laws.
• Any employee harmed due to a contractor’s failure to pay wages.
Dealing with Bond Claims
For starters, any of the individual/entities listed above can file a complaint with the CSLB against your construction company’s employee/workers bond. However, such a complaint does not automatically translate into a payable claim. The applicable surety must first conduct investigations on any outstanding claims to determine their validity and in extension payability. This is in addition to investigations carried out by the CSLB, which also has the responsibility of effecting disciplinary action or recommending alternative complaint resolution options.
Complaint Resolution between Contractors and Aggrieved Parties
It is advisable for contractors to resolve issues that could lead to claims against their bonds as well as potentially costly legal disputes. Sureties also recommend that all construction contract terms including amendments should be in writing and well documented. At the same time, contractors should communicate frequently with their clients to ensure they can address grievances before they balloon into legal disputes. Finally, construction contractors should keep highly detailed records related to all financial transactions or a disciplinary bond may be required.
The LLC employee workers bond is mandatory for contractors operating in California’s construction industry. This $100,000 bond should be deposited with the CSLB for the benefit of individuals including employees who may be harmed by a contractor’s failure to meet financial obligations such as paying wages. It is worth noting that this bond applies to general engineering, general building, as well as specialty contractors. Contact us today for a Free LLC bond Quote today at: 619-354-9720