Landlords Hiring A Contractor.
Hiring a Contractor
Adequate property management can be labor intensive, with significant demands on resources. Some tasks require specialized skills, licensure, and compliance to regulatory standards. The landlord/property manager must understand the nature of the work, the best resources to accomplish the task, and regulatory requirements.
Even the smallest of jobs requires the landlord/property manager to assess the issues of the work being performed by employee vs. independent contractor and by licensed contractor vs. unlicensed tradesman. There are also issues regarding liability insurance coverage, workers’ compensation, city or county building permit/code requirements, and possible other federal, state, and local regulations. Failure to act regarding any of those issues and others could result in legal problems and financial losses. The correct decision may save time, money, and equally important reduce exposure to liability from claims of negligence, discrimination, injury or failure to comply.
For many landlords, outsourcing a job is the more efficient way to produce the desired work result, particularly when the work should be/must be done according to licensure and code standards. Most often this is the case for extensive property repair or remodeling work. A landlord may need to select a general contractor for a major remodeling project or a specific skilled trade contractor such as an electrician or plumber.
Without first-hand knowledge of a tradesperson’s skills or a trusted referral, how can a landlord determine the qualifications of the would-be hire? Even more so, how can a landlord assess the risk as presented by the individual regarding quality of work, on-time completion, contractual authorities and responsibilities, financial stability, professional standing with state boards, and general reputation within the community?
The basic rule before starting any project is to define and analyze the project. Obviously the type and size of the project, the requirements of the state and county or city building standards and codes, and resource availability will be major considerations.
The following questions, while not all inclusive of every issue, may help you decide which items are important for a particular project and set of circumstances, taking into consideration your experience and your tolerance for risk.
- Is the project allowed by zoning, building codes, CC&Rs, and association bylaws?
- Is the estimated cost within my budget?
- What levels of skills and experience are required?
- Is a license required by law for certain aspects of the project?
- Should I hire a licensed contractor even if not required by law?
- Is a building permit required?
- Will the project require the services of an architect, engineer or designer?
- Is the percentage of cost that would be recouped from increased rents and/or reduced expenses and/or from increased sale value make the project cost effective considering the expected holding period?
- What efficiencies might be gained by doing more than initially considered?
You want to make sure that your remodeling or construction project doesn’t turn into a nightmare, with liens or lawsuits in addition to bad work. Some knowledge, some research, and some probing questions can help you make the right decision, save you time and money, and help you avoid problems.
Employee vs. Independent Contractor
A previously published article discussed the issue of classifying workers as employees or independent contractors. Before hiring an individual to perform work, the employer must weigh the potential advantages and disadvantages of each classification. Needs of the business, employer preference, resource availability, and regulatory requirements will be factors in determining the best course of action. The nature of the work must be balanced against the potential issues of control of work product, exercise of right to termination of work services, potential labor costs, and exposure to liability.
An employer must correctly define the business relationship that will exist between the employer and the individual performing the work before the employment offer is made. Once hired, the worker will legally be classified as employee or independent contractor based on set criteria and it may be difficult to change the assumed status to the actual legal status after the fact.
Whether you are hiring a licensed or unlicensed worker, it is very important that the worker be legally an independent contractor rather than your employee – unless you do in fact intend for him to be an employee. The fact that a worker possesses a contractor license does not per se make him an independent contractor. It depends on the relationship, not the license.
Additional information regarding classification of workers can be found in Internal Revenue Service Publications 15, 15-A, and Circular E. There may be differing requirements under state laws and the appropriate state agency should be contacted for specific requirements.
Licensed vs. Unlicensed Contractor
There are several extra precautions to take when using unlicensed workers who you assume to be independent contractors compared to using licensed contractors. First, it is more important to be sure of the employee/independent contractor status if you desire to have the worker considered an independent contractor because licensed contractors are more likely to satisfy the government’s criteria than unlicensed contractors.
Second, it is even more important to verify that the contractor has liability insurance and provides worker’s compensation coverage for any employees because unlicensed contractors are less likely to have either, whereas most state licensing agencies require proof of both insurances for licensed contractors in order to remain licensed. Finally, it is more important to require the unlicensed contractor to sign an independent contractor agreement that covers the issues of concern to the IRS.
One added advantage of using licensed contractors is that stating licensing agencies will generally assist consumers who have problems with the contractor.
Liability Insurance
Liability insurance is an issue of concern whether the worker is an employee or an independent contractor. No matter what the assumed status or the actual legal status, you the owner will be sued if the worker causes injury or property damage while working for you.
You must carry adequate liability insurance to protect you from such events. Furthermore, when you hire an independent contractor, you should require proof that the contractor carries adequate liability insurance that covers you because doing so provides another layer of protection. This is particularly important if your rental insurance does not adequately cover all of the possible risks.
Workers’ Compensation
Workers’ compensation is meant to provide replacement income and pay medical expenses for employees who incur work-related illness or injury. Each state has its own system for workers’ compensation. Most owners know that workers’ compensation insurance is required for employees.
However, you should also be aware that an independent contractor who is not covered by workers’ compensation insurance can sue you if your negligence caused or contributed to his/her personal injury. Even more important, you need to require proof that the independent contractor provides workers’ compensation coverage for any employees that might work for him/her on your behalf. Otherwise, you may become liable in the event of injury to those workers.
Some states do not require workers’ compensation for employers with fewer than some number of employees. The minimum number is usually in the range of 3 to 5. Most states do not require workers’ compensation for casual labor. The definition of “casual” varies from state to state, but basically is considered for a brief period of time and is labor that is outside the employer’s normal course of business. However, because state law doesn’t require coverage for those classes of workers does not prevent these workers from making claims against you and filing lawsuits related to illness or injury alleged to have resulted from working for you.
OSHA Regulations
OSHA covers all private-sector employers and their employees in the 50 states and all territories and jurisdictions under federal authority. OSHA covers employers and employees either directly through federal OSHA or through an OSHA-approved state program. OSHA requires record keeping of work related injuries and illnesses and, in some cases, requires formal reporting of them to OSHA.
When using true independent contractors, OSHA will normally be the responsibility of the contractor. If using unlicensed “independent contractors” and there is a chance that they would not qualify as independent contractors if their hiring status were closely examined, as for workers’ compensation insurance, you need to be concerned about OSHA.
Local codes
Zoning laws and building codes can both determine what repair/rehab you can do and what repair/rehab you must do.
When planning significant physical modifications to a property – whether adding rooms, changing design, re-painting, re-roofing, or otherwise modernizing – you must be sure that your plans are not affected by architectural or landmark preservation restrictions. These restrictions may be in addition to building codes and zoning laws.
Risk Assessment
Due diligence is required in all phases of a work relationship as well as the construction process itself. You will need to analyze the skill set and the legal requirements required to meet the needs of your business and the scope of the project.