The age old question - Should contractors be paid for a lunch break?

July 28, 2016

Hello Renovators and Houzz readers,

My mom is in the 8th week of her kitchen remodel. Gone are the original cabinetry from when she moved in to the house in the 1970's and in are some beautiful looking Omega cabinets, Cambria countertops, wood tile and other changes throughout the house.

The general contractor with whom we have been working has been a real craftsman. He has done a great job and the workers he has brought in have been very conscientious, save for a couple of broken items. He usually has two to three people with whom he brings to the job and they are paid individually with a separate rate per hour by us as well. At the end of every week, I am emailed his rate of service, along with "non-subcontractors" labor service.

What we have found is that they do not "clock out" for lunch. Somewhere between 12pm and 1pm daily, they stop working and spend time in the backyard eating for 30-50min, variably. When my mom gently said after giving them their most recent paychecks, "I didn't know that lunch was included in the work day. I didn't know you didn't clock out," the GC stated, "Oh yeah. We don't take breaks. We don't leave the job site." He was very adamant about it.

During lunch, we don't bother them (or have rarely bothered them with questions, possibly only in that first week). I actually remember asking them questions during their seminal week but then I thought about it and said to myself, "I shouldn't bother them with questions during their lunch break. That's not fair of me." So I haven't since.

I looked in the contract my mom signed and nothing is stated about paid lunch breaks. I remember when we first met the contractor last year, he said that each person has their own time card and that they clocked out for lunch. In this scenario, he is saying that unless they leave the job site then they are "on the clock." Nothing is in writing though

Is this standard methodology for contractors? Are they paid to eat lunch? Nothing is in writing. He says that they are not taking breaks, but yet they are sitting down and eating. As I wash dishes in the backyard, I know they are not talking about work. Also, the whole idea of "non-subcontractor labor." Even though the other men work with him, we pay them individually. To me this is kind of weird. I mean, if they work for him, shouldn't he be paying them? Or does this save him money by not having to buy insurance for them since then he doesn't have a "company" of sorts? I guess I'm not sure how this really works.

Anyways, feedback would be appreciated. Perhaps we are just being naive about this and anything you can give us to chalk this up to a learning experience would help. We are in the home stretch of these renovations. This is the house where my mom is supposed to continue her retirement well into her old age and it would be a shame if anything compromised that.

Comments (118)

  • Vith

    The FLSA does not require lunch breaks, and two short breaks (5-20 mins) are considered compensable. If they don't take breaks during the day they can use both their paid breaks for lunch. State laws vary, look up yours.

    lpasteur thanked Vith
  • JDS

    I keep seeing references to employees. Who is their employer? I suggest it is you and that makes you the General Contractor. You have effectively hired a project manager to oversee your employees. That seems evident from the use of the ridiculous term "non-subcontractor". He's shifting responsibility to you or thinks he is. If additional pay for overtime is due, it is probably you who would owe it. His accountant is only going to see his income from you because he didn't pay anyone for their work. Businesses pay taxes on net income not invoices.

    I've seen this kind of arrangement on a large project in order to avoid sales tax and it cost the owner a lot of money when it fell apart.

    If things are going well, the last thing you should do is rock the boat.

    lpasteur thanked JDS
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  • jellytoast

    I kind of agree. You only have a couple of weeks left on this project. Hopefully it will be over and done with soon, your mom will be happy with the work, and there won't be any repercussions. If you feel like you spent more than you should, chalk it up to a lesson learned. Most of us have had to do the same at one time or another.

    lpasteur thanked jellytoast
  • energy_rater_la

    I'm in the leave it alone you are almost done camp too.

    if you had a complaint about the work, job site condition, behavior...but

    1/2 hour lunch eaten on site? 10 hour days...

    this stands out to me in your latest post:
    - They get paid hourly for shopping at the Home Depot or other lumber
    store, whereas in a fixed bid, that time is built-in if needed. For
    instance, he bought a new ladder for the attic, but when taken out of
    the box, the ladder was broken. He had to take the ladder back and
    that's time on the clock (driving, waiting in line, picking out a new
    ladder etc.)

    Is his time free for picking up materials & returning materials?

    could you return the broken attic staircase?this is the one item that I see disputed over an over itrw.

    homeowners thinking that paying for trips to the store don't count,

    because one isn't on site working.

    its a rare homeowner who makes these runs and

    gets the right parts & pieces so that the job runs smoothly

    the next day.

    best of luck and congrats on the good work.

    lpasteur thanked energy_rater_la
  • watchmelol

    Bottom line is your GC is providing day laborers that you are paying under the table plus collecting a fee for finding them for you. Super shady and good luck on collecting on any sub par work discovered down the line when the "crew" has left and the contractor moves on to his next "job".

    You don't say exactly what they are doing. Basic non structural carpentry and cabinet install is not rocket science. But if there is plumbing and electrical or moving of walls etc. involved by these unlicensed non subcontractors I would be wary. Have permits been pulled?

  • Caree

    I can't imagine people expecting to be paid for their lunch time. I've worked for large corporations most of my life. We were not paid for the lunch 'hour' (sometimes a 1/2 hour). I rarely took them so was not paid at all for that time which was spent working. Then there were the many hours above and beyond that.

    In my own business, I would not dream of charging people for anything but productive time when I was actually working, or for materials and overhead costs. Not for eating, not for talking unnecessarily, not for any other down time, avoidable errors or random inefficiencies - that would be deducted. Otherwise is total BS and so unethical.

    P.S. I like it that way.

    lpasteur thanked Caree
  • greg_2015

    So these people DON'T have insurance (ie. worker's compensation insurance, not personal health care)! If they get hurt then YOU are responsible. You are just lucky that the nail that flew up in the workers face was just a minor injury and he was willing to ignore it. If it had blinded him, I can pretty much guarantee that there would be lawsuits and you would be on the hook.

    These people are being paid under the table. So there really isn't any reason to complain because this whole situation is shady, not just whether they should be paid for their lunch hour. Quoting laws is irrelevant since none of this is legal.

    But since it's near the end, I'd be tempted to just continue and hope nothing happens and breath a sigh of relief when it's done.

    I doubt the workers will sign a lien release since they aren't legal workers. They won't want any kind of documentation that they were ever at your house.

    lpasteur thanked greg_2015
  • energy_rater_la

    lots of assumptions going on here.

    one side of story from homeowner's daughter? son?

    gc isn't here to defend himself. it could well be he

    pays taxes & insurances...none of us know that.

    not even the person issuing the checks.

    fact is 8 weeks of two hours overtime every day

    vs 1/2 hour of lunch.

    pay the overtime & deduct the half hour out of

    the regular rate...not the overtime pay. unless

    of course they are eating lunch after the 8 hours of

    regular pay.

    otherwise just moan & groan about it.

    it sounds like contractors are doing a good job &

    check writer is now trying to recoup 1/2 hour pay.

    what does the contract say?

    once you pay the first paycheck without contesting the lunch

    break...you have accepted the verbal contract.

    late in the game to be re-negotiating.

  • MongoCT

    My comments are unrelated to who is paying for lunch, but I'll try to open your eyes to what to me is a larger issue.

    Read Greg's previous post.

    Now what follows is all supposition. It's based on limited info. However, it also reflects my experience sitting as a panel member for arbitration hearings and having to sort out situations similar to yours. So I have some familiarity with the issues at hand. And again, this is based on information from only one party in this situation: yours.

    If one of the workers were to get a minor injury, sure, they may be able to get treatment and have the treatment covered by their spouse's insurance. Apparently that has already happened.

    However, if one of them were to have a serious injury...example, the loss if an eye (which almost occurred) , or a fall off a ladder? Then their insurance might investigate further. If they find out the injury occurred while they were at work, their spouse's insurance company may very well come after the injured worker's employer. Which, when all of the paperwork is sorted, could be you.

    Are you their employer? You may be. You may not be. But the answer to that question might only be answered in court.

    If the spouse's insurance pays for medical costs, you may later be sued by the insurance company. Again, it could result in a court case.

    If the spouse's insurance denies medical coverage, you'll likely be sued directly by the injured worker. Again, a court case.

    A worker gets into a car accident on the way to Home Depot? The financial ramifications of that accident could fall back on you.

    Might not happen.

    Might happen.

    But you came close once already with the incident in the attic.

    I'd recommend you call an agent for your homeowner's insurance. You may be able to get a short term policy to cover your exposure. Or, you may be able to up your umbrella coverage. Just in case. But talk to your agent or insurance representative.

    And by all means, get each and every person involved in this arrangement to sign a Mechanic's Lien Wavier. Print out the form. On the next payday, have them sign the waiver before you hand them their paychecks. No signature? No paycheck.

    Legally, do you need the Lien Waiver? Maybe. Maybe not.

    Honestly, paying for their lunch breaks is the least of your worries. Sure it's the issue that's bothering you right now, but in the grand scheme of things regarding financial exposure and risk? You may already be buried up to your neck.

    One last thing. You may have been deceived by the GC. You may be ignorant of the ramifications of the law regarding Workers Comp, insurance, and how the responsibility for injuries on the a job site if sorted. None of that is intended as an insult. But that does not absolve you from the financial responsibility if an incident occurs.

    Your GC? Your situation is quite unusual. Because of that, I'd venture (again, an assumption) that he knows exactly what he's doing, and he knows exactly what situation he has put you in and the level of financial risk to which you are exposed.

  • jellytoast

    Oh, come on, energy_rater_la ... it's completely obvious that the GC is avoiding payroll taxes and insurance by having the homeowner pay the checks! No way this situation is normal or acceptable for a contractor who conducts business legitimately. This is in California where it is his responsibility to provide worker's comp for his employees and they have already told the homeowner that they don't have any. Besides, since when do we ever hear both sides of a story here? Every problem posted on this forum is a one-sided story! That doesn't mean we can't take the OP at his/her word and give advice and opinions. What's the point of the forum otherwise?

    "I doubt the workers will sign a lien release since they aren't legal workers. They won't want any kind of documentation that they were ever at your house."

    That has already been documented because they were issued a check every week from the Homeowner.

    BTW, the OP can easily enough do a license check by running his license number on the CSLB website. My guess is that he claims "exempt" status by stating he has no employees. Otherwise, the license board would suspend him for not having an active worker's comp policy on file.

    lpasteur thanked jellytoast
  • Skil367

    Ipasteur: << I've looked at the work contract. Nothing is mentioned of paid lunches.
    The GC and his crew do conscientious work and I am grateful, but doing
    good work doesn't mean these details are allowed to just slide by
    without any mention >>

    Why aren't you as outraged about the workers not being paid overtime? I'm sorry, but this is getting to be comical.

  • PRO

    As a Hist. Pres. carpenter for many years, if the homeowner accosted me during lunch, that lunch was on the clock. If it is spent discussing the project, it was a working lunch. I had lots of working lunches.


  • PRO
    Joseph Corlett, LLC

    As the Service Manager of a solid surface fabricator more than a decade ago, I often went through the drive-through and ate lunch on my way to the next job. The boss's wife didn't pay me for my lunches and we reached a several thousand dollar settlement when I explained that under Michigan law, employees must be paid for all hours worked.

  • Caree

    I'm not sure what you are trying to say. You think you were working as you picked up lunch at the drive-through and ate it on your way to the next job?

  • lpasteur

    freeoscar - Yes, you are right. Health insurance is not substitute for worker's comp. I don't know what their contingency plan is for a work-related disaster. I wonder if it is subtly us without so much as it being discussed(?) It is definitely a concern. The "nonsubcontracted laborers" aren't on the job as much any more as they are working for the same GC in other very lucrative jobs, but it is something I can bring up with him tomorrow. Hopefully he doesn't feel slighted by the questions. It is definitely a concern of mine.

    Vith - Yes, thank you for bringing this up. I went on the Division of Labor's website to see what the status was for breaks in California. Paid 10 minute breaks are required for every 4 hours worked, while 30 min is required every 5 hours worked. Overtime pay is required if the occupation is FLSA non-exempt. It does not appear that construction workers fall under FLSA exempt status, which means if they are paid hourly, overtime should be instituted.

    As I explained earlier, it appears that the GC has instituted a "hybrid" working contract - he has proposed an estimate of the work, based on material, labor/hour and subcontractors who are paid a flat fee but works like he has firm value bid for the work. I believe it was freeoscarwho called the laborers independent contractors. I think that's correct. The GC doesn't have workers comp for them. THey have their own insurance. However save for the GC, everyone else doesn't not have a contractor's license.

    JDS - "Who is their employer?" Well, we give them the checks but do minimal direction or supervision. We have only asked them to fix/alter things that don't fit the 3D rendition provided by the designer as their has been a misstep in communication between him and the GC on the build of the project. The "nonsubcontracted laborers" all him "boss" He directs them. He has no workers comp for them though.

    I have no idea how their taxes work. They do have invoices that they present to the homeowner, but whether they are presented exactly as such to the IRS is, I suppose, not my business. Based on the pictures I have seen of their past renovations and the locations of their present and prior jobs, their clients are quite affluent. I feel like my mom and I are at the bottom of the food chain. Obviously I can't say for a fact, but no one else appears to be questioning their working & payment methods as they keep getting re-hired for other house renovations by the same home owners as well as neighbors. Some of them actually don't give them checks but bundles of cash as payment. The other home owners have very opulent lifestyles.

    watchmelol - Permits are something we vehemently questioned every GC with whom we talked. This particular GC went to city hall for approval of renovation plans and attained the permits as per cost on the bid. We learned our lesson from our neighbors who recently had some bathroom renovations. The contractors did not pull permits and a city inspector happened to be driving by and took a look at the job. They ended up paying a fine and re-opening a previously closed wall. The contractors then asked my neighbor to go in 50/50 for the city fine and extra materials needed to re-complete the job which she reluctantly and graciously did.

    Along with the cabinet install, the job required plumbing, electrical and a load bearing wall needed to be knocked down. The permits pulled are all in the name of the GC, not his laborers.

    snookums2 - As I related earlier, I've never had a job where I've been paid for lunch. I've also never had an employer who allowed me to save up my paid break times so I could have a longer lunch when the meal period came. But it is what it is at this point. We are drastically close to finishing.

    greg_2015 - Yes, the more I see what is going on, the more I see how much worse it could be. How they report their taxes is unknown to me and none of my business.

    MongoCT - Yes, our GC knows more about the specifics of how he is doing things than we do, but it's worked for him. One of his laborers has been with him for 8 years, seemingly without incident. We are definitely in the dark when it comes to a major onsite injury. That's something I hope to clear up tomorrow.

    Sombreuil - We've been leaving them alone for lunch. Aside from those first couple days when we were getting used to having people around, we don't bother them with work questions or other during lunch.

    MAG77 - Dear Lord. Do you even read what others on this topic write? Everyone else is on the same page but you. You seem to be adamant on not just inculcating your opinion as fact, but doing so in a pejorative and questioning format. Honestly, you've added nothing positive to the discussion.

    "I'm sorry, but this is getting to be comical." "No," don't be sorry. Just leave.

    I think JDS, jellytoast, energy_rater_la, greg_2015have it right when to leave well enough alone at this point. Based on the DOL state rules, they are saving their paid breaks into one period and then tacking on extra time to finish their lunch. I think for me the main idea is for things to finish smoothly and have my mom enjoy her new kitchen well into her old age as she transitions to life without my dad around. Based on how much this renovation is costing, I just hope she doesn't eventually have to sell the house. That would be a disaster.

    We are still about 3 weeks away from finishing.

  • PRO
    Joseph Corlett, LLC

    "You think you were working as you picked up lunch at the drive-through and ate it on your way to the next job?"

    If I wasn't working, what the hell was I doing? Out for a pleasure cruise after completion of a project and just happened to arrive at my next assignment by accident?

  • jellytoast

    lpasteur, please let us know how the conversation goes.

  • greg_2015

    And just because the GC says "Oh yeah, everyone is insured and everything is legal. Don't worry about it." that doesn't absolve you of the responsibility when it turns out they aren't.

    How they report their taxes is unknown to me and none of my business.

    Unless it turns out that how this is set up is that they are your employees and your responsibility. Then it is your business.

    If they don't work for the GC and they aren't licensed independent contractors, then by default you've hired them since you are paying them for the work that they are performing and therefore you are the employer and responsible for taxes and insurance.

    This is why the GC is having you pay them directly. To attempt to absolve HIM of any responsibility. He doesn't care about you if the sh!t hits the fan with a major onsite injury. Just because it's been working for him for years, doesn't mean that it will continue to do so. And meanwhile, he's reaping the profits of skirting around the laws.

  • Skil367

    Ipasteur: "Just leave"

    Great idea. I just wish I had thought of it first.

  • Caree

    'If I wasn't working, what the hell was I doing?'

    Eating your lunch between jobs.

    The details weren't given.

    Of course if you are employed for a job that involves being on the road then those are hours worked.

    That said, now sounds like you were supposed to take an unpaid lunch break but chose not to. Then wanted to be compensated for working through lunch, which wasn't part of the employment agreement or pay schedule. Things like that usually have to be authorized beforehand because it costs the employer more money.

    Then again, managers are usually salaried. They often work through lunch, come in early, stay late. Every day. Without extra pay. They do the job for an agreed upon salary. Hours and overtime (which has to be authorized) are used to pay hourly workers not managers.

    You've talked so much about all the things you charge for, that's all.

    Lunch breaks and driving to work, no.

  • Katrina Tate

    I've been in construction for about 10 years (commercial/retail) and we have never had to pay workers hourly. We get a quote for the job and paying the workers is the GC's problem. My company requires $5 million in insurance. It's strange and seems underhanded that you are cutting checks weekly to the GC's workers.

  • lpasteur

    jellytoast, greg_2015, Katrina Tate

    So i had a conversation with one of the workers ("non-subcontracted laborer") about injury and insurance. Some time after watching him and the other employee climb a 10ft tall scaffold in the living room in order to put a cap on a j-box on a sloped ceiling, I asked what would happen if someone fell and broke a bone. Essentially, who would pay?

    At first he answered, "workers compensation, I guess" but after gently pointing out that he didn't have any, he responded that whatever his wife's insurance didn't/couldn't pay, would just come out of pocket. He added that every work day was a "risk" whether or not you had insurance. The GC walked in on the middle of the conversation and agreed that every day you work is a risk for injury, regardless if you have insurance.

    So without trying to make the situation more tenuous, what I gather is we (my mom & I) just need to take it on blind faith and good will that if there is an injury onsite, they won't come back and litigate. These two and a half months later, I realize that I shouldn't be asking them or feeling if guilty if I don't offer my help whether it is for something simple like holding a ladder, teaming up to move furniture, gathering tools etc. because if the act with which I am participating results in an accident, I've just possibly implicated myself as a probable cause of the injury.

    And as greg_2015 pointed out, it is us that are writing the checks, but does that really make us the employer? The GC is directing/assigning/supervising the non-subcontractor's tasks, but they are not under his payroll. It's as if we are paying them to take direction from him.

  • greg_2015

    Even if the worker themselves choose not to litigate, if the accident itself is bad enough and the authorities become aware that they were working on your property with your approval you'll be in deep trouble.

    You are implicated just by having people work on your house without them having the proper insurance and licenses, whether you are actively holding ladders or not.

  • freeoscar

    For small issues they'll be fine with the health insurance. For repeated or something larger, I could see the health insurer demanding that worker's comp pay for it. Finding none, and learning about the unusual situation, I'd imagine they go after you (and you'd bring in your homeowners/umbrella). I have no idea how successful they'd be, nor how large of a claim for the litigation to be worth their while.

    Anyway, for everyone's sake let's hope the rest of the reno goes off safely.

  • PRO
    Joseph Corlett, LLC

    "...it is us that are writing the checks, but does that really make us the employer?"

    Yes. And if someone get hurt, you'll be hurting shortly.

  • jellytoast

    Yes, they are right ... everyday on the jobsite is a risk for injury, which is why the contractor is required to provide worker's comp!

    Of course he is their employer, and as such, he is violating a bunch of laws, including perjury if he's claiming exempt status at the licensing board. According to the CSLB, if you hire an unlicensed contractor, you could be held liable for his and/or his employees injuries while they are working on your property. He may be in possession of a licence, but if he lied about having employees, then he is in violation and his license would be suspended until he gets insurance. So does that make him an unlicensed contractor if his license was obtained under false pretenses? I'm not sure. Did you run his license number to see if he claimed exempt?

  • Captain Oblivious

    As an accountant I suspect that JDS is the closest to correct on the actual working arrangement. I also suspect that the OP should be withholding taxes on the employees. It looks to me that you hired a construction manager and not a general contractor. Everything about the working arrangement you have absolutely screams that you have an agency relationship.

    This arrangement isn't new in the construction industry and while more common in commercial projects they are not unheard of in small projects. On commercial projects C.M.s are quite different from GC's, however, on small projects a construction manager's day to day activities might be indistinguishable from those of a G.C.

    Obviously you have done some research and found that you don't control the work and therefore are not an employer. However, you don't have to control the work directly, often an agent is hired to control the work that you are not familiar with. I own a small horse farm that I inherited, we have a trainer who hires, fires and oversees all the workers. He is an independent contractor, who I have hired to oversee my workers. The workers that he oversees are still my employees. That relationship is very similar to one of the more common construction manager arrangements (think UbuildIt).

    If you were my client I would ask to see the contract but if no contract was available I would advise you to withhold payroll taxes, do the employer match, pay overtime and decide what benefits you are required to offer, because all of my years of experience tell me you are the employer through an agent. I know many other accountants who would tell you that you are screwed when you get audited but what are the odds. I mean really the employees would almost have to report you for you to get audited, so don't be stupid and do anything to upset them.

    Many people here are assuming the contractor is breaking a lot of rules. He could be, or he could be smart enough to simply put you in a position to break rules, which you are more likely to break as you are not familiar with them.

  • Vith

    There is risk every day... driving to work being a risk for most people... people die daily.

    Btw, breaking a bone falling from height would be getting off easy. Would be lucky to not have head or spine trauma. For most people they cannot continue their normal lives again after an injury like that.

    I dont think she is breaking any tax rules. The subs are doing their own part, it is for them to claim their income. When you hire someone to work on your plumbing do you expect to withhold taxes for them? Dont think so. Not like she is going to pull a W2 out of her back pocket for them. Pretty sure the IRS would not expect that of a consumer.

  • greg_2015

    Vith, the difference is that the plumber is not your employee. They have their own license, insurance, etc. So you don't have to worry about taxes etc.

    These 'subs' are NOT subcontractors. The very definition of that word is "under" a contractor (ie. they work for a contractor). The GC in this case has explicitly said that they are non-sub workers.

    So what does that leave them as? They have to be employed by someone. They don't have a license so they don't work for themselves and they don't work for the GC. Therefore they are employed by the person that pays them.

    The OP has illegally hired them to work on his property. He is paying them under the table and he doesn't have insurance to cover any accidents. If it all goes smoothly, nothing will happen and everyone will go on their merry way without having to pay any overhead so it's cheap work. The problem is if something happens.

  • Captain Oblivious

    If you hire a day laborer to work on your plumbing, then yes you have to withhold taxes on them. However, if you hire a plumbing company for that same task, you don't.

    The line between consumer of labor and provider of labor is not really that blurry and has a fairly simple test. Find the person who is paying their FICA - if you can't point to that person then odds are it is you.

  • Jim Mat

    IRS requires a 1099 for $600. IIRC, Meg Whitman running for public office, had a maid who was paid without withholding.

  • jellytoast

    Hiring a General Contractor who brings his own employees to the job is not comparable to hiring a housekeeper on your own. From the OP's first post, I got the impression that her mom (who signed the contract) was not fully aware of what was going on with the payment arrangements. Operating a business with shady financial practices is one thing when all of the parties are aware of what's going on, and in that case, everyone gets what they deserve. But it doesn't really sound like that is the case here.

    "Many people here are assuming the contractor is breaking a lot of rules. He could be, or he could be smart enough to simply put you in a position to break rules, which you are more likely to break as you are not familiar with them."

    As an accountant, are you saying that the IRS and the Employment Development Department would be okay with this arrangement?

  • greg_2015

    But ignorance of the law is not a defense.

    A homeowner is responsible to make sure that everyone that they hire are licensed and insured. Period.

    The fact that they were paying the workers directly should have been a huge red flag that something weird was going on. The 'non-sub workers' line in the bill should have been another flag. But even without those red flags, the homeowner still has the responsibility.

    The GC may very well have some responsibility if something happens. But in his case, he can just have his company declare bankruptcy and his personal finances will be untouched. So he may be willing to take the risk. Or he may be totally covered because he told you (and provided paperwork to show) that they don't work for him and he's just directing them.

  • Captain Oblivious

    1099's are for businesses and not individuals. Individuals do not have to send 1099's to contractors, only businesses do.

    As an accountant, are you saying that the IRS and the Employment Development Department would be okay with this arrangement?

    Absolutely. There is nothing new or unusual about this relationship, while it may be atypical in the construction industry it is certainly not an untested tax relationship. I doubt any architect, attorney or accountant would be stumped by this relationship and the Construction Manager would just explain that he builds houses and if you want legal or financial advice then get a different agent.

  • weedyacres

    A homeowner is responsible to make sure that everyone that they hire are licensed and insured. Period.

    Really? I'm breaking the law if I don't verify license and insurance? While I agree I'm stupid not to, I think it's the unlicensed person that's on the hook for illegality. Because, after all, they could forge documents or something to make me think they were licensed and insured.

    Also, if individuals are not required to 1099 other individuals, then where's the payor's responsibility to figure out whether they're paying a worker as an employee or as a contractor? Couldn't one conceivably claim, if audited, that "The worker told me he was a business with his own insurance and payroll system. The hourly rate I paid him was supposed to cover all employment taxes, etc."

    Mr. Weedy used to do handyman work for hire. He billed out at $35/hour, none of his customers withheld taxes, and I reported all income, on which we paid employment and income taxes. What makes these workers any different?

    BTW, I happen to agree that the GC is a shyster, I'm just delving into some of the details of the legal issues here.

  • PRO

    Individuals who own property for investment, rental or other business purposes send 1099s. Only personal residential property does not require 1099s

  • Captain Oblivious

    To the OP - You have gotten some great advice here and I think much of it is spot on. Again, I am not so sure your "contractor" is doing anything illegal or breaking any rules, in fact, as a CPA with 22 years of experience I think it less than likely. I have been exposed to a Construction Manager when a bank insisted an owner/builder hire one, and the set up with the subs and insurance sounds very similar to your arrangement. I am not saying he is a good guy, I believe his willingness to keep you uninformed proves otherwise but before you confront him about breaking the law, you might want to make sure you are also prepared to bear those costs if it turns out it is you that is breaking the law.

    To Linda - This is a real gray area. Individuals who own property for investment, rental or other business purposes are not required to send 1099's. Only businesses have to do 1099's but the question is, are most landlords businesses or investments. Congress has traditionally held that most rental income is passive and an investment rather than a business. However, Congress reversed its opinion in 2010 when they passed legislation stating that all rental income was business income. Which meant that every person who owned rental property was a business and therefore would have to send out 1099's. But, before the law took effect it was repealed and rental income went back to being passive income for most people. Adding to the confusion is the fact that on Schedule E there are questions about 1099's. The AICPA has put out several clarifications stating that 1099's are not required and asked the IRS to make changes to schedule E. Thus far the IRS has not commented, but so far as I know, they also haven't won in court (which is a sign that they haven't really tried to enforce a 1099 rule). I suspect many CPA's do them just to avoid poking the lion and the IRS avoids pushing the issue because they like the information.

    lpasteur thanked Captain Oblivious
  • greg_2015


    I'm not a lawyer so I don't know the intricate details of where all the lines are drawn, but I imagine if someone forged documents then that could resolve the homeowner's responsibility and would place the responsibility on the forger (as well as possibly criminal charges).

    I know that a lot of people probably don't ask for proof of license and insurance (like you described in your husbands case) but that doesn't mean that that is okay. They are taking a chance by not asking for proof but since your husband is a responsible person, everything is on the up and up so there is no problem. And there is probably a line where it isn't needed (eg. paying the neighbourhood kid ten bucks to mow your lawn) to the point where it is needed (eg. building an addition on your house, doing any electrical or plumbing work, etc). Maybe some handyman work would fall under the former. As I said, I don't know where that line is.

    But in this case, it's a big job with multiple workers and the homeowner has been explicitly told that they don't have insurance or a license. That definitely falls under the scope of illegal.

  • PRO
    Joseph Corlett, LLC

    That "he forged the documents" bit isn't going to fly in the internet age.

  • Vith

    I agree with weedy,

    back to OP, just hope they finish with no one injured and everything done well. I wouldnt poke the bear here.

  • jellytoast

    Captain Oblivious, what do you make of the procedure whereby the Gen. Contractor bills the OP every week for his "non-subcontracted labor"? As far as I know, non-subcontracted labor is employee labor. If they aren't his labor, why is he submitting the bill for them?

  • Captain Oblivious

    jellytoast - I absolutely agree that the non-subcontracted labor are employees. However, I suspect they are the OP's employees and not the contractors. The OP is being told that they are not contractors, and he is paying them weekly, which is a giant hint that he is their employer. I can't really comment on forged documents or any of that. I can almost certainly guarantee you that the IRS will send you a bill for withholding if they find out that you pay them weekly and that they are noted as not sub-contractors.

    I can't stress how typical this relationship is, ask any mid sized farmer, or find an accountant or attorney in a small farming community and they will all be intimately familiar with contracted farm managers who supervise and turn in time for the farm's hourly employees. Usually these are temporary or seasonal relationships, like harvesting crops, building facilities, starting a business, or streamlining a business. It is just outsourcing.

  • jellytoast

    I totally agree that the OP's General Contractor is acting more as a project manager and stated such far up in the thread. Still, it seems to me that by billing for wages for those other workers, the GC has stated that he has a relationship with them other than being their "manager."

    From what you are saying, a Gen. Contractor can legally skirt around state and federal laws for wages and worker's comp insurance simply by getting his clients to write the checks? Worse, he put the client in the position of not being able to complain or get out of the deal because the client has now been involved in his scheme and can be held financially liable in a number of ways! Despicable.

  • greg_2015

    I don't think what the GC is giving the OP is really a 'bill' since the OP is supposed to pay the workers directly. The GC probably calls it a status report on what the hours are that the workers worked and their hourly wage.

    But I obviously haven't seen the 'bill'.

  • weedyacres

    Can't these workers just call themselves self-employed tradespeople/independent contractors? In which case they don't need to purchase work comp insurance on themselves. Kind of like Mr. Weedy the handyman. Someone can be paid hourly without being called an employee.

    They would still need to report their earnings and pay both sides of the payroll taxes.

    But the homeowner wouldn't be legally obligated for the taxes or insurance.

    In my jurisdiction, only a few trades are licensed, so no laws are being violated by the worker.

  • jellytoast

    Yes, but that is the same as hiring an unlicensed contractor. The OP is in Cali. If the total price of the job is more than $500.00, they have to be a licensed contractor in California.

  • jellytoast

    This is the kind of BS that makes it hard for legitimate contractors to stay competitive. You have idiots like this GC undercutting the competition with lower prices that are due his creative accounting practices. Buyer beware, I guess. If you want to be held responsible for any errors or accidents, go ahead and accept that low bid. At least the OP got good craftsmanship out of the deal (I hope).

  • Captain Oblivious

    To weedy - if you get paid a wage, then you are employed by someone, whether that be yourself or someone else. Someone has to pay the payroll taxes and in the real world the burden is really on the payer to prove that payees are not employees. In this case, I doubt very seriously that would happen.

    To jelly - This is not simply a tax arrangement, it is a very robust set of laws known as agency law. It allows for things like power of attorney and governs the rights of corporations. This tax thing is only a small part of it. If I am not mistaken, and my knowledge of this is far from complete, construction managers are far older than general contractors. General Contractors were born from the need for arms length relationships in construction projects instead of agency relationships. The standing issues alone make most homeowners uncomfortable with it. Forget the idea that two laborers don't work for the contractor, none of the subs work for the contractor. He is essentially an adviser helping you build a better house yourself. It is how he avoids licensing problems, you are allowed to be the unlicensed G.C. of your own home, and he is charging you a fee for helping you do that. However, anything that goes wrong is between you and the sub, he has no obligation to repair any problems unless those problems were allowed because of his negligence.

  • jellytoast

    Captain O, your contributions to the thread have been very interesting and eye-opening! Yes, California does permit a homeowner to act as their own GC, but that is not the case here. The GC acted as the GC by pulling the permits for the job so wouldn't that make him the GC on the job? Quoting the OP, "GC went to city hall for approval of renovation plans and attained the permits as per cost on the bid."

  • Captain Oblivious

    jelly, I can't really tell you anything about the rules for pulling permits. I am not sure if the building department requires you to show up for your permits or if you can send an authorized representative. Essentially, a Construction Manager has a limited power of attorney, so he is authorized to take actions in the homeowner's name, but whether the building department would allow this at all is something I can't answer. I am not even sure they care about the difference between a G.C. and a C.M., in the end construction is being overseen by someone qualified to do so.

    Furthermore, I am not even sure if they are legally different jobs. It is essentially just a contractually created differentiation. In reality the wording of the contract creates different rights and responsibilities, other than that there may be no distinction between the two. It might be easier to think of it as a third type of construction contract. General contractors can offer "fixed price" contracts, "cost plus" contracts or "Construction Manager" contracts.

    Again, I really am not sure how some of the legalities work. I know a little bit about agents and their fiduciary responsibilities because I am one. I have a little experience with construction projects, but I am by no means an expert on either. I was more or less trying to keep the OP from making a costly mistake by presenting him with another possibility.

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