California Contractors who are an LLCs (Limited Liability Companies) are required to have an LLC Employee/Worker Bond to maintain a license in the state. This requirement was part of Senate Bill 392 Chapter 698.
What is a California LLC/Work Bond?
The California LLC/Worker Bond requirement was established because of a lack of case law regarding the piercing of corporate veils for LLCs in the state. The bond exists to protect the workers employed by Limited Liability Companies by ensuring that the LLC will pay their wages and benefits and not hide behind the protection of the LLC. Section 1 of the bill states,
“the additional one-hundred-thousand-dollar ($100,000) bond requirement for the benefit of workers relative to payment of wages and fringe benefits will ensure that workers are protected despite the absence of case law dealing with limited liability companies.”
Additionally, the bond will cover the welfare fund contributions, pension fund contributions, and apprentice program contributions if the LLC is subject to collective bargaining agreement.
The Principle on the bond is the Contractor LLC, the Obligee is The State of California Contractor Licensing Board and the Surety is the bond company that is guaranteeing the LLC’s obligation.
What is the Amount of the California LLC/Worker Bond?
California requires the bond to be $100,000. The bond is required for both active licenses as well as reissuance, reinstatement, reactivation, and renewal of an LLC license.
How Long Is the California LLC/Worker Bond in Effect?
This bond is continuous. That means that the bond needs to remain in effect for as long as the LLC maintains a license, the bonds is replaced by another bond or the bond is cancelled by the Surety. Per California Code, if the bond is cancelled by the surety:
(a) The bond remains in full force and effect for all liabilities incurred before, and for acts, omissions, or causes existing or which arose before, the cancellation or withdrawal. Legal proceedings may be had therefor in all respects as though there had been no cancellation or withdrawal.
(b) The surety is not liable for any act, default, or misconduct of the principal or other breach of the condition of the bond that occurs after, or for any liabilities on the bond that arise after, the cancellation or withdrawal.
(c) The cancellation or withdrawal does not affect the bond as to the remaining sureties or alter or change their liability in any respect.
Regardless of who cancels the bond, the LLC will either need to replace the bond with another surety company or risk having their license suspended.
How Do You Get a California LLC/Worker Bond?
These bonds are easily issue for applicants with good credit. In fact, most applicants can purchase these California LLC/Worker Bonds themselves by clicking the button below. For those that qualify, these bonds can be issued instantly in a matter of minutes. For those that do not qualify or that may have some credit challenges, these bonds are still obtainable. However, it may require the LLC to provide financial statements on the business, members or both.
What is the Cost of an LLC/Worker Bond in California?
The cost of the bond depends on the credit or strength of the account. Preferred account rates generally run about 1% per year. The cost for most LLCs will be between 1% – 2% per year. These bonds are continuous in nature so the bond premium will be do every year the bond is in place. Most surety bond companies will provide the customer will discounts if they purchase multiple years in advance. For example, a preferred rate may only pay $2,500 in premium if they purchase 3 years upfront.
Contractors and LLCs with credit challenges can still obtain these bonds. However, the rates may be slightly higher.
Additional California Bonds Are Required
Having an LLC/Worker Bond is only one requirement. California still requires contractors to obtain a $15,000 California Contractor License Bond. You can read more about those here. The LLC/Worker Bond will be in addition to the Contractor License Bond. Also, an LLC may also be required to post a Bond of Qualifying Individual or a Disciplinary Bond if necessary. More can be read about those on the Contractor State Licensing Board website here.
Indemnity is Required
Surety bonds are written on the Principal of Indemnity and California LLC/Worker Bonds are no exception. That means that if the bond company pays a loss, they will seek reimbursement from the LLC and any indemnitors. This contrasts an insurance product and losses should be avoided.
Verify the Bond
A California LLC/Worker Bond must be written by a surety that is admitted in the state of California. Additionally, LLCs should usually make sure that their bond is highly rated. We also recommend verifying the bond as fraudulent surety bonds do exist. You can learn more about verifying surety bonds here.
The California State License Board also requires an LLC to maintain liability insurance with a minimum of $1 million in limits for licensees with five or fewer members and an additional $100,000 in limits for each additional member listed. This requirement is not required to exceed $5 million. However, this requirement is important as some surety bond underwriters will want to make sure adequate insurance limits are in place to comply with state laws.
California LLC/Worker Bonds are easily written for most contractors. Most LLCs can purchase their instantly here. Our surety bond experts are always available to help contractors determine what bonds are needed and the best way to obtain them. Contact us anytime or visit our Surety Bond FAQ Page. You can also visit our Blog for a wealth of information on surety and construction.