There are a lot of potential risks and pitfalls in managing rental properties. Working with contractors is one of those risks. I find that many landlords don’t understand what the risks are, not to mention how to protect themselves from them. So I thought it might be beneficial for you to understand the potential risks and the corresponding risk reduction techniques that you can employ.
Let’s start off with one of the biggest risks when it comes to contractors. This is that the contractor does not have workers compensation insurance (often referred to as “worker’s comp”). This insurance covers workers that are injured on the job. You might be telling yourself, as a landlord, “That’s not my problem, that’s the contractor’s problem.” Unfortunately, that is not the case. Assuming the contractor doesn’t have worker’s comp, there are two situations when this becomes a large problem for the landlord.
The first issue arises when the contractor is found to be an employee of the landlord. If this is found to be the case through an audit of the landlord’s insurance policy by the landlord’s insurance company, the landlord would be responsible for paying the insurance premium retroactively for the contractor for the premium year being audited. Workers comp premiums are calculated based on the gross amount of the job. For example, worker’s comp for a roofer can be around 33%. So if you paid a roofing contractor $10,000 to complete a new roof and your insurance company found you are responsible to pay the worker’s comp, your bill would be $3,300. If you did three roofs that year, multiply that number by three. So you can see, the numbers get really ugly really fast.
The second issue that can arise is that if the contractor does not have worker’s comp and gets injured on the job, the landlord could be held responsible for all medical bills and other financial hardships realized by the injured person. Depending on the extent of the injury, this too could get very ugly very quickly and also include lawsuits and litigation.
The above issues can easily be avoided by requiring that any contractor working on your property has worker’s comp. Ask them to provide proof from their insurance provider.
Another thing to be aware of is that the landlord is responsible for any contractor comments made to a tenant as they relate to fair housing laws. If Joe the handyman is in a tenant occupied property and states that he hates working for disabled people (a protected class by fair housing laws), the tenant could register a formal complaint and the responsible person would be the landlord. Although you certainly cannot control everything a contractor says, one way to help you avoid this issue is to make sure your contractors have at least a basic understanding of the fair housing laws and let them know that the less they talk to tenants or anyone at a job site, the better.
And the final contractor risk we’ll consider surrounds employee screening. Do your contractors screen their employees for criminal history, drug use, etc.? Are you confident that Joe the handyman wasn’t recently released from prison for sexual assault and you are sending him to a single woman’s home to repair the door lock? Be sure you know the people you are using and have the confidence that they are not putting your tenants in danger.