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LLC Employee/Worker Bonds – What Are They & How Much do they cost?

What Is an LLC Employee/Worker Bond?

The $100,000 LLC employee/worker bond is required for all contractors in California with a business entity registered as an LLC (Limited Liability Company).  

An LLC employee/worker bond serves those employed by an LLC construction business in the event they are not compensated properly for performed work including wages, interest on wages, fringe benefits, welfare fund contributions, and apprentice program contributions. This bond must be filed with the Contractors State License Board (CSLB) and is required in addition to a contractor’s license bond.

When establishing a Limited Liability Company in California, contractors should consult with the CSLB for a complete list of LLC license requirements, as well as a qualified attorney. In addition, businesses organized as an LLC must also maintain a $1 million general liability insurance policy.

How Does It Work?

LLC employee/worker bonds are a type of three-party license bond agreement whereby the surety carrier provides the CSLB (the obligee) a guarantee that any employed workers of the LLC (the principal) will receive payment for any unpaid compensation or fringe benefits up to $100,000.

Should the LLC violate state law with regard to this regulation, a claim can be made against their bond, resulting in a bond payout. Should a bond claim occur, the surety (often in conjunction with the CSLB) will perform an investigation into the validity of the claim. If a claim is determined to be valid, an LLC must reimburse the surety for any payments made under the bond or be subjected to penalties, including license suspension or revocation.

Who Is Protected by It?

An LLC bond is for the benefit of any employee or worker who may have incurred financial damages as a result of the company’s failure to pay wages, fringe benefits, or other financial contributions as outlined in the California Business and Professions code. In light of this, contractors should be mindful that if a justified claim is made, the surety that issued the bond will essentially hold a contractor accountable for any errors they made and any corresponding bond payout. With this in mind, contractors should be aware that an LLC bond is for the benefit of the LLC’s employees, not the LLC.

Why Is It Required?

California Contractor License Law requires licensed contractor businesses organized as an LLC to have an LLC employee/worker bond, it is reasoned, due to the presumption that LLC’s fail to properly pay wages and fringe benefits to employed or contracted workers at a higher rate than other business entity structures. Prior to January 1st, 2012, California did not allow contractors to form LLCs in the state due to this higher perceived risk. For more information on primary requirements for and components of LLC licenses, refer to the Contractors State License Board website.

How Much Does an LLC Employee/Worker Bond Cost?

Contractor LLC bonds costs are based on multiple rating factors including but not limited to an applicant’s credit and financial status as well as real estate ownership in some instances, with rates currently ranging from about 1.5% to 10% of the bond amount on approved applications.

Does Your Credit Matter?

Yes, the personal credit of the principle matters when acquiring an LLC surety bond. The stronger the credit score, the less an LLC will have to pay for a bond, all other factors being equal. For a $100,000 LLC employee/worker bond, annual pricing is generally as follows:

Credit Tiers 1 Year Bond Cost (Estimates as of Jan. 2022)
Ultra Preferred $1,150 to $1,500
Preferred $2,000
Standard $3,000 to $5,000
Challenged $5,000+

*Bond pricing indicated above is estimated for one-year terms subject to several factors including but not limited to credit score, real estate ownership, license history, as well as financial and business reports. These estimates do not constitute an offer of coverage.

What Are the Specifics of This Bond?

LLC employee/worker bonds must be renewed annually, as they are not a one-time expense. If the bond lapses upon renewal, the CSLB will suspend the LLC license. LLC bonds are continuous until canceled, though the surety may cancel the bond at any point if seen fit, such as in the case of failing to pay a renewal fee or if the principal is uncooperative with regard to a pending bond claim. Canceling a bond requires the surety to operate in accordance with section 996.310 et seq. of the Code of Civil Procedure, which states that the surety must provide adequate notice to both the obligee and the principal. Cancellation typically occurs 30 days after the notice is provided. Once a bond is canceled, the LLC must obtain a new bond within 30 days or run the risk of license suspension.

How Are Bond Claims Handled?

In the event an LLC fails to pay an employee or contractor due wages or fringe benefits, the employee can seek owed wages and benefits through a bond claim. The maximum compensation that can be sought is the penal sum of the bond, which is $100,000 for an LLC employee/worker bond. The surety carrier will cover costs for proven claims, though the LLC is required to reimburse these funds as with other surety bonds.

How Can You Avoid Bond Claims?

While you must have an LLC employee/worker bond, ideally you won’t have to use it. Avoid bond claims by:

  • Thoroughly reading contracts you have with employees
  • Obeying all laws as outlined in the California Business & Professions code
  • Providing timely payment to employees
  • Documenting all agreements and payments

How Can You Get an LLC Employee/Worker Bond?

An LLC employee/worker bond can be acquired from a surety bond carrier. To get your free quote on a new $100,000 LLC employee/worker bond, call Kevin at 530.320.3617.

What Other Types of Bonds Are Needed For California Contractors?

In addition to an LLC employee/worker bond, contractors licensed in California must also have a $15,000 contractors license bond, as well as a bond of qualifying individual and a disciplinary bond if required by the CSLB.

These bond requirements are in addition to the requirement that businesses organized as an LLC must also have a $1 million general liability insurance policy.

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