Just a Reference or General Contracting? Online Contractor Referral Services Operate in Evolving Legal Landscape

Most of us have been asked by a friend or neighbor to recommend a “good contractor” for a home repair or improvement project. Most of us are also comfortable using the internet to purchase goods ranging from car air fresheners to cars themselves. And many people have grown accustomed to using the internet to simplify comparison shopping – often through the known reviewing websites and services that aggregate the reviews of other consumers.

Predictably, some internet and technology companies have seen an opportunity to use the internet to provide contractor referrals. Online contractor referral services, though, operate at the confluence of several important, and often conflicting, bodies of law. As a result, maintaining compliance with ever-changing regulations requires creativity and thoughtful planning by service providers.

 

The Law that Applies to Online Contractor Referral Services

Online commerce thrives based on the law that has developed concerning “click-wrap” and “browse-wrap” online contracts, often labeled as Terms of Service (“TOS”). While courts classify TOSs as adhesion contracts, courts routinely enforce these agreements with proper notice to and acceptance by the consumer. However, product liability law is increasingly holding e-commerce platforms liable for injuries caused by goods sold by third parties through these platforms. Product liability law disregards the distinction many TOSs attempt to draw between the online platform operator and the third-party sellers who transact business on that platform.

Amazon’s Fulfilled by Amazon (“FBA”) service illustrates these competing issues. Amazon not only provides the platform for third-party sellers but also inventories goods on behalf of third-party sellers, packages and ships the goods to the buyer in Amazon-branded packaging and on Amazon-branded trucks, and accepts and processes returned goods on behalf of third-party sellers. At least one court has found that with FBA, Amazon is functionally acting as the seller, just as if it had the goods on a shelf in a brick-and-mortar store.

At the same time, state regulators are increasingly scrutinizing online platforms such as contractor referral services. Some of these referral services, such as Craigslist, function as little more than community bulletin boards where contractors can list their services. Other referral services, such as Angie’s List or Home Advisor, purport to limit participating contractors to those who show proof of required licensing and insurance and pass a criminal background screen. But otherwise, these referral services are simply listing services for a select group of contractors. Still other online referral services offer greater convenience for consumers by pre-negotiating pricing, scheduling the contractor’s work and facilitating payment from the consumer. This last type of referral service is drawing the most scrutiny from regulators because it mimics the activities of a licensed general contractor.

 

SGR is Helping Bring Order From Chaos

Home improvement scams, which are perpetrated by a small fraction of the total universe of contractors, cast the entire home improvement industry in a negative light. Bad contractors target senior citizens and others who cannot “do it yourself” for even the simplest home repair. Online contractor referral services provide a pathway for these fraudsters to more easily identify and victimize unsuspecting homeowners over a larger geographic area.

SGR’s Construction Law section lawyers are helping bring order and predictability to the “Wild West” of online contractor referral services. SGR is working with the National Association of State Contractor Licensing Agencies[1] (NASCLA) to develop model legislation and promote awareness of the benefits and detriments of online contractor referral services. SGR is also working with NASCLA to address the ever-changing nature of e-commerce and the law that makes that e-commerce possible.

SGR, the California Contractor State Licensing Board (CSLB) and the Texas Department of Licensing and Regulation (TDLR) recently presented a webinar to NASCLA’s nationwide members. That presentation focused on the various types of online contractor referral services, the consumer confusion that currently exists in the marketplace, and the various efforts by state licensing boards to increase transparency as to with whom the consumer is contracting. SGR, CSLB and TDLR are slated to present on this topic at NASCLA’s next national meeting.

 

The Amazon Case Study

Amazon’s former contractor referral service provides an excellent example of the consumer confusion that can arise with online contractor referral services. In the past, Amazon allowed consumers to purchase online home improvement products ranging from faucets to water heaters. Amazon also allowed consumers to “purchase” an installation service for those products as part of the transaction for the purchased of the goods. Amazon set the price for the installation service and the consumer paid Amazon for the installation at the time of purchase. If there were any problems with the work, the consumer contacted Amazon. Consequently, many consumers believed they bought the installation from Amazon – i.e., that they had hired Amazon to perform the installation work. Importantly, in many states, selling these installation services would have required Amazon to be licensed as a contractor.

However, Amazon contended that it was not selling the installation service; instead, Amazon was making it easier for consumers to hire third-party contractors through Amazon’s website. Amazon’s TOS, to which the customer agreed before making purchases on Amazon’s platform, provided that the consumer was contracting directly with the third-party contractor, and that Amazon was not a party to that contract. Amazon’s TOS also provided that it was neither responsible nor liable for poor workmanship by the contractor, even though Amazon offered a “happiness” guarantee for consumers who were unhappy with a contractor obtained via Amazon’s platform.

Eventually, the CSLB, TDLR and other state licensure agencies received complaints from consumers. These agencies investigated Amazon’s contractor referral service and determined that Amazon’s business model effectively put it in the role of a general contractor, which required licensure as a contractor. The agencies found that the structure of Amazon’s platform caused consumers to believe they were contracting with Amazon, paying Amazon and resolving problems with Amazon. In effect, these agencies found Amazon looked like a contractor, acted like a contractor and talked (via its website) like a contractor, and therefore should have been licensed like a contractor.

As a result of the efforts of these agencies, Amazon recently announced that it was changing its business model. Amazon has elected to stop “selling” work by third-party contractors and instead is obtaining the required general contractor licenses in states in which it offers installation services. Amazon will now be a general contractor that sells home improvement and installation services to consumers, with Amazon hiring subcontractors to perform work on Amazon’s behalf.

The Future of Online Contractor Referral Services

Online referral services fulfill an important need for consumers. Consumers want the convenience of on-demand, online shopping while avoiding scams and fraudulent services. Balancing these competing demands is a daunting challenge for licensing boards and other regulatory bodies. As such, we are likely to see increased regulation of online contractor referral services as well as increased enforcement activity by contractor licensing boards and other consumer protection agencies. In light of these changes, maintaining compliance in this dynamic environment is and will continue to be a formidable challenge.

 

[1] NASCLA is an association of state agencies responsible for regulating and licensing contractors. NASCLA works with member agencies to standardize and promote knowledge and skills testing for contractors seeking to be licensed, to provide continuing education for licensed contractors seeking to stay current on building codes and requirements, and to coordinate interstate efforts to protect the elderly and other unsuspecting consumers from unlicensed contractors.

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