Hiring Vendors? Legal Issues for HOAs to Consider

Posted on Monday November 02, 2015 |



Your Board of Directors oversees the many day-to-day tasks required to operate and maintain your community…but they can’t do it alone. Over the course of the year, your homeowners association will hire vendors to provide a variety of services to keep your community running smoothly, such as exterior painting, plumbing, electrical, landscaping, tree trimming, equipment repair, exterminating, pool maintenance, street repair, and more. And then there are capital improvements, unforeseen events or emergency repairs — yeah, you’ll need vendors to take care of those, too. 

So how do you choose? Someone may “know someone” who can do a great job, but it may not be in your best interest to hire your next-door-neighbor’s fraternity brother or your barber’s cousin’s wife, and worse yet, seal the deal with a handshake—even if they’re old friends and offer below-market rates. Why? Because choosing the wrong vendor can impact much more than the quality of the services provided—it can also expose your community association to liability, either through the vendor’s actions or the terms of the contract — or both. And if that happens, your community association and homeowners may be held legally accountable and incur significant financial damages. 

What’s a better way? Start by asking a professional who can point you towards quality providers with proven track records. A seasoned Board member may be able to share past vendor experiences, and if you work with a property management company, its experienced team can help you decide whom to choose — and whom not to. That’s because management companies have longstanding relationships with trusted vendors—and some may even have their own vendor certification process to ensure providers have the proper credentials and adhere to rigorous service standards. In addition, management companies usually work closely with the association’s attorneys — so once you select a vendor, the attorney can structure the terms of your contract to protect your association from liability.

It’s always a good idea for associations to seek professional and legal advice when choosing vendors, but to help you get started, here are three important steps to help you hire quality vendors to safely and effectively serve your community: 

Confirm proper certification. 

How can your association be sure that a potential vendor is qualified — professionally, financially and legally—to effectively and safely provide the services your community needs? Due diligence. Board members have a fiduciary duty to the association and the homeowners, and must therefore ensure that any vendor under consideration is properly licensed, bonded and insured — and if not, they need to find another vendor.

Here’s why. In most states, any individual who wishes to provide materials and/or labor valued over a specified amount is required to hold a valid state license in his or her specialty. And then there’s the triple whammy — if vendors don’t have licenses, there’s a strong possibility that they also aren’t bonded and don’t carry worker’s compensation insurance and other insurance. So if your association hires an unlicensed or uninsured vendor, it risks substantial financial penalties if injury or property damage results from their actions. Moreover, your association may also be responsible for making good on unpaid wages or worker’s comp claims filed by the vendor’s employees. 

As we mentioned earlier, some property management companies have established proprietary certification programs — that means potential vendors must prove they hold all required credentials and fulfill other requirements before they can be approved to perform work in the company’s managed communities. If your management company doesn’t certify vendors or if your association is self-managed, you can visit the website of your state’s Licensing Board to verify if a potential vendor is licensed, as well as whether he or she has been subject to legal claims filed by previous clients.

Determine the vendor’s employment status – and choose accordingly. 

Okay, now that you know the importance of verifying a vendor’s credentials, let’s move on to the next important consideration — vendor employment status. According to the Internal Revenue Service, vendors may be classified as either employees or independent contractors. It’s important to know the difference as well as which type is the better choice for your association. 

There are numerous factors that go into determining a vendor’s status — in fact, too many to go into here — but you can check IRS Publication 1179 for complete information. It’s also a good idea to consult with an attorney or a good property management company to help you select the right type of vendor to suit your needs. But no matter which type of vendor you choose, you will still need to…

Draw up a written, legally binding contract.

No matter which type of provider you choose, you must finalize your vendor agreement with a written contract that clearly spells out all required terms. Again, work with an attorney—he or she can draw up a legal and binding contract that meets your needs and protects your association. 

The vendor selection process is much more complex than just hiring an acquaintance or someone you find online—after all, if things go south, the legal and financial risks to your association can be substantial. But by following the steps we outlined — and following up with an attorney — you’ll be better positioned to choose a quality vendor who can meet the needs of your association, your community and your residents. For more information about the vendor selection process and protecting your association’s interests, contact FirstService Residential.  

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