Contractors – even licensed contractors – sometimes make mistakes. There are at least three mistakes that could result in the contractor being deemed unlicensed by a judge or jury. This adverse finding can have significant consequences.
It may be helpful to first provide a reminder of why licensure is so uniquely important in the construction industry. Any person performing construction services, directly or through others, typically requires a contractor’s license to perform that work. (Cal. Bus. & Prof. Code § 7026.) This requirement is significant because an unlicensed person is not entitled to any payment for work which requires a license. (Cal. Bus. & Prof. Code § 7031.) What is sometimes a surprise, is that the owner of the property can keep the work and require the unlicensed person to return all compensation paid for that work – called ‘disgorgement.’ (Id.) The unlicensed person is not entitled to any compensation if they were unlicensed for any portion of the work. (MW Erectors, Inc. v. Niederhauser Ornamental & Metal Works Co., Inc. (2005) 36 Cal.4th 412.) Offsets are not permitted for work performed after a license is obtained. (Alatriste v. Cesar’s Exterior Designs, Inc. (2010) 183 Cal.App.4th 656.) The courts are also expressly barred from permitting recovery to the contractor on the grounds of ‘fairness’ or even fraud by the owner. (See e.g., Pac. Custom Pools v. Turner Constr. Co. (2000) 79 Cal.App.4th 1254, 1266; see also Buzheia v. Leasco Sierra Grove (1997) 60 Cal.App.4th 374 [finding no exception for fraud claims].)
On-the-ground experience in construction litigation quickly teaches all involved the same lesson: under no circumstances allow yourself to be unlicensed or you will lose significant funds (as well as risk consequences from the Contractors State License Board moving forward). Most contractors are compliant, but even those who think they are in compliance sometimes are not because they make simple mistakes that can be avoided. Another two mistakes that continue to arise are contractors who sign their paperwork with the wrong name and contractors who hold inadequate worker’s compensation insurance.
Typically, small contractors obtain a contractors license in their personal name. As they perform work they are often advised (and wisely so) that it makes sense to incorporate their business in order to provide levels of protection for assets held by the contractor, but unrelated to the business, such as personal real property. That is, they form a corporation or a limited liability company and begin performing work under that entity. This can make a lot of sense, particularly as it can help shelter the contractor’s personal assets from many business debts or liabilities.
However, problems arise when the contractor forgets to obtain a new license or to move their license into the company’s name.
As a reminder, whoever is performing the work and signing the contracts needs to hold a valid contractors license. If the company is performing the work and the company is the party named on the contract, then the company needs a contractor’s license. Otherwise the ‘person’ performing the work is the company, and if the company is unlicensed, then the work is being performed by an unlicensed contractor and face all the consequences of unlicensed work discussed above. The Courts have actually considered whether a personally licensed owner who contracts in the name of his unlicensed corporation can recover based on his own license notwithstanding the party named in the contract. (Opp v. St. Paul Fire & Marine Ins. Co. (2007) 154 Cal.App.4th 71, 76). The answer is clear – the company is unlicensed and cannot benefit from the license of the owner.
There are several methods to ensure that this is not a problem. One of the simplest is to fill out the CSLB forms, the Request for License Number Reissuance (form 13A-1h) and the accompanying Application for Original Contractor License – Examination Waiver 7065.
A third and more common mistake relates to worker’s compensation insurance, and specifically the failure to carry such insurance. Contractors who have any employees are required to hold appropriate worker’s compensation insurance. (Cal. Bus. & Prof. Code § 7125.) Many contractors are exempt at some point in their operations and report that they are exempt on the basis that they have no employees. (Cal. Bus. & Prof. Code § 7125(b).) This is fine, until along comes a larger project and the contractor hires an extra pair of hands or a friend or grows into a significantly larger business. The contractor is then required to have appropriate worker’s compensation insurance and failure to immediately have that insurance prior to performing that work automatically and immediately suspends the contractor’s license. (Cal. Bus. & Prof. Code § 7125.2.) In certain circumstances, even failing to adequately report or obtain adequate worker’s compensation insurance may be construed as a failure to obtain insurance and render the contractor unlicensed. (e.g., Castillo v. Toll Bros., Inc. (2011) 197 Cal.App.4th 1172, 1211; Wright v. Issak (2007) 149 Cal.App.4th 1116.)
Compliance with the contractor’s license laws matters a great deal, and can be complicated. It is recommended to consult with legal counsel before the matter finds itself in litigation. As always with lawsuits: an ounce of prevention is far cheaper and more potent than a pound of cure.