Disadvanatages of Being or Using an Unlicensed Contractor for Construction Work in California Law

Posted about 3 years ago. Applies to California, 1 helpful vote

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California Contractors’ Licensing Law Requirements, and the Adverse Effects to Contractors and Property Owners From the Failure to be “Duly Licensed" as Required By the California Contractor’s State License Law California law requires that all persons who act as a “contractor" on behalf of a property owner or other person and who performs work or installs fixtures on a property other than for hourly wages must be “duly licensed" as a contractor by the Contractors State License Board, The License Law requires contractors to establish experience and take a test in the particular speciality category for which they seek a license. They are required to also have a License Bond to protect their customers, and comply with numerous other statutes and regulations. Corporations or other business entities must have a “responsible" officer or employee who has a license, and must meet other requirements

The license requirements protect the public from incompetent and unscrupulous persons: The effect of not having a proper general or specialty license are often drastic, potentially disastrous .for the unlicensed builder!

A. Contractors Who are Not Properly Licensed Cannot Sue to Get Paid. These laws help encourage contractors to get licensed: “It follows that an unlicensed contractor may not circumvent the clear provisions and purposes of section 7031 simply by alleging that when the illegal contract was made, the other party had no intention of performing. Section 7031 places the risk of such bad faith squarely on the unlicensed contractor's shoulders. "Knowing that they will receive no help from the courts and must trust completely to each other's good faith, the parties are less likely to enter an illegal arrangement in the first place. [Citations.]" (Lewis & Queen, supra, 48 Cal.2d at p. 150, italics added" (Emphasis added) Hydrotech Systems, Ltd. v. Oasis Waterpark (1991) 52 Cal.3d 988, 997-998. The same Bus & Prof Code § 7031 mentioned above provides in relevant part that: “(b) Except as provided in subdivision (e), a person who utilizes the services of an unlicensed contractor may bring an action in any court of competent jurisdiction in this state to recover all compensation paid to the unlicensed contractor for performance of any act or contract. . . ." (Italics and emphasis added) Even if the work of the unlicensed contractor was perfect, and the other party is perfectly happy with the work done and is using it, and even if the property owner knew that person was unlicensed before the work started that the builder was not licensed, the unlicensed contractor may not sue to recover the amount owed on the contract, and can be forced to pay back to the owner every single penny that it was paid for the work..

C. The Licenses of Licensed Contractors who Fail to Buy and Maintain Workers Compensation Insurance for All Their Employees are Automatically Suspended By Operation of Law, and The Contractor Is Considered Not Licensed. Even if a contractor may have been properly issued or nominally holds an otherwise valid contractors license, if the license is automatically suspended (such as under Bus & Prof. Code §§ 7068.2 or 7125.2, ) then the contractor is no longer "duly licensed" “during the performance" of a job, within the meaning of Bus. & Prof. Code § 7031. Likewise, an otherwise validly licensed speciality or general contractor who acts outside the scope of his licensed speciality is also not "duly licensed" under §7031. Buzgheia v. Leasco Sierra Grove (1997) 60 Cal. App. 4th 374, 386-387. The Contractors State License Law (Bus & Prof Code § 7000 et seq), specifically Bus & Prof Code § 7125, mandate that a licensed contractor must procure worker’s compensation insurance for all persons who perform work for the contractor, including employees, as well as purported “indep-endent contractors" or “subcontractors" who don’t themselves hold a valid Contractors License.

Corporations obviously cannot construct buildings without employees or licensed subcontractors, so it must have insurance for its own workers.Lab Code § 3351 Cal Bus & Prof Code § 7125.2, as revised in 2002, provides that: The failure of a licensee to obtain or maintain workers' compensation insurance coverage, if required under this chapter, shall result in the automatic suspension of the license by operation of law in accordance with the provisions of this section, . . . (a) The license suspension imposed by this section is effective upon the earlier of either of the following: (1) On the date that the relevant workers' compensation insurance coverage lapses. (2) On the date that workers' compensation coverage is required to be obtained. (emphasis added)Wright v. Issak (2007) 149 Cal. App. 4th 1116 Under this statute, even where a contractor had workers compensation insurance but just significantly under-reported his payroll in his workers' compensation reports., his license would still be suspended In Wright v. Issak the Court of Appeal recently upheld a trial court finding that an otherwise validly licensed contractor was not a duly licensed contractor because his license had been automatically suspended by operation of Bus. & Prof. Code, § 7125.2, for his failure to “obtain and maintain" workers' compensation insurance. Wright v. Issak, supra, 149 Cal. App. 4th at 1122-1123. “[T]he date that workers' compensation coverage is required to be obtained" is the date any persons worked on the project. D. The Dangers and Grave Risks that Property or Home Owners or Others Unknowingly Take in Hiring an Unlicensed Contractor. While the above laws might seem to some to create an opportunity for an owner or general contractor to hire an unlicensed person at a discount very cheap to what an experienced licensed contractor might charge for the same job, and then still be able to avoid paying the unlicensed builder and even sue him or her to get back the money you paid them, this is NOT a good idea. As noted above, the License Law is designed to “provide minimal assurance that all persons offering such services in California have the requisite skill and character, understand applicable local laws and codes, and know the rudiments of administering a contracting business". Thus, the unlicensed builder, while seemingly relatively cheap upfront, may be no bargain at all if he or she is inexperienced, unskilled, or incompetent. And the ability to follow building codes is important, as they are designed to protect the safety of building occupants from collapse, fire, leaks, earthquakes and the like. You put your life and property at great risk when you use someone who might not know what they are doing or how to ensure you have a building that will endure nature and the elements. Unlicensed contractors in almost every case will not have bonds, liability insurance or workers compensation insurance to protect you, your property, and protect you from liability to the workers or “independent contractors" who work on the property, as insurance companies will not take the risk to insure them. If a passer-by, neighbor or your own property or possessions are injured by the unlicensed builder during or after the construction work, or if building damage caused by the builder occurs, appears or is later discovered only after the completion of the job, the unlicensed builder will not have liability insurance to protect you from these damage or your potential liability to others. Similarly, if the worker of the unlicensed contractor is injured on the job, the property owner may potentially be liable and effectively be liable for paying workers compensation benefits to those injured workers, which could be quite large in the case of a serious personal injury.. And under some circumstances, the hirer of the unlicensed builder could be possibly liable for the unpaid wages of the builder’s workers on the job. Finally, if you have had work done by an unlicensed builder, or done without building permits or not in compliance with the Building Codes, you may be legally required to disclose these facts to buyers of your property in a Property Disclosure Statement or other document when you sell the home. Obviously, such a disclosure might affect the sales price of your property, depending on market conditions at the time. And if you fail to disclose such important facts to the buyer and the buyer later discovers them or is injured by the improper work, you could potentially be liable to the buyer for fraud or other damages! Even licensed builders may be uninsured or less than fully competent. Check the builder's references thoroughly, required that you be named as an additional insured on all his insurance policies, and require him or her to furnish Certificates of Insurance or Copies of his Liability and Wokrers Comp Insurance Policies. And make sure you have a detailed contract and that you understand it. N.B. No legal advice is intended or given by this information, as the statutes and case law could still change or evolve very substantially. Please consult a competent construction attorney before preparing or signing any construction contract.

Additional Resources

California Contractors State License Board, to Check a Contractor's License

Construction Webpage of Author

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