from Kenyon Plastering in Phoenix AZ wrote to me recently
about an article she read in the CSLB Summer/Fall 2003
newsletter about a California State Appellate Court decision
pertaining to "improperly licensed contractors" and
Section 7031, Chapter 12 of The Contractors State License
Board; License Law, Rules and Regulations, and Related
Laws. She suggested that it might be a good topic for my
thing I find myself saying quite often when talking to
folks about the pitfalls of contracting is "Been there,
done that" and yep, this time is no exception... Me
writing about this topic is more appropriate than most
people know (I'll tell you about it a little later in this
aforementioned article in the CSLB Newsletter was about
a Subcontractor who sued a General Contractor for nonpayment
on a contract job. I don’t know why the GC chose
not to pay the Sub, it could have been due to § 7031
(or something else entirely), but the judge ruled against
the Sub based on § 7031.
Basically, § 7031
gives the customer, of an unlicensed and/or not properly
licensed contractor, the legal right to refuse to pay
that which would otherwise be due under the contract.
In addition, § 7031(b) gives the customer the
right to sue the contractor to recover any monies
he did pay
under the contract.
the Sub originally set up his company, and contractor
license, it was a solely owned business. Later when he
incorporated his business he neglected to change his
solely owned contractors license to a corporate contractors
license. By not making the appropriate change to his
license, suddenly his status of being properly licensed
changed to being improperly licensed (which is apparently
pretty much the same as being unlicensed).
is definitely very good reason for § 7031. It’s
great when used to protect a homeowner from an unlicensed
contractor that would contract with a homeowner, do a poor
job and then sue the homeowner for payment.
though it appears to also be a legal way to get away with
not paying a guy who has done a good job, but is improperly
the trial and appellate courts recognized the capability
of § 7031 to cause “harsh and inequitable
please note, I am not in any way condoning unlicensed contractors.
I'm just pointing out how this law can be, in my opinion,
misused, causing honest contractors doing honest work who
for whatever reason are improperly licensed, to lose out
in the end.
do think that part of the problem is that so many (especially
smaller) contractors may be very technically proficient
in their trade, but not real "business savvy" --
and, after all, who wants to sit down and read a bunch
of laws! I can understand that the law intends that
your business entity registration and your license
registration be "transparent" -- that you
are easily "traced", and that your licensed
entity reflect the proper financial setup that your
business has. There is a great big difference between
a sole proprietorship and a corporation as far as owner
financial responsibility goes. So - the law makes sense,
it's just that no one really thinks about the rationale
behind it... especially if you are an honest contractor
just out to do a good job."
some might say that we should all be responsible and make
sure that we keep our licensing in order and I do agree
with that however at the same time, we are all human and
most of us have much more to do than we have time for and
we do make mistakes.
forget things every single day and I can imagine how easy
it can be to miss something that might seem, at first glance,
would you have ever thought that after doing a whiz-bang
job for your General that he could legally not pay you
on a technicality such as this, and that the license
board and law would not back you up?
all, the Subcontractor who lost the case did possess a
valid, active, in-good-standing license; it was just the
wrong license. The only problem was that he hadn't changed
his license from Sole-Owner to Corporate.
same scenario can play out between an Owner and a General
Contractor (or any contractor the Owner directly contracts
with), with the Owner legally refusing to pay the bill.
you’ve made changes in your business financial setup,
take some time now to make sure your contractor’s
license is setup appropriately. It can be the difference
between getting paid and not.
no worries you say, you haven’t made any changes
and you know that your license is in good order and that
you don’t stand any risk of losing out on payment
due to improper licensing?
another angle, as pointed out by Bonnie:
been doing an update of our computer base of Contractors
that we work for - comparing their "corporate
entity" registration with the state, and the existence
of a contractors license with the state of California.
I have found many "improperly licensed contractors",
and when you read about the court's decision, you can
just imagine the jeopardy you can be in if you are
a Sub working for one of them and something goes wrong
on the job. The money can dry up fast!"
you’re a Sub and you have your license in good order,
everything right and proper, but the General you’re
contracted with forgot to change his license when he changed
his company setup?
way the law is applied right now, it would appear that
the Owner of the property could legally not pay the improperly
licensed General Contractor.
does that leave you, and your suppliers?
is the General going to pay you when he hasn’t been
paid? Plus now he’s tangled up with the license board
and who knows how high his fines will be... Add to that
the "pay when paid" clause that’s probably
in your contract and it could be a l-o-o-o-n-g time before
you collect any monies on that project (if ever) ...
you might have mechanic’s lien rights, if you did
your prelim, but I’d still rather turn down that
job from the get-go and avoid the hassles, rather than
have to deal with mechanic’s liens.
know though, now that I'm thinking about it, I wonder if
there might not be mechanic’s lien rights even
if you did do your prelim.
the contract between you and the improperly licensed General
is not valid because he’s not properly licensed.
Since you’re not contracted directly with the owner,
technically you’ve done work on the Owner’s
property without a contract. Might this kill, or seriously
risk, those mechanic lien rights?
at it from yet another angle, what about properly licensed
Contractor B’s risk of being disciplined by the CSLB
for contracting (or attempting to contract) with unlicensed,
or not properly licensed, Contractor A?
decided to dig further into Chapter 12, to see what I could
find. Please remember that I am not an attorney and
that everything I’ve written here is based upon my
own opinions and understandings (or lack thereof ;) of
the various laws...
7118 of Chapter 12 states that:
into a contract with a contractor while such contractor
is not licensed as provided in this chapter constitutes
a cause for disciplinary action.”
pretty cut and dry. As a licensed contractor subject
to Chapter 12, contract with an unlicensed or improperly
contractor and risk disciplinary action. But what if
Contractor A didn’t know that Contractor B wasn’t
what Section 7118.5 says:
contractor, applicant for licensure, or person required
to be licensed, who, either knowingly or negligently,
or by reason of a failure to inquire, enters into a
contract with another person who is required to be,
and is not, certified pursuant to Section 7058.5 to
engage in asbestos-related work, as defined in Section
6501.8 of the Labor Code, is subject to ... (penalties)
that means that ignorance won’t save Contractor B;
that it’s his responsibility to make sure those contractors
he contracts with are properly licensed. The only thing
is, because Section 7118.5 specifically mentions asbestos-related
work, it makes one wonder if the same applies to all construction
work and not just asbestos-related construction work.
what Section 7118.6 says:
contractor who, either knowingly or negligently, or
by reason of a failure to inquire, enters into a contract
with another person who is required to be, and is not
certified pursuant to Section 7058.7 to engage in a
removal or remedial action, as defined in Section 7058.7,
is subject to ... (penalties) ..."
section specifically mentions hazardous waste, so again
I’m left wondering if the same would hold true
for all types of construction work...
properly licensed Contractor B be disciplined for contracting
with improperly licensed Contractor A, when “B” was
not aware that “A” wasn’t properly licensed?
cannot seem to locate anywhere within Chapter 12 any text,
that addresses this specific question, that doesn’t
also include specific references such as asbestos and hazardous
the lack of this specific information just due to my inability
to find it or is it an oversight of the
lawmakers or does it mean simply that “A” will
not be disciplined since he was “ignorant” of
the other contractor’s improper licensing status?
I do not have the answers to several of the questions
here but I do know one thing... I like Bonnie's
idea of contractors checking up on other contractors'
licensing and keeping track of it.
Now might be a good time to take a look at
your licensing and make sure it accurately reflects your
check your General Contractor’s licensing if you’re
a Sub or your Sub’s licensing if you’re a General.
you might want to look into tracking your customers’ respective
licensing status. If one of your customers doesn’t
get paid because his licensing is improper it’ll
no doubt be that much harder for you to get paid.
addition, Suppliers might want to educate their contractor
customers about this and encourage those contractor customers
to keep track
of the status of their own contractor customers' licensing.
considering creating a tracking form for this. Any suggestions
are always more than welcome! :) And if you have any feedback
on this article I'd love to hear it! :) Click
here to send me an email...
Because the Subcontractor was found to be an unlicensed
contractor, technically that puts the General Contractor
in violation of Labor Code Section 1021.5 which dictates
that if you are a licensed contractor and you "enter
into a contract with any person ... for which a license
is required ... and that person does not ... hold a valid
state contractor's license" then you are subject
to civil penalty... We'll chat about that in an upcoming
now for that "Been there, done that" story...
after we started our construction business in 1995 we found
ourselves on the non-payment end of § 7031. What a
learning (and totally not fun) experience that
(my hubby) and his buddy opened their new construction
business, in 1994, on a license they thought was a partnership
it wasn't, it was only a sole-proprietorship license, in
Curtis' buddy's name...
were contracting without a license, and the projects were
big, way over the $500 maximum allowed for unlicensed contractors.
I kid you not, every single time the phone rang or someone
came through the door I was expecting it to be the License
Board coming to take Curtis away...
then things got worse... It was then that we learned about § 7031.
It was a General Contractor that we had literally just
finished up a job for that very day that told us about § 7031...
right before he told us that he wouldn't be paying us.
we were, just starting out a construction business, no
operating capital to speak of, and now we had to pay our
supplier even though we wouldn't be getting paid. Thank
goodness our supplier (Cal-Ply Redlands) hung in there
we had to pay a fine to the CSLB. Fortunately they realized
that although we were operating illegally we were honest
and we weren't out ripping off people. Because of that
they charged us the lowest fine amount that the law allowed.
closed up our newly opened company and Curtis went to a
contractor school, took his test, got his own contractor's
license in January 1995 and it's been full speed ahead
since then. :)