Unlicensed Contractors: The Good, The Bad, and The Ugly

Whether you’re a homeowner, general contractor, or sub-contractor, it’s all bad over $500

You have a home improvement project that requires some professional assistance.  You’ve looked around, received a few quotes for the work from various contractors; but ever the savvy shopper, you really want to find the best deal.  Then you remember your co-worker’s roommate does some handyman work and needs a job.  The roommate is unlicensed, but seems nice, and offered a much lower bid than anybody else.  So what do you do?  Whether you are a homeowner, or a general contractor looking to hire some sub-contractors, you should think long and hard before hiring someone without a proper contractor’s license.  Alternatively, you could seek legal advice from a civil attorney, and let them do the thinking.

California considers the hiring of unlicensed contractors to be an insidious and illegal underground economy and strongly dis-incentivizes (and sometimes criminalizes) the practice.  Whatever purported benefits of the practice – cheaper rates, expedited work times, helping a friend, etc. – these unlicensed contractors lack accountability and the assurance of quality work that a license represents.  As they are not subject to professional accountability, they are free to fleece clients with scams and other ignoble business practices.  Unlicensed contractors are also considered unfair competition for licensed contractors who obtain bonds and insurance and otherwise conduct business responsibly.  Furthermore, they are often paid in untaxed cash, putting additional strain on local municipal budgets.  While California law most strongly penalizes the un-credentialed contractors, those who hire them also risk financial repercussions.

First and foremost, customers are not legally required to pay an unlicensed contractor for any work valued at $500 or more in combined materials and labor costs.[1]  Regardless of the nature of the work performed and regardless of customer satisfaction, unlicensed contractors have no legal recourse to recover payment for any job worth over $500.  Even when the work is performed under “exceptional circumstances,” – like an unlicensed contractor, convinced to take the job by fraudulent promises of payment, doing a one-time job that could not be performed by anybody else – the law is clear: unlicensed contractors do not have a leg to stand on when it comes to demanding payment.[2] Anybody trying to get around this by portioning out the work into $500 increments is out of luck because the law will consider the individual projects to be part of a larger whole.[3]  Any unlicensed contractor who holds themself out to be licensed is barred wholesale from taking advantage of the $500 “small operations exemption.”

Even if an unlicensed contractor is paid for her work, the customer may file suit in any California court to recover all compensation paid.[4]  In fact, the customer can sue to recover money paid even if she knew the contractor was unlicensed.[5]  In one case, an unlicensed contractor completed a contract fully and satisfactorily, but was required to return the full contract price of $751,995.[6]

The only limitation to this rule is the legal defense of substantial compliance, which can be difficult to prove.  Substantial compliance requires the unlicensed contractor to show that she 1) held a license in California prior to the disputed work, 2) acted reasonably and in good faith to maintain the license, and 3) promptly acted to remedy the situation upon learning that the license had expired.[7]  By law, a contractor is licensed if they possess a valid license at all times during the work.  If the contractor first becomes licensed after starting the job, then they simply cannot expect to get paid – not even substantial compliance will help.

Not only are unlicensed contractors not guaranteed a payday, they can face criminal penalties, too.  Performing contractor work without a license, or with a suspended license, is a misdemeanor punishable on first conviction by a fine of up to $5,000 and/ or up to 6 months in jail.[8]  Repeat offenders can expect even harsher penalties: fines up to $10,000 and beyond, and a jail sentence between ninety days and one year.[9]  Falsely advertising oneself as a licensed contractor is a misdemeanor punishable by a fine ranging from $700 to $1,000.[10]  Using a fake contractor’s license number is a felony punishable by a fine of up to $10,000 and/ or up to one year in prison.[11]  The worst offenders may even appear on the Contractor’s State License Board’s Most Wanted List.  A contractor who continues to work after her license is revoked automatically faces the steeper repeat offender penalties, even on a first-time conviction.[12]

Homeowners, or any other party hiring an unlicensed contractor, can be punished for their part in the underground economy, too.  Anybody who hires an unlicensed contractor is presumed to be that contractor’s employer, and is thus required to provide safe working conditions.[13]  Not only is the hirer of an unlicensed contractor legally obligated to provide a safe work environment in compliance with OSHA regulations, but that employer is legally required to pay the medical bills of any unlicensed contractor, or his employees, injured on the job.  This is true regardless of the reason for injury – even if the injured party is completely at fault, the presumption of employer status places liability squarely on the hirer.  Homeowners’ insurance policies don’t typically cover employee injury, and unless the hirer takes out a worker’s compensation insurance policy, she will have to foot the contractor’s medical bills herself.  Unlicensed contractors cannot sue to recover payment for work performed, but they can sue the homeowner (or general contractor) for illegally hiring an unlicensed contractor in order to recover their medical expenses.[14]

The good news is not all home improvement projects require a contractor’s license.  As previously mentioned, if the total cost of labor and materials is less than $500, then no license is needed.  Various other limited exceptions exist, including the installation of satellite antennae on residential properties.[15]  The Contractor’s State License Board lists several kinds of exempted work, but note that these exceptions are narrow and sometimes require other kinds of license or registration.

Those who only furnish materials and supplies, without actually performing any construction work, do not need a contractor’s license.[16]  People designated as employees – those who are paid solely in wages, do not customarily engage in independently established business, and do not have executive control over the project – are not required to carry a contractor’s license, either.[17]  Note that their employers still need a license – if a homeowner furnishes the materials, directs the work, and pays regular wages to workers hired for a project – the homeowner would be considered an employer, and would be liable for the workers’ safety.[18]

When it comes to a property owner building on or making improvements to her own property, California’s licensing requirements are a bit more relaxed.[19]  If she does the work herself, and the improvements are not intended or offered for sale, then no license is required whatever the value of the project.[20]  Even if the improvements are intended for sale, an unlicensed owner can legally contribute to work done on the property provided she contracts with properly licensed contractors, and offers no more than four structures for sale within a calendar year.

Fortunately for anybody hiring a contractor, all that is needed to protect oneself is to verify the contractor’s license.  Ask to see their license and make sure it’s not expired, and match it to the contractor’s photo identification to make sure the person who showed up to give you a quote is who they claim to be.  If you need further certainty, you can look up the contractor’s status by searching the Contractor’s State License Board for the contractor’s name, license number, business name, or Home Improvement Salesperson number.

For information on how to report unlicensed activity, check out the CSLB’s Statewide Investigative Fraud Team.

Becoming an officially licensed contractor can be a costly and time-consuming process, and California requires a license for a wide range of work, but it is well worth the investment in light of the steep penalties for being caught working without a license.  For more information on fees, examinations, licensing classifications and the application process in general, go to https://www.cslb.ca.gov/contractors/applicants/.

Working as an unlicensed contractor can be a risky proposition in California.  The stiff civil and criminal penalties, including jail time and forfeiture of pay, and the narrow range of legal work not penalized for unlicensed contractors, means a civil attorney can be indispensable.  If you are ever unsure about doing unlicensed work, or hiring an unlicensed contractor, consider seeking legal advice about the proposed work before subjecting yourself to possible civil and criminal penalties.  Similarly, if you are an unlicensed worker and have questions about obtaining the proper license, a small amount of legal advice could spare you a lot of legal trouble.

 

[1] Cal. Bus. & Prof. Code §§ 7031(a) & 7048.

[2] Hydrotech Sys., Ltd. v. Oasis Waterpark, 52 Cal. 3d 988, 992 (1991).

[3] Cal. Bus. & Prof. Code § 7048.

[4] Cal. Bus. & Prof. Code § 7031(b).

[5] Cal. Bus. & Prof. Code § 7028(h).

[6] Twenty-Nine Palms Enters. Corp. v. Bardos, 210 Cal. App. 4th 1435, 1438 (2012).

[7] Cal. Bus. & Prof. Code § 7031(e).

[8] Cal. Bus. & Prof. Code § 7028

[9] Id.

[10] Cal. Bus. & Prof. Code § 7027.1.

[11] Cal. Bus. & Prof. Code § 7027.3.

[12] Cal. Bus. & Prof. Code § 7028(e).

[13] Cal Lab. Code § 2750.5.

[14] Cal. Lab. Code § 3706.

[15] Cal. Bus. & Prof. Code § 7054.5.

[16] Cal. Bus. & Prof. Code § 7052.

[17] Cal. Bus. & Prof. Code § 7053.

[18] Albaugh v. Moss Constr. Co., 125 Cal. App. 2d 126, 132 (1954).

[19] People v. Moss, 33 Cal. App. 2d Supp. 763, 766 (1939).

[20] Cal. Bus. & Prof. Code § 7044.

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