Dimitry Tsimberg, Esq.

California Law for Contractors: Licensing and Related Issues

California law requires any person who acts as a “contractor” 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 speciality category for which they seek a license. They are also required to have a License Bond and comply with other statutes and regulations. Corporations or other business entities must have a “responsible” officer or employee who has a license, as well as meet other requirements.

Who is a “contractor” that is required to have a contractor’s license?

Business & Professions Code § 7026: "Contractor," for the purposes of this chapter, is synonymous with "builder" and, within the meaning of this chapter, a contractor is any person who undertakes to or offers to undertake to, or purports to have the capacity to undertake to, or submits a bid to, or does himself or herself or by or through others, construct, alter, repair, add to, subtract from, improve, move, wreck or demolish any building, highway, road, parking facility, railroad, excavation or other structure, project, development or improvement, or to do any part thereof, including the erection of scaffolding or other structures or works in connection therewith, or the cleaning of grounds or structures in connection therewith, or the preparation and removal of roadway construction zones, lane closures, flagging, or traffic diversions, or the installation, repair, maintenance, or calibration of monitoring equipment for underground storage tanks, and whether or not the performance of work herein described involves the addition to, or fabrication into, any structure, project development or improvement herein described of any material or article of merchandise. "Contractor" includes subcontractor and specialty contractor. "Roadway" includes, but is not limited to, public or city streets, highways, or any public conveyance.

Business & Professions Code § 7026.1: The term "contractor" includes all of the following: (a) Any person not exempt under Section 7053 who maintains or services air-conditioning, heating, or refrigeration equipment that is a fixed part of the structure to which it is attached. (b) Any person, consultant to an owner-builder, firm, association, organization, partnership, business trust, corporation, or company, who or which undertakes, offers to undertake, purports to have the capacity to undertake, or submits a bid, to construct any building or home improvement project, or part thereof. (c) A temporary labor service agency that, as the employer, provides employees for the performance of work covered by this chapter.

“The[se] licensing requirements 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.” Hydrotech Systems, Ltd. v. Oasis Waterpark (1991) 52 Cal.3d 988, 995; see also Construction Financial v. Perlite Plastering Co. (1997) 53 Cal.App.4th 170, 176–177. It has long been established that the provisions of section 7031 represent “a legislative determination that the importance of deterring unlicensed persons from engaging in the contracting business outweighs any harshness between the parties.” Lewis & Queen v. N. M. Ball Sons (1957) 48 Cal.2d 141, 151. Section 7031 applies “despite injustice to the unlicensed contractor.” Hydrotech, supra, at p. 995.

What are the repercussions of not having a proper license?

1. Contractors who are not properly licensed cannot sue to receive payment for their work.

Business & Professions Code § 7031: “(a) Except as provided in subdivision (e), no person engaged in the business or acting in the capacity of a contractor, may bring or maintain any action, or recover in law or equity in any action, in any court of this state for the collection of compensation for the performance of any act or contract where a license is required by this chapter without alleging that he or she was a duly licensed contractor at all times during the performance of that act or contract, regardless of the merits of the cause of action brought by the person, except that this prohibition shall not apply to contractors who are each individually licensed under this chapter but who fail to comply with Section 7029.”

“Regardless of the equities, section 7031 bars all actions, however they are characterized, which effectively seek ‘compensation’ for illegal unlicensed contract work.” Lewis & Queen, supra, 48 Cal.2d at pp. 150-152. Thus, an unlicensed contractor cannot recover either for the agreed contract price or for the reasonable value of labor and materials. Davis Co. v. Superior Court (1969) 1 Cal.App.3d 156, 159; Grant v. Weatherholt (1954) 123 Cal.App.2d 34, 41-42. The statutory prohibition operates even where the person for whom the work was performed knew the contractor was unlicensed. Pickens v. American Mortgage Exchange (1969) 269 Cal.App.2d 299, 302; Cash v. Blackett (1948) 87 Cal.App.2d 233.

2. Contractors who are not properly licensed cannot claim they were defrauded or the other party took advantage of them.

“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.’" Lewis & Queen, supra, 48 Cal.2d at p. 150; Hydrotech Systems, Ltd. v. Oasis Waterpark (1991) 52 Cal.3d 988, 997-998.

This would be so "even when the person for whom the work was performed has taken calculated advantage of the contractor's lack of licensure," since "it matters not that the beneficiary of the contractor's labors knew the contractor was unlicensed." MW Erectors, Inc. v. Niederhauser Ornamental & Metal Works Co., Inc. (2005) 36 Cal.4th 412, 424; Hydrotech, supra, 52 Cal.3d at pp. 997-1002.

3. Contractors who are not properly licensed can be ordered to refund all amounts paid to them.

Business & Professions Code § 7031: “(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....”

Thus, even if the work of the unlicensed contractor was without fault or damage, the other party can force the contractor to pay back everything they were paid for the work. This is true even if the other party knew that the contractor was unlicensed before the work began! “It has long been established that the provisions of section 7031 represent “a legislative determination that the importance of deterring unlicensed persons from engaging in the contracting business outweighs any harshness between the parties.” Lewis & Queen v. N. M. Ball Sons (1957) 48 Cal.2d 141, 151. Section 7031 applies “despite injustice to the unlicensed contractor.” Hydrotech, supra, at p. 995; Goldstein v. Barak Construction (2008) 164 Cal.App.4th 845, 854.

4. Contractors whose license is suspended (even for short period of time) cannot recover for work done during the suspension.

Even if a contractor was properly issued or holds an otherwise valid contractors license, if the license is suspended then the contractor is no longer "duly licensed" “during the performance” of a job, within the meaning of Bus. & Prof. Code § 7031.

Since its adoption in 1939, the CSLL "has declared that, except as expressly otherwise provided, a contractor may not sue to collect compensation for performance of `any act or contract' requiring a license without alleging that he or she was duly licensed `at all times during the performance of that act or contract.'" MW Erectors, Inc. v. Niederhauser Ornamental & Metal Works Co., Inc. (2005) 36 Cal.4th 412, 425. "[T]he bar extends to actions `in law or equity' and applies `regardless of the merits of the cause of action.'" Ibid.

However, there is a narrow exception under the doctrine of “substantial compliance” in Business & Professions Code § 7031(d), where “the court may determine that there has been substantial compliance with licensure requirements under this section if it is shown at an evidentiary hearing that the person who engaged in the business or acted in the capacity of a contractor (1) had been duly licensed as a contractor in this state prior to the performance of the act or contract, (2) acted reasonably and in good faith to maintain proper licensure, and (3) did not know or reasonably should not have known that he or she was not duly licensed...." All three elements must be satisfied. Construction Financial, supra, 53 Cal.App.4th at p. 180.

5. Acting outside the scope of a license also means the contractor is not “duly licensed.”

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.

6. Contractors who fail to obtain Workers Compensation insurance are automatically suspended and considered unlicensed.

Business & Professions Code § 7125 requires a licensed contractor to obtain worker’s compensation insurance for all persons who perform work for the contractor, including employees, as well as purported “independent contractors” or “subcontractors” who themselves do not hold a valid Contractors License:

“(a) Except as provided in subdivision (b), the board shall require as a condition precedent to the issuance, reinstatement, reactivation, renewal, or continued maintenance of a license, that the applicant or licensee have on file at all times a current and valid Certificate of Workers' Compensation Insurance or Certification of Self-Insurance. . . . (b) This section does not apply to an applicant or licensee who meets both of the following conditions: (1) Has no employees provided that he or she files a statement with the board on a form prescribed by the registrar prior to the issuance, reinstatement, reactivation, or continued maintenance of a license, certifying that he or she does not employ any person in any manner so as to become subject to the workers' compensation laws of California or is not otherwise required to provide for workers' compensation insurance coverage under California law. (2) Does not hold a C-39 license . . . . “

See Labor Code § 2750.5; Hunt Bldg. Corp. v. Bernick (2000) 79 Cal.App.4th 213; State Comp. Ins. Fund v. Workers' Comp. Appeals Bd. (1985) 40 Cal.3d 5, 20; Rosas v. Dishong (1998) 67 Cal.App.4th 815. Corporations obviously cannot work without employees or licensed subcontractors, so they must have insurance for their workers. Labor Code § 3351.

Business & Professions Code § 7125.2 provides: “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.”

Under this statute, even where a contractor had workers compensation insurance but significantly under-reported his payroll in his workers' compensation reports, his license may still be suspended. Wright v. Issak (2007) 149 Cal.App.4th 1116, 1122-1123.

In Wright v. Issak, the Court of Appeal upheld a trial court finding that an otherwise validly licensed contractor was not “duly licensed” 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 pp. 1122-1123. “[T]he date that workers' compensation coverage is required to be obtained” is the date any persons worked on the project. Ibid.

This post is for educational and information purposes only. It is not legal advice on any particular case, and merely a general opinion of one California lawyer. You should not rely on it without consulting a competent attorney in your area about your specific case and facts. It is not intended to, and shall not, create an attorney-client relationship. So, be happy you got some free info and use your grey matter!

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