California has some of the toughest penalties in the country for unlicensed contractors. An unlicensed contractor is not just a contractor without a license, but could also be a contractor who is not correctly licensed or a contractor who has the correct license but whose qualifying individual – a responsible managing officer (RMO) or responsible managing employee (RME) – is not as involved in the operations of the contractor to maintain proper licensure.
An unlicensed contractor, for example, may be subject to both civil and criminal penalties such as one-year imprisonment and/or $10,000 fine for intentional use of another person’s license with intent to defraud or a civil penalty of $200/day per employee performing work for unlicensed contractor. In addition, California Business & Professions Code Section 7031 precludes an unlicensed contractor from maintaining a lawsuit to recover compensation for its work.
But perhaps the most onerous penalty of all is that an unlicensed contractor may be required to disgorge any compensation it has previously been paid for performing work requiring a license. California Business & Professions Code Section 7031(b) sets forth the rule that if a contractor is not properly licensed at any point during the construction project, the party who paid the contractor who was unlicensed is entitled to sue that contractor to recover all sums it paid to that unlicensed contractor in relation to the entire project.
Subject to very limited exceptions, California courts have supported this harsh result and it is clear that this policy is now firmly entrenched in the law. Note the following examples:
In Wright v. Issak (2007) 149 Cal. App. 4th 1116, a contractor sued two homeowners for unpaid amounts in connection with a home remodeling project. The homeowners responded with a cross-complaint against the contractor seeking, among other things, the return of all amounts they had paid him on the ground he did not have a valid contractor's license. Although the contractor held a California contractor’s license, he grossly underreported his payroll to the State Compensation Insurance Fund, and never obtained workers compensation for his crew working on the home remodeling project. Both the trial court and court of appeal agreed with the homeowners that, under California Business & Professions Code section 7125.2, the contractor’s license was automatically suspended for his failure to obtain workers compensation insurance for his employees. Both courts rejected the contractor’s argument that such suspension could not take effect until the contractor received a notice of suspension from the registrar of contractors. Because the contractor failed to properly report his payroll and obtain insurance for his workers before, during and after the home remodeling project, the contractor was not properly licensed. The homeowners were entitled to recover all amounts paid to the contractor under Business & Professions Code section 7031(b).
In Goldstein v. Barak Construction (2008) 164 Cal. App. 4th 845, homeowners entered into a contract with Barak Construction to remodel their home in mid-June 2004. Barak began work on the project right away, but did not obtain a contractor’s license for the first time until mid-September 2004. Homeowners paid Barak $362,629.50 before Barak abandoned the incomplete project. Homeowners then filed suit under Business and Professions Code Section 7031(b), seeking a writ of attachment against Barak for the full amount paid, plus an amount for attorneys’ fees and costs. The trial court granted the writ of attachment. Though the court recognized the draconian nature of the disgorgement action, the Contractors’ License Law allows recovery of all compensation paid to the unlicensed contractor regardless of whether the amounts paid are ultimately retained by it. And the court of appeal rejected the contention that the amount of the attachment should be reduced by the amount earned by Barak after it became a licensed contractor. The court reiterated that to recover for work performed on a project, a contractor must be licensed at all times during which it performs the contractual work.
Finally, in White v. Cridlebaugh (2009) 178 Cal. App. 4th 506, plaintiffs and a contractor entered into a contract to build a new house. Within a few months after the contract was entered, the relationship soured. Plaintiffs terminated the contract and the contractor recorded a mechanics’ lien against the property. Litigation ensued between the plaintiffs and contractor. The RMO for the contractor was an individual named Robert Diani. At trial, Diani testified that in 2004 he had turned over all dealings and daily work of the business to Terry Cridlebaugh. Since that time Diani had been living in Peru. Cridlebaugh did not hold a contractor’s license. Based upon these facts, it was held that the contractor’s license was automatically suspended. Therefore, the contractor was barred from suing to recover for its work, and the contractor was required to repay all previous compensation it had received from the plaintiffs.
The results from these cases are clear. If a contractor is unlicensed at any point during its construction work on a project, the general rule is that not only will the contractor be unable to sue for any sum it contends it is owed for the work, but it may also be required to actually disgorge all sums it received in relation to the entire project, including for work performed while the license was properly in place. Despite this seemingly harsh result, the language and intent of these statutes are clear and will be enforced by the courts. Contractors and subcontractors are well advised not to perform any work on any construction project without a valid California contractor’s license in place at all times.
