SubscribeThe Ultimate Remedy Against Unlicensed Contractors
February 9, 2007
Unlicensed contractors have the riskiest of occupations. That is, they risk the legal ability to collect compensation for work they perform, and more importantly, they risk the ability to keep the money they have been paid. Why is this you say? Well the California legislature has made a point to prevent unlicensed individuals from doing business in this state by not offering them any judicial help to recover compensation even if the consumers strategically were lying in wait to prey on the unlicensed individuals. California Business & Professions Code Section 7031(a) prevents an unlicensed contractor from collecting on debts owed to them by consumers under contracts due to their unlicensed status. Similarly, B&P Sec. 7031(b) gives consumers who have contracted with unlicensed contractors the ability to sue for restitution or reimbursement of all monies paid to the unlicensed contractor for ‘any act or contract.’ This harsh and draconian rule applies even if the unlicensed individual has perfectly built you the Taj Mahal.
The California Supreme Court has a long history of consistently supporting the legislative determination that unlicensed contractors ‘work for free in this state.’ California courts have consistently held that the licensing status of all contractors and subcontractors is a condition precedent to recovering compensation for contracted work in this state.
Most recently the California’s Highest court held in MW Erectors v. Neiderhauser (2005) 36 Cal. 4th 412, that a sub-subcontractor (MW Erectors) who sued a subcontractor (Neiderhauser) for non-payment of more than $1.3 million for steel work performed under two sub-contracts on a private hotel project (California Grand Hotel at Disneyland) was barred from recovering their compensation because they were unlicensed when they entered into the subcontracts. Neiderhauser argued that MW’s payment claims were barred under 7031(a), because MW was unlicensed when the sub-contracts were signed and was not licensed for the first eighteen days of the year-long project in which it was involved under one of the contracts. MW performed their obligations proficiently but was barred from recovering their $1.3 million by the Court because they failed to abide by B&P Sec. 7031. Sound unfair? Write your state senator or assemblyperson and tell them you think so.
Recently, my firm represented a homeowner in a binding arbitration with this issue dominating the outcome. The homeowner stopped paying his contractor because he felt the contractor was not properly building his house, i.e., a number of defective components began to manifest themselves during construction which were denied by the contractor. The contractor filed a mechanic’s lien and sued our homeowner client for breach of contract and foreclosure of the lien. Our client cross-complained for defective construction and breach of contract. We began investigating the contractor’s background and found that he had obtained and maintained his contractor’s license by fraud. In essence, he had obtained his license by the use of sham RMOs (Responsible Managing Officers) – other licensed individuals who have an ownership interest in a construction corporation and who supervise the day-to-day operations of the contracting business. Needless to say, the RMOs this contractor had vouch for him never set foot on his projects; which is a violation of the statute. Thus, we were able to prove that he did not have a valid license, and we successfully prevailed under a B&P Sec. 7031(b) claim. Our client received approximately $400,000 in reimbursement of monies paid to the contractor and another $200,000 in attorney’s fees from this unlicensed individual. Ouch!
The lesson here is that it’s important to recognize this body of law when referring individual contractors to your clients, especially if they end up in a dispute with a contractor. A quick check of a contractor’s license may give you or your client a significant upper hand in a contract dispute if the facts show the contractor is not validly licensed. B&P 7031(b) is ultimate remedy against an unlicensed contractor and will give a consumer a judicial windfall by enabling them to collect all of the money paid to the contractor as a penalty for them not being licensed. (The status of a contractor’s license can be viewed at the California State Licensing Board’s website at www.cslb.ca.gov.)
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10 Responses to “The Ultimate Remedy Against Unlicensed Contractors”
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Thanks for this very informative post, David! I knew that unlicensed contractors were on shaky legal ground, but I had no idea that simply being unlicensed is grounds for them to not have to be paid!
Dear David,
I took a unlicenced contractor to court based on 1029.8 (a) and provided proof based on (www.cslb.c.gov) that the contractor never had a licenses. Even though the defendant didn’t even show up to court, I still lost my case. I had entered into contract for 23k with unlicensed contractors and I took him to small claims court asking only for damages to my property which added up to $7500. What Remedy if any do I have? I think the judge discriminated against me!!
I have learned that they can make it hell to get your money back through a civil process. The average person doesn’t have the money to get their money back. I was ripped off badly by someone who tore my whole place apart, promising everything and nothing even approximated completion when he left. Later I learned that he’s had other difficulties, but has worked illegally for some time. After I found out that he doesn’t have a license, his wife, who was a colleague and referred him to me, stated that he usually works under “owner/builder,” which he would be doing illegally, too. She stated that she wouldn’t help me and to do what I “need to do.” I was without a bathroom for about eight months and still don’t have a kitchen almost two years later. He also tore up the decking in my yard, leaving me with a huge, dirty mess. In addition, he tore up my fireplace area and failed to redo it. He had his guys pull all of the electrical out of my walls and left it that way. He was supposed to refinish and repaint the walls and that job was left partially complete. He promised to polish my concrete floors and ended up leaving them in very poor condition. After he ran through all of my cash and accomplished nothing, he charged my credit card in anger and I haven’t gotten sufficient help from the credit card company. He ran the charges through his son’s Fine Art company in San Francisco and the two concocted a fake invoice using the art company’s name and listed things I’d already paid for in cash previously. His son submitted the fake invoice each of the six times that I called back to dispute the charges and he also submitted a page of mostly false statements claiming that I had ordered the “materials” from his art company in San Francisco and his dad was merely the subcontractor and delivery agent. They tried to write it up for “materials only” in order to circumvent the unlicensed contractor codes. I have gone through two attorneys and lost more money than I can even account for. I am having my first financial problems ever and my family is trying to help with car problems and such. I have a civil suit and both the of the “gentlemen” were served. The fake contractor decided not to even respond and the son is playing games. This is a nightmare and can practically ruin someone’s life. People have no idea how traumatizing the whole experience is because you have no outward injuries. I referred the matter to the Contractor’s State License Board and they have referred it for prosecution. I may be ruined financially, but, in the end, at least the crook and his son will have to answer to someone for their actions.
The author of this article who suggests California’s B&P Code Section 7031 represents a “harsh and draconian” rule is either naive or secretly biased. The contractor in the MW Erectors case certainly should have done better due diligence before signing such a large contract. Contracts in California have many rules and regulations that must be met to comply with law and being duly licensed is among them.
Construction in California is among the state’s largest industries. Unlicensed contractors typically operate illegally for many reasons. Immigration status and criminal record are among the leading reasons people work unlicensed. Licensure is not an available option for them. The majority of offenders though are individuals who recognize they face little or no consequence of operating illegally. They offer attractive prices because they typically declare no income and pay their workers cash thereby evading taxes that would otherwise contribute to our state’s economy. They place their clients and employees at risk by not insuring them from liability or injury. They often hire untrained and unskilled workers and perform shoddy work that is then percieved by the public as being consistent with the building trades.
So I respectfully submit that what some may feel harsh and draconian, others may see as only fair. As a licensed contractor I must insure my clients from liability and insure my workers from injury. As a responsible business owner and employer I must ensure the welfare of our workers by providing a living wage, health benefits, dental & vision care. I’m responsible for contributing to their Social Security benefit and unemployment insurance. We pay licensing and bonding fees. We are members of professional trade associations and pay to train and certify our workers. There are many costs of operating in a free society that are not free. When the citizens of our communities decide to take a risk of using these illegal operators they are largely on their own. I certainly understand the attraction of a low price for construction repairs or home improvements but I caution people to take a longer view. If you are getting estimates on repairs or home improvement projects and someone comes in with a substantially lower bid there is ususally a reason for that.
I recommend ALWAYS checking on contractors by logging on to http://www.cslb.ca.gov and reviewing their license status. If they haven’t provided a license number you can search by company name or personell name. And just because a contractor is licensed doesn’t assure they are operating legally. The CSLB website will list who their Worker’s Compensation insurance carrier is or whether they claim exempt. A contractor can only claim exempt from the worker’s comp rule if they are doing all of the work themselves. They are not required to insure themselves from injury.
HOW CAN YOU PROTECT YOURSELF? Ask the contractor you are considering to send you a copy of their insurance certificates. Upon awarding the contract, you can require their insurance company send you a certified copy naming you as additional insured. This is standard practice for insurance companies that won’t cost you a dime. So this should not be a problem for your contractor unless of course they don’t carry insurance. You should also ask for local client references and call them to find out what their experience was working with the contractor. Ask to visit some of their job sites and look at their work. Most people won’t buy a car without kicking the tires. Would you make any other substantial investment without due diligence?
I have worked with far too many homeowners who thought they were taking very little risk when hiring an unlicensed contractor and given the cost savings they’d realize they felt it was worth it. Unfortunately for many their experience is beyond what they though would be possible. People end up losing tens of thousands, in some cases hundreds of thousands of dollars to unscrupulous contractors operating illegally who end up leaving them high and dry. Elizabeth’s experience is all too uncommon yet many will not believe it is a problem until it happens to them.
So for those of you who think current license law is harsh and draconian I would suggest you talk to Elizabeth first before writing your legislators. When license law is dismissed out of hand it sends a message to unscrupulous predators that California is fair game and unsuspecting homeowners are ripe for the picking. It also sets dangerous precedent for licensing in every other area of our economy. How will it feel when real estate transactions are done in back room deals?
Unlicensed Operators are bad for California. They contribute only to the underground economy that is bleeding our state dry. Enforcement is largely ineffective because while the rules may result in a judgment against an unlicensed contractor, collecting on judgments is quite another story.
DUH….CALL ME
It’s Elizabeth again, with an update for anyone who may be interested. The CSLB case is at the City Attorney’s Office. I hope they do something soon. I am still living in a mess & without a kitchen and the financial damage has has multiple negative effects on my life. Prior to coming to work at my place, my colleague’s husband, who they both referred to a “high-end,” emailed photos of some of his “work.” They were photos of beautiful, modern residences, both interior and exteriors. . . . Every now and then I google the gent’s name, just to see if something turns up. This past week, I googled his name and was amazed to see that he is cited as the “General Contractor” in an architect’s database. He is listed as the “General Contractor” for a well known modern residence in L.A. and he’s never had a license. The architect is BIG in the world of modern architecture. This home is mentioned in multiple places on the internet and has been used in moves and on television, too! The photos of it are some of the exact same photos this guy sent to me prior to working on my place. He was indeed involved and, illegally, too, and working with a major architect! (I guess this is where the “owner/builder” arrangement that his wife mentioned came in handy, although he surely didn’t and doesn’t own that residence.) I became curious and googled the architect’s name and came up with another photo that was identical to one that the pretend contractor sent to me prior to beginning work. It is on a photographer’s website and shows the name of the residence. So, I got curious again and googled the name of the architect along with the house name and a photo of the architect posing in the house turned up, under the same photographer’s website! I am certain that the man who left my home torn apart was truly working with this major architect, but it is astounding to find out this information. No wonder this guy feels he is free to do as he pleases. He’s done it for years . . Still not sure if something will happen with the criminal charges. Time will tell. . . Oh, he ignored my lawsuit. Apparently he’s above it all. I hope this continues to underscore the importance of proper skill, credentials & ethics.
By the way, I assumed this guy was licensed and who wouldn’t? I worked closely with his wife, a colleague and one who is in a position of authority. She spoke frequently about his work – mentioning large jobs, exclusive locations and his employees by name. He has a large “workshop” not far from our work-site. She described situations where he was supposedly correctly poor work done by other contractors. Both she and he called his work “high-end.” He also emailed the photos of the beautiful modern residences. I found out that he didn’t have a license one day at work when his wife blurted out, “He’s supposed to be working on his license so he can help his son build his house.” This was near the end of the three months that his guys were monkeying around in my home. . . He had been anticipating building his son’s house, a beautiful, modern place (the kind that merits an architect’s model. . . His wife had emailed a photo of it to me) in the Bay Area and when he bailed on me, that’s where he went. He was up there for over a year and I have no idea whose license was used or if the son applied for “owner/builder.” It would be interesting to know. Apparently there are all sorts of “unlicensed contractors” out there. The moral of the story is to check the license, even of people you’d assume you can trust.
There are 316,000 licensed contractors in California and 1.2 million unlicensed. I’m a licensed electrical contractor and am often working as a sub contractor on jobs where I’m THE ONLY licensed contractor.
Most people prefer dealing with unlicensed contractors because of their low prices. In fact, when I bid a job for a home owner, I never mention the fact that I’m licensed because I don’t want to scare them away.
The CSLB (Contractors State License Board) has allowed the home improvement industry to be dominated by unlicensed contractors through weak enforcement. I dare anybody to call the CSLB and speak to a real person, it’s impossible.
For what it’s worth, the tests that one must pass to become licensed are laughably easy, for example, here’s a real question from the general contractors test: How many sides does a triangular trowel have?
The population of licensed contractors is actually declining per capita. This is due to a recent CSLB policy of doing criminal background checks on license applicants and baby boomers retiring from the industry. The CSLB cannot do criminal background checks on applicants who are immigrants from the middle east and eastern europe and this explains the disproportionately large number of these people practicing as licensed contractors.
I have been using an unlicensed contractor who has actually been very good. He is almost done with extensive renovations. I was naive and just assumed he was licensed. I am now panicked that he is unlicensed – that I am doing something illegal.
Though his work is very good.
What should I do at this point, if anything?
Thanks
I am a licensed contractor in Ca. and today I was told my price was too high and the client claimed a person in the building dept of the local city hall said it was ok to hire anyone they wanted if they wanted to do the proejct as owner/builder. I informed them this is the case if they hire licensed sub-contractors to perform the work in excessof ($500-$600). They thought that by being an owner/builder they could forego the employee taxes that I pay and save a substantial amount.
It seems that those that do this are in complete denial that they are in fact committing a crime, non-payment of taxes workers comp issues etc. Why is I have to abide by a different set of rules? Can anyone tell me what they have done ot overcome this objection when trying to get the contract? Im interested in doing good work for a fair price but it just seems to difficult anymore in Ca. Might just as well join the darkside and take my chances pay cash to the employees forego any taxation or moral obligation to do the right thing. FED UP IN CA