By: E-News Editorial Staff
Special Thanks To: Pamela Scholefield, Esq.
On August 9, 2023, Pamela Scholefield, Esq. presented a webinar in association with the Real Property Law Section titled “Clarifying the Contractors State License Law.” That presentation is available here for “participatory” CLE credit in the Real Property Law Section education library. In an effort to raise awareness of the webinar the Real Property Law Section E-News editorial staff conducted a brief interview with Ms. Scholefield about the presentation and the contractors license law topic more generally.
E-News Staff: Why was the contractors state license law something that you wanted to present a webinar about?
Pamela Scholefield: I find there are a lot of misconceptions about California’s licensing laws, and to some extent, a disbelief that our laws are so harsh against those who are not properly licensed (see Business & Professions Code, Section 7031). This is especially true when counseling out-of-state contractors who want to set up shop in California. It is really hard for them to get their head around the concept that a contractor who is not properly licensed can be denied payment even if their work is perfect. Plus, this law is still in flux regarding when the “work” under a contract begins, which is an important distinction when a client has signed a contract for a private project before they are licensed but intends to not start the work until their license is issued. This topic is so important to understand to keep attorneys and their client out of trouble, yet I haven’t found many, if any, seminars that focus on explaining the many aspects of our license laws.
E-News Staff: In advancing a public policy that absolutely bars recovery to unlicensed contractors, the contractors state license law often leads to a result that your typical “everyman” would feel is “unfair.” I have found that understanding the reasons for this rule is sometimes hard for people to appreciate. Do you have any suggestions for how to approach a client who is encountering these concepts for the first time, especially when it might mean financial disaster?
Pamela Scholefield: It’s not just the average person who thinks this law is unfair. I once had a judge share her thoughts that the law is inequitable when ruling in favor of my client on a motion for summary judgment against an unlicensed company. In that case, the company that entered in the contract with my client fabricated cabinetry and was not a licensed contractor, but it had hired an “installer” that was licensed. But the judge knew she had to follow the law requiring disgorgement of all compensation even though she didn’t like it. I usually try to explain that the law is primarily to protect consumers from unqualified contractors. The licensing system provides at least some threshold of understanding construction. Also, when a contractor is licensed, they are required to carry a $25,000 license bond to protect homeowners from damages caused by the contractor. When the contractor is licensed, the Contractors State License Board (CSLB) offers homeowners industry experts free of charge to assess any damages caused by the contractor and an arbitration program designed to allow the parties to present their side of a dispute without the need for attorneys. A contractor who is not licensed robs the consumer of these benefits, leaving them no choice but to seek relief through court. Our Supreme Court explains it this way: “Section 7031 represents a legislative determination that the importance of deterring unlicensed persons from engaging in the contracting business outweighs any harshness between the parties.” (Hydrotech Systems, Ltd. v. Oasis Waterpark (1991) 52 Cal. 3d 988, 995).
E-News Staff: I have occasionally encountered cases where it was relatively clear that the General Contractor chose to use an unlicensed sub-contractor with the intention not to pay. Have you ever seen that kind of behavior held to account, even if it wasn’t in the form of a payment to the subcontractor (e.g. CSLB administrative action against the general, or the general being held liable to the Owner)?
Pamela Scholefield: I have not personally been involved in a case where the General Contractor hires an unlicensed subcontractor with the intention not to pay. I usually see it become an issue when there is a payment dispute. But, in your example, the CSLB would be able to bring a disciplinary action against the GC for contracting with an unlicensed sub under B&P Section, 7118. We also have a recent case (Kim v. TWA Construction, Inc. (2022) 78 Cal. App. 5th 808), where the court held that “section 7031 bars even a licensed general contractor in California from bringing an action for compensation for an act or contract performed by an unlicensed subcontractor where a license is required.” Prior to this case, there had not been a ruling by an appellate court or the Supreme Court directly on point.
E-News Staff: What licensing concepts do you think people in the construction industry misunderstand? (e.g. Determining the need for a type “C” license with the “two unrelated building trades” rule under 7057)
Pamela Scholefield: Many people think that you can do any type of work under the Class B license (General Building Contractor). But a Class B contractor cannot take a contract unless it involves at least two unrelated building trades other than framing or carpentry, or the contractor holds a specialty (Class C) license for the trade they are performing. Another huge misunderstanding comes into play when a family business gets passed down to a son or daughter, or even grandkids. Often the original owner (whether a parent or a grandparent) remains listed as the license qualifier long after they’ve retired. They are required to be replaced within 90 days of retiring, otherwise they can be found to be a “sham” qualifier. I’ve also seen people who run their business as a sole proprietorship and then decide they want to be a corporation, but they continue to use their sole proprietor’s license number while having their corporation enter into contracts and perform the work. This means that their corporation would likely be subject to disgorgement under Section 7031 if a dispute arose. Many people also fail to realize the absolute requirement for a contractor to carry workers comp insurance if they have employees. If a contractor pays its workers under the table or misreports its labor hours to avoid having to pay workers comp, the contractor can be prosecuted for insurance fraud and its license is considered suspended as a matter of law.