By: Jason R. Thornton, Esq., Jeffrey B. Baird, Esq., and Dan P. Scholz, Esq. of Finch, Thornton & Baird, LLP.
Effective January 1, 2027, Senate Bill 342 amends California Business and Professions Code section 7031 (“Section 7031”) to soften the potentially draconian consequences of a contractor’s licensing lapse on specified projects.
Unless a contractor fit within a limited substantial compliance exception, Section 7031 historically prevented a contractor from recovering compensation for work performed unless the contractor could prove it was duly licensed “at all times” during its performance. Section 7031 also allowed a contracting party to recover all compensation paid to a contractor in the event the contractor was unlicensed or there was any gap in licensure, regardless of the quality or completeness of the actual work performed. This all-or-nothing rule created harsh and often inequitable results for contractors.
SB 342 changes the rule. A licensing lapse during performance will not automatically defeat recovery for properly licensed work, so long as the contractor was also duly licensed when the contract was executed. Additionally, SB 342 now limits a party’s disgorgement remedy under Section 7031 to the compensation paid for work performed while unlicensed. The expressed purpose of SB 342 is to avoid the prior inequitable result, by allowing recovery for all licensed work performed, even if part of the work occurred during a gap in licensure.
The amendments apply to public works, commercial and institutional construction, construction of common interest developments, and construction of multifamily residential projects consisting of four or more units. For the latter two categories, a tenant or resident cannot be a party to the contract. Notably, the amendment does not authorize unlicensed work, and Section 7031’s separate restriction on enforcing security interests remains unchanged. Accordingly, mechanics’ lien rights may still be lost if a contractor is not duly licensed throughout performance of the act or contract requiring a contractor’s license. Further, the text of SB 342 leaves open some ambiguity as to whether certain projects may be categorically exempt from application of Section 7031 altogether. The amendments become effective on January 1, 2027, so the changes do not apply to any projects completed before this date. However, it remains an open question how courts should analyze projects which started before January 1, 2027, but complete after that date.
For contractors encountering a licensing issue, the amendment may provide options for addressing the problem without automatically forfeiting compensation for all work or disgorging all prior payments. Those options depend on the circumstances and applicable contractual obligations.
Contractors with questions regarding how this law impacts their active or upcoming projects are encouraged to reach out directly to Jason R. Thornton, Esq., Jeffrey B. Baird, Esq., or Dan P. Scholz, Esq., at Finch Thornton & Baird, LLP.
DISCLAIMER: This new law advisory is a publication of Finch, Thornton & Baird, LLP, for the purpose of providing information relating to recent legal developments. It is not intended, nor should it be used, as a substitute for specific legal advice, and it does not create an attorney-client relationship.
