By Daniel Scholz, Jason R. Thornton, & Scott Bennett, Esq. of Finch, Thornton & Baird, LLP.
California’s contractor licensing laws shield the public from the risks of hiring unlicensed contractors and provide a method for victims to prosecute contractors that perform unlicensed work.[1] Construction contractors are subject to strict licensing laws and face severe consequences for performing work without being properly licensed. Except in very limited circumstances, a contractor that performs work without being “duly licensed at all times” is barred by statute from recovering any compensation for their work.[2] Harsher still, the contractor is subject to possible disgorgement for all compensation they have received for work on a construction project.[3] In practice, this means a contractor that files suit to recover compensation for construction work performed must prove it was properly licensed at all times during the project or risks disgorgement and dismissal of its claims.
The intent of California’s all-or-nothing penalty is to protect the public from incompetence and dishonesty by those who provide building and construction services. California’s Supreme Court has found California’s licensing laws “represent a legislative determination that the importance of deterring unlicensed persons from engaging in the contracting business outweighs any harshness between the parties, and that such deterrence can best be realized by denying violators the right to maintain any action for compensation in the courts of this state.”[4] However, since the inception of the law, courts have grappled with what it means to be duly licensed.
In California, contractors are licensed and regulated by the Contractors State License Board (CSLB), which is a part of the California Department of Consumer Affairs. Each contractor seeking a license must designate a qualifying individual to directly supervise and control the construction operations of the licensee. Generally, to obtain a license, the qualifying individual must apply to the CSLB, demonstrate suitable experience in their particular field, and pass an examination.[5] Once the license is issued, contractors must adhere to various statutes and regulations to maintain their license. These requirements include the licensee maintaining an appropriate workers’ compensation insurance policy for its employees and maintaining a contractors’ bond with a surety.[6]
For contractors engaged in a lawsuit to recover payment for their work, the burden is on the contractor to prove they held a valid license at all times during their performance.[7] Typically, contractors prove valid licensure by producing a verified certificate of licensure issued by the CSLB, showing the contractor held a valid license for the relevant period. However, this only creates a rebuttable presumption of licensure. Courts have found where a contractor’s license is controverted—where valid licensure is challenged—the onus remains on the contractor to prove that it held a valid license for the entire duration of the work for which it seeks payment.[8] Courts are empowered to look behind the face of a verified certificate of licensure issued by the CSLB and independently determine whether the contractor has complied with all requirements to obtain and maintain its license.[9] If a contractor has failed to adhere to licensing requirements, the court may find the contractor is not duly licensed, notwithstanding the CSLB certificate showing licensure. [10]
There are several methods to establish that a contractor has not complied with licensure requirements and successfully challenge the validity of a contractor’s license. For example, a party sued by a corporate contractor may challenge the contractor’s license on the grounds that the qualifying individual for the license—sometimes referred to as the responsible managing employee (RME) — is not performing statutorily required duties and is acting as a ‘sham’ RME. Where a corporation uses an RME as the qualifying individual for its license, the RME must satisfy statutory requirements to be considered a valid qualifying individual. Among other criteria, the RME must be a bona fide employee of the licensee and must be actively engaged in the classification of work for which they are the qualifying person.[11] Moreover, the RME must have direct supervision and control over the work for which a license is required.[12]
Despite the statutory requirements for qualifying individuals, some contractors choose to “rent” or borrow a RME to satisfy the license requirements. These individuals are often retired licensees who receive a monthly fee in exchange for acting as the RME but have no direct involvement in construction and business activities, making the qualifying RME a sham RME. When the RME is a sham, the contractor is acting outside the license because they have failed to satisfy the skill and knowledge requirements for licensure, placing consumers at risk.
For example, in Buzgheia v. Leasco Sierra Grove, a project owner asserted his general contractor was barred by statute from recovering compensation for his work because the contractor’s RME was a sham.[13] Specifically, the owner asserted the RME was not a bona fide employee of the contractor and did not satisfy the supervision requirements for the projects at issue.[14] Conversely, the contractor contended his production of a verified certificate of licensure was conclusive proof of licensure and that the CSLB’s determination of valid licensure should be the end of the inquiry.[15]
At trial, the court directed the jury that the burden of proof regarding the validity of the contractor’s license had shifted to the project owner, based on the contractor’s production of a verified certificate of licensure.[16] The jury found the contractor was duly licensed.[17] On appeal, the appellate court rejected the contractor’s argument.[18] The appellate court agreed the production of the contractor’s license was necessary, as proving licensure was an essential element of the contractor’s claims.[19] However, the certified license history was not conclusive proof of licensure.[20] The verified certificate of licensure meets the contractor’s initial burden.[21] If the license is controverted, the contractor maintained the burden to establish it was duly licensed and was required to put on evidence that it did meet the requirements for licensure, including having a valid qualifying individual.[22] The judgment was reversed and the case was remanded back to trial for further proceedings.[23]
FOR MORE INFORMATION
Read the article here.
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.
