California’s contracting licensure laws are some of the most complicated and burdensome in the country. They require licensure for general contracting, general engineering contracting, and specialty contracting work. Further, negligent or unintentional technical violations of certain statutes can result in automatic suspensions of the license by operation of law. Additionally, the potential penalties for performing work on a given project while the license is suspended are severe, up to and including disgorgement of all monies paid to the contractor for a particular project, including monies paid for materials as well as the inability to collect any monies due for work performed. This article first focuses on two common pitfalls that can result in suspension of a contractor’s license. Next, it addresses the potentially draconian penalties for non-compliance. Finally, it provides some recommendations on best practices to avoid disputes regarding licensure.
Two Common Violations Resulting in Automatic Suspension of a License
From a litigation perspective, two very common licensure violations that result in automatic suspension of a license are (1) failing to maintain workers’ compensation insurance and (2) failing to have a Responsible Managing Officer (“RMO”) or Responsible Managing Employee (“RME”) exercise direct supervision and control over the construction operations of the company.
Failing to maintain worker’s compensation insurance is the easiest violation to avoid. In California, workers compensation insurance for any licensed contractor with employees must be continuous during the time that the contractor’s license remains active. Note that roofers with an active C-39 license who have no employees are nevertheless required to carry workers compensation insurance or proof of self-insurance. Otherwise, sole proprietors are typically exempt from the workers compensation requirements. If the workers compensation insurance coverage lapses for any reason, the contractor’s license is automatically suspended until proof of acceptable workers compensation insurance is received by the Contractors State License Board. Any work performed by the contractor during the time periods that the license was automatically suspended is deemed to be unlicensed. The potential penalties for unlicensed work are discussed in greater detail below.
Another common violation involves RMO/RME requirements. The failure of the RMO or RME to perform its statutorily prescribed duties is a more complex violation, but the penalty is the same – automatic suspension of the license. Under California law, the RMO or RME must exercise direct supervision and control over the construction work being performed by the company. As one might expect, exactly what constitutes “direct supervision and control” over construction activities is often the subject of much debate and litigation. Some guidance, however, is offered by the California Code of Regulations. The relevant regulations provide than an RMO or RME can fulfill the direct supervision and control requirement by performing at least one of the following activities: (1) supervising construction, (2) managing construction activities by making technical and administrative decisions, (3) checking jobs for proper workmanship, or (4) direct supervision on construction job sites.
The Potential Penalties for The Performance of Unlicensed Work While A License Is Suspended
The potential penalties for unlicensed work are draconian, to say the least. For example, even if an owner is aware of the lack of licensure and nevertheless agrees to hire the unlicensed contractor to perform the work, the owner can nevertheless refuse to pay the contractor after completion of the work and raise the lack of licensure as a complete defense to any claim by the unlicensed contractor for money.
Additionally, where the owner with knowledge of the lack of licensure has made payments to the contractor, the owner can file suit to recover those monies from the contractor. And there is no limit to the recovery: payments made for goods, materials, labor costs, and other typical general condition charges are all recoverable by the owner or hirer from the unlicensed contractor. Finally, there can also be criminal penalties, including fines and jail time, for performing unlicensed construction work.
Best Practices for Ensuring Compliance with California’s Licensure Requirements
Having appropriate worker’s compensation insurance is essential to compliance with California licensing requirements. Consequently, having a relationship with an insurance broker experience with worker’s compensation insurance requirements is essential to ensure compliance and that there are no lapses in coverage. (This is true for all insurance coverages typically carried by a construction business, including commercial general liability coverage.)
With respect to the RMO/RME requirements, the best practice is to have the RMO/RME meaningfully involved in every project from the beginning, and to document that involvement through internal meeting minutes. For example, if a “round-table” company meeting is held on a weekly or monthly basis regarding all ongoing projects, attendance at those meetings and the names of the specific projects discussed should be documented. Additionally, adding the RMO or RME as a direct recipient, or a “cc,” to project emails regarding issues that arise during the course of construction involving scheduling, design changes, or value engineering, is also beneficial. The goal of these activities is to create a paper trail of the RMO/RME’s involvement in the project in case there is some dispute with the owner or hirer of the contractor later on and the issue of licensure is raised.
As explained above, the suspension of a construction license can have serious consequences and potentially create an existential threat to a company. If any serious questions arise regarding licensure, the best practice is to seek the counsel of a licensed California attorney regarding the issue as soon as possible.
Zachariah H. Rowland is a partner in the law firm of Dunn DeSantis Walt & Kendrick. He advises clients on all types of commercial litigation and construction matters in state and federal courts throughout California. He can be reached at zrowland@ddwklaw.com.
Dunn DeSantis Walt & Kendrick provides a broad spectrum of legal services to businesses of all sizes, from small, local start-ups and non-profits to large, national companies. DDWK’s real estate development and construction practice includes representing all segments of the development and construction industries on both private and public projects.
You can find additional information and resources related to helping business owners and their businesses through COVID-19 challenges on the DDWK website.
