The State of California is very serious about enforcement of license laws. As most contractors know, there is no right of collection and money already collected may have to be paid back for work performed without a license. This is common knowledge and the vast majority of licensed contractors large and small think that this provision of the Business and Professions Code has nothing to do with their daily business.
“B&P 7031 (a.) Except as provided in subdivision (e), no person engaged in the business or acting in the capacity of a contractor, may bring or maintain any action, or recover in law or equity or in any action, in any court of this state for the collection of compensation for the performance of any act or contract where a license is required by this chapter without alleging that he or she was a duly licensed contractor at all times during the performance of that act or contract…”
What few contractors understand, however, is that there are other much less known provisions of the B&P Code that can render their contractor’s license suspended retroactively – by law.
A recent case in San Diego Superior Court arising out of a dispute between the Owners of a small condo project and their General Contractor provides an interesting example. The Contractor claimed that the Owner owed for change order work and extended general conditions and the Owner claimed that the Contractor owed for delay damages. The contractor had held a contractor’s license for 30 years and the status of his contractor’s license was the least of his worries.
In the course of our investigation into the issues on behalf of the Owner, we discovered that the Contractor’s cost records had many entries reflecting relatively small amounts spent on labor in hundred dollar increments. (For example: “Jose Garcia – $300”) These costs entries went back to the very beginning of the project for clearing and excavation work. This observation begged the question of whether the Contractor had been paying workers compensation for these day laborers. A check of the California State License Board (CSLB) website showed that the Contractor had filed for exempt status for workers comp certifying that he had no employees and implying that all of his work is sub contracted out. In deposition, the Contractor confirmed that it was his common practice to hire hourly “contract labor” paid with cash. He further confirmed that he did not pay workers comp for these contract laborers.
“B&P 7125.2 The failure of a licensee to obtain or maintain workers compensation insurance coverage, if required under this chapter, shall result in the automatic suspension of the license by operation of law in accordance with the provisions of this section…”
In a pre-trial motion the attorney for the Owner asserted that since the contractor’s license was, by law, suspended due to the failure to pay workers compensation the contractor had no right of collection. The judge ruled in favor of the Owner and by doing so wiped out the contractor’s claim against the Owner allowing the Owner to continue to pursue his claim against the Contractor.
Although this draconian provision of the B&P Code seems inequitable, the courts have traditionally held that it is enforceable. The incidence of contractors failing to pay workers comp has actually increased in these tough economic times as contractors cut costs to squeeze out a drop of profit. Unfortunately, many are unknowingly gambling with disaster. In the referenced case, counsel for the contractor appealed the decision; however, while the case was pending at the appellate level, it was settled by the parties, so the law as applied by the trial judge remains unchanged.
It is surprising how many smaller contractors file for a worker’s comp exemption and utilize day laborers paid with cash. Few realize that this practice can lead to a forfeiture of collection rights, can wipe out any potential claims they may have against the Owner, and may lead to a potential financial disaster.
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