California General Contractors are at serious risk if they hire Unlicensed Subcontractors. A recent construction case in California should give general contractors pause when hiring unlicensed subcontractors to perform work on a project, even though the general contractor is licensed.
Penalty for Hiring Unlicensed Subcontractor in California
Any unlicensed contractors doing work that requires a contractor’s license are barred from recovering payment for their work and must return all sums paid to them upon request, according to Section 7031 of the California Business & Professions Code.
In this way, Section 7031 is said to act as both a shield and a sword against unlicensed contractors performing work that requires a contractor’s license, and both the shield and sword apply even if the work was performed flawlessly and on schedule. Until recently, however, it was unclear whether a licensed general contractor could be penalized for hiring unlicensed subcontractors to perform work.
Construction Case Kim v. TWA Construction, Inc
The case of Kim v. TWA Construction, Inc. (2022) 78 Cal.App.5th 808 (“Kim”) answered this question in the affirmative. In Kim, the general contractor was required to return all monies paid for a tree removal to the homeowner, due to the individual hired by the general to remove the tree not possessing a C-61 / D-49 Tree Service Specialty license. It seems that this ruling would apply no matter the general contractor’s knowledge of the tree contractor’s licensure status.
Action Required of General Contractor
With this case now in the field, general contractors should take extra precautions to verify licenses of all trades before permitting them to perform any work on a project, or they are at risk of having to return all monies paid to them by their client for any of the work performed by an unlicensed subcontractor.
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Legal Requirements for Hiring Subcontractors in California
California’s legal framework for construction, primarily governed by the Contractors’ State License Law (found within the Business and Professions Code), is designed to protect consumers by ensuring that all work is performed by qualified individuals. For a general contractor, this means navigating a complex web of requirements to ensure every subcontractor they hire holds a valid contractor’s license for their specific trade.
The law is clear that any person or entity who performs work requiring a contractor’s license must possess one, or they are barred from collecting payment for their work. This “shield and sword” provision, found in Section 7031(a), even requires unlicensed contractors to return all payments received for their work. This rule applies regardless of whether the work was performed flawlessly or on schedule, making it a powerful tool against unlicensed activity.
As discussed above, the case of Kim v. TWA Construction, Inc. (2022) clarified that this penalty extends to licensed general contractors as well. As a result licensed general contractor can be forced to return all money paid by a client for work performed by an unlicensed subcontractor, even if the general contractor was unaware of the subcontractor’s licensure status. This places the general contractor at risk of paying twice for the same work—once to the unlicensed subcontractor and again to the client.
In addition to licensing, general contractors must also ensure compliance with various other laws, including local, state, and federal wage laws. Misclassifying employees as independent contractors, for instance, can lead to serious legal and financial consequences. With the stakes so high, Putterman Law works with our clients to ensure all their subcontracts are legally compliant to protect their business.
Can a Subcontractor Work Under Someone Else’s License in California?
A general contractor should never hire an unlicensed subcontractor in California or anywhere else. A general contractor who hires an unlicensed contractor to perform work on a construction project faces serious exposure in two respects. First, the general contractor may not be able to collect payment for any work performed by the unlicensed contractor. This places the general contractor in a precarious position and may negatively impact other work done by licensed trades. Second, the general contractor may be forced to return any money paid by the owner for work performed by an unlicensed contractor, regardless of whether the general contractor is able to recover any sums paid to the unlicensed contractor for their work. This would result in the general contractor having to pay twice for the same mistake. To avoid these unnecessary risks, general contractors should never hire an unlicensed contractor to perform work on a project.
Is It Illegal to Hire an Unlicensed Contractor in California?
When it comes to the legality of hiring an unlicensed contractor, the answer is complex and depends on your perspective. The law is not designed to put homeowners in jail but to financially penalize those who fail to comply with licensing requirements and to protect the public from substandard work.
- From the Unlicensed Contractor’s Perspective Hiring yourself out as an unlicensed contractor for a job that requires a license is illegal. California’s Business & Professions Code, Section 7031 is a powerful deterrent, often called a “shield and sword” against unlicensed contractors. As the “shield,” it bars an unlicensed contractor from filing a lawsuit to collect payment for their work. As the “sword,” it requires the unlicensed contractor to return all money they’ve been paid for the work, even if the job was completed flawlessly. This means an unlicensed contractor can be forced to work for free and then have to pay back everything they received.
- From the Homeowner’s or General Contractor’s Perspective While it’s not a crime for a homeowner to hire an unlicensed contractor, doing so exposes you to significant legal and financial risks. If you hire an unlicensed contractor and they fail to complete the work, you have little to no legal recourse to force payment or performance, as they are barred from the court system. The most significant risk, however, is being forced to pay for the same work twice. As the case of Kim v. TWA Construction, Inc. made clear, a licensed general contractor may have to return all money paid by a client for work performed by an unlicensed subcontractor, regardless of whether the general contractor is able to recover those sums from the subcontractor.
How Putterman Law Can Help
Putterman Law can provide crucial support from both sides of this issue. For a homeowner or general contractor, we can help you understand your options and take action to recover funds paid to an unlicensed contractor. We’ll work diligently to help you get the money back that you are legally owed. For an unlicensed contractor who has completed work but is now facing a lawsuit, we can help you navigate the legal proceedings and work toward the best possible outcome.
We bring extensive experience and candid opinions to help you make informed decisions and protect yourself from unnecessary risk. Don’t let a legal misstep jeopardize your project or your business.
With many laws affecting homeowners and general contractors, it is impossible to stay up to date. That is why having a construction lawyer on your side like Putterman Law is essential. Learn about our construction law services here or click the button below to schedule a legal consultation.
