The Dangers of an Unlicensed Contractor from Every Angle

The State of California requires that contractors in the building trades be licensed.  Individuals and business entities obtain their contractors licenses by demonstrating to the California Contractors State License Board that they have the requisite knowledge, skill, and experience to be licensed.  The CSLB issues licenses to those meeting requirements.  As a construction attorney for many years, I have witnessed the impact of unlicensed building contractors from every point of view.  If you are considering hiring an unlicensed contractor, acting as an unlicensed contractor or even working for an unlicensed contractor as an employee, please consider the following perils:

To the Owner Considering Hiring an Unlicensed Contractor:

On the positive side for owners considering hiring an unlicensed contractor, the general rule in California is that an owner can escape the obligation to pay an unlicensed contractor for work performed and materials supplied because unlicensed contractors are prohibited from bringing legal actions against owners for payment.  The law even goes so far as to allow the owner to bring a legal action against the unlicensed Contractor for reimbursement of anything the owner paid to the unlicensed contractor.  This is done through a “disgorgement” action (see, Business and Professions Code 7031. See also, the following article: Disgorgement Article). Despite this, there are a great many negative potential consequences to be considered by any owner who might consider hiring an unlicensed contractor.  Among them are the following:

1. If you are considering not paying your unlicensed contractor because Business and Professions Code 7031 allows it, please consider that unlicensed contractors, who have clearly demonstrated a disinclination to follow legal obligations in the first place, may resort to “less than socially acceptable” means of exacting retribution against those who do not pay them or who demand the return of money paid through a disgorgement action  I am sorry to say this.  Let us leave it at that.  
2. Also important for the owner to consider is that the unlicensed contractor and its employees become the actual legal “employees” of the owner (see Labor Code 2750.5).  This means that any employee who is injured during work on the project may sue the owner for his or her injuries (see, Labor Code 3706). Moreover, if laborers are paid less than what the law requires or were not given legally required breaks, lunch breaks, overtime, or if there were other Labor Code violations, the owner becomes liable for payments owed, plus penalties. 
3. Further to consider is that in the usual course of events, the owner who has hired an unlicensed contractor has no workers compensation coverage for injury claims of the unlicensed contractor’s employees.  In such a case, not only is the owner liable for those injuries, but the owner may also be presumed negligent and the defenses of contributory negligence and assumption of risk may be unavailable. The owner may be liable not only for the injuries themselves, but also for the attorney fees to pay the attorney who brings the action against the owner.  (see, Labor Code 3708–3709).
4. The owner should also consider that use of an unlicensed contractor may void insurance coverage.  Many homeowner insurance policies require the use of only licensed contractors for repairs.  If repairs are improperly performed by an unlicensed contractor, resulting in later damages attributable to defective repairs, many insurance policies will deny coverage to repair the subsequent damage because the original repairs were performed by an unlicensed contractor in violation of the policy terms. Some policies are canceled by their own terms when the owner allows an unlicensed contractor to perform the work.
5. Finally, if an owner hires an unlicensed contractor to perform repairs, when the owner acts to sell the home the owner may be required by law to disclose this fact (see, Civil Code 1102–1102.19).  This disclosure may reduce the selling price of the home.  The failure to report the fact that repairs were performed by an unlicensed party may subject the owner for a later legal action for such failure (see, Civil Code 1102.13), including for fraud and misrepresentation.

To the Person Considering Acting as an Unlicensed Contractor:

As long as the entire project costs under $500, a contractor’s license is not required (see, Business and Professions Code 7048).  However, if an individual seeks to act as a contractor without a license for any project at a price of $500 or more, they are playing with fire and will eventually get burned, likely in one of the following ways:

1. Acting as a contractor without a license is a crime (Business and Professions Code 7028).  Those convicted risk up to six months in jail, a fine of up to $5,000 and administrative fines of up to $15,000.
2. If you are unpaid for your work, you have no right to bring a lawsuit to get paid (Business and Professions Code 7031).
3. If you have already been paid for the work, the party who paid you can sue you to get back everything they paid you. This is done through a “disgorgement” lawsuit against you (Business and Professions Code 7031).
4. If you are convicted of acting as a contractor without a license, your aspirations to ever obtain a contractor’s license may well be lost forever (Business and Professions Code 7123).

To any Person Considering Working for an Unlicensed Contractor:

If you are a prospective employee of an unlicensed contractor, you face dangers as well.  Consider the following:

1. Since your ostensible “employer” is unlicensed, they are entirely illegitimate and acting illegally.  In the eyes of the law, you may be considered a co-conspirator with your employer in this criminal enterprise.  Thus, you too risk conviction of a crime and a sentence of up to six months in jail, a fine of up to $5,000 and administrative fines of up to $15,000  (Business and Professions Code 7028).
2. It is entirely unlikely that your ostensible employer will obtain workers compensation insurance to provide treatment, hospitalization, and compensation if you are injured while working.  More likely than not, you will be required to fend for yourself in the treatment of your injuries and providing income for your household while injured.
3. It is also entirely unlikely that your ostensible employer will be making deductions from your paycheck for state and federal taxes, social security, and other standard deductions.  Thus, you may thus be left with a tax bill and may be subject to prosecution for income tax evasion.
4. If you are employed “off the books” or “under the table” you will not be able to substantiate your income for purposes of showing employment history necessary to obtain credit, rent an apartment, fill out a mortgage application, a student loan application or an insurance application.  Instead, you may be treated as chronically unemployed, a scofflaw, or both.
5. You will not be able to build up any employment history necessary to participate in Social Security.
6. You will not participate in employer sponsored 401-K and other similar employer tax deferred savings programs to supplement Social Security income, if any.

Conclusion: Whether you are considering hiring an unlicensed contractor, acting as one yourself or working for an unlicensed contractor, you can expect serious negative consequences.  These consequences may not visit you immediately, but eventually and catastrophically, they will land on your doorstep.  Steer clear of any association with unlicensed contractors and you will never have to worry about these catastrophic consequences.

Article by William L. Porter, Esq. in 2024. Mr. Porter is a principal in The Porter Law Group, Inc. in Sacramento, California. He can be reached by phone at (916) 381-7868. Visit the firm’s website at www.porterlaw.com and www.AppliedLegal.com