BILL ANALYSIS Ó ----------------------------------------------------------------------- |Hearing Date:April 8, 2013 |Bill No:SB | | |263 | ----------------------------------------------------------------------- SENATE COMMITTEE ON BUSINESS, PROFESSIONS AND ECONOMIC DEVELOPMENT Senator Curren D. Price, Jr., Chair Bill No: SB 263Author:Monning As Amended:April 1, 2013 Fiscal:Yes SUBJECT: Contractors: unlicensed activity. SUMMARY: Clarifies the misdemeanor penalty for a person engaging in the business or acting in the capacity of a contractor to also include a person who has never been a licensed contractor, or a person who was licensed but who acts under a license that is inactive, expired, revoked, or under suspension for any reason. Provides that a contractor may pursue payment for any work on the contract while duly licensed, but precludes payment for work performed in a classification in which the contractor was not licensed, or was under license suspension, or under an expired or inactive license when the work was performed. Existing law: 1)Licenses and regulates more than 300,000 contractors under the Contractors State License Law (Contractors Law) by the Contractors State License Board (CSLB) within the Department of Consumer Affairs (DCA). The CSLB is under the direction of the registrar of contractors (Registrar) 2)Provides for contractor licensing under the classification of general engineering contractor (Class A license), general building contractor (Class B license), and specialty contractor (Class C license). In addition, there are 41 separate Class C license classifications for specialty contractors whose construction work requires special skill and whose principal contracting business involves the use of specialized building trades or crafts. 3)Makes it a misdemeanor for an unlicensed contractor to advertise for SB 263 Page 2 construction or work of improvements or act in the capacity of a contractor. Imposes specified civil penalties, including fines and imprisonment against the unlicensed contractor, and authorizes CSLB to cite the unlicensed contractor. (Business and Professions Code (BPC) § 7028) 4)Establishes the following provisions regarding actions for compensation for contracting work performed under the Contractors Law, as specified: (BPC § 7031) a) Prohibits a person engaged in the business or acting in the capacity of a contractor from bringing an action for collection of compensation for the performance of an act or contract for which a contractor's license is required without alleging that he or she was a duly licensed contractor at all times during the performance of that act or contract. b) Authorizes a person who hires an unlicensed contractor to sue for recovery of all compensation paid to the unlicensed contractor for performance of any act or contract, regardless of whether the person had knowledge that the contractor was unlicensed. c) Provides that a security interest for payment under a contract is unenforceable if the person performing work under the contract was not a duly licensed contractor at all times during the work. d) Provides that if licensure or proper licensure is controverted, then the burden of proof of licensure or proper licensure shall be upon the licensee, as specified. e) Specifies that the judicial doctrine of substantial compliance shall not apply regarding these provisions where the person has never been a duly licensed contractor. The law further authorizes the court to determine whether a person has exercised substantial compliance with CSLB licensure requirements at an evidentiary hearing if a person who engaged in the business or acted in the capacity of a contractor: i. Had been duly licensed as a contractor in California prior to performing work on the contract. ii. Acted reasonably and in good faith to maintain proper licensure. iii. Did not know or reasonably should not have known that SB 263 Page 3 he or she was not duly licensed when work on the contract commenced. iv. Acted promptly and in good faith to reinstate his or her license upon learning that it was invalid. 5)Defines "licensee" under the Contractors Law to include an individual, partnership, corporation, limited liability company, joint venture, or any other authorized combination, and to also include any named responsible managing officer, responsible managing manager, responsible managing member, or personnel who is the qualifier for purposes of issuing the contractor license. (BPC § 7096) 6)Provides that aiding or abetting an unlicensed person to evade the Contractors Law, or allowing one's license to be used by an unlicensed person, or acting as a partner with an unlicensed person with the intent to evade the law, constitutes a cause for disciplinary action. (BPC § 7114) 7)Provides that entering into a contract with a contractor while the contractor is not licensed constitutes a cause for disciplinary action. (BPC § 7118) This bill: 1)Revises and clarifies the misdemeanor penalty for a person engaging in the business or acting in the capacity of a contractor to also include a person who has never been a licensed contractor, or a person who was licensed but who acts under a license that is inactive, expired, revoked, or under suspension for any reason. 2)Repeals and recasts the provisions in Item # 4) above, to provide the following: a) Requires as a condition of bringing an action to collect payment for the performance of any act or contract that a contractor be duly licensed during the performance of the act or contract. b) Authorizes a person who utilizes the services of an unlicensed person who engages in the business or acts in the capacity of a contractor to recover all compensation paid to that person, except as specified. c) Provides that if a security interest is taken to secure SB 263 Page 4 payment for the performance of any act or contract, the security interest is unenforceable if the person performing the act or contract is not duly licensed at all times during the performance of the act or contract. d) Provides that if licensure or proper licensure is disputed, it is the burden of a purported licensee to provide proof of licensure by production of a verified certificate of licensure from the board. e) Authorizes a court to determine that there has been substantial compliance with the licensure requirements of the Contractors Law if the person was duly licensed at the time the contract was executed, but who subsequently performed work out of the licensed classification, under license suspension, or using an expired or inactive license. i. Provides that the contractor may pursue payment for any work on the contract while duly licensed, but precludes payment for work performed in a classification in which the person was not licensed, or was under license suspension, or under an expired or inactive license. ii. Provides that a person may recover from the contractor the compensation paid for work performed on the contract in which the contractor was not licensed in that classification, or was under license suspension, or under an expired or inactive license. 3) Provides that entering into a contract with any person whose license is inactive, expired, revoked, or under suspension is a cause for discipline if the purpose of the contract is for that person to perform an act subject to licensure under the law. 4) Revises and recasts the provisions which make it a cause for disciplinary action to aid or abet an unlicensed person to evade the Contractors Law, and defines "unlicensed person" for these purposes as a person who has never been licensed under the Contractors Law, or who has acted with an inactive, expired, revoked license or a license suspended for any reason. 5) Defines "duly licensed" or "duly licensed to act in the capacity of a contractor" under the Contractors Law if (1) the act was performed under a board-issued license during a period in which the license was not inactive, expired, revoked, or under suspension for any reason; and (2) the person was authorized to engage in work in SB 263 Page 5 that license classification. FISCAL EFFECT: Unknown. This bill has been keyed "fiscal" by Legislative Counsel. COMMENTS: 1.Purpose. This bill is sponsored by the Contractors State License Board (Sponsor) to simultaneously address two reoccurring issues with current state contracting statutes: To clarify, for purposes of criminal prosecution, the definition of an "unlicensed" contractor, expanding it to include those persons who are not listed as personnel of record on a contractor's license, as well as licensed persons who are under suspension due to unpaid civil judgments and/or outstanding tax liabilities owed to the Employment Development Department, Franchise Tax Board, and/or the Board of Equalization. To clarify that licensed contractors may be eligible for partial compensation if they enter into a contract while properly licensed, but subsequently perform work out of their classification or under an expired, suspended, or inactive license. 1.Background. a. Unlicensed Contracting. Existing law prohibits anyone from entering into a contract for any construction project with a total cost over $500 without a valid contractor license, and provides administrative sanctions for a violation of that requirement. (BPC § 7028.7) The law also provides for misdemeanor criminal prosecution of persons who enter into a contract "without having a license therefore." (BPC § 7028 B&P) The Contractors Law further clarifies, for purposes of administrative sanctions, that no contractor can act in such capacity under any license that is inactive, has been suspended, or is expired (BPC § 7117.5). The CSLB states that there is no corresponding clarification for the imposition of criminal sanctions, and that this has led to some judicial confusion regarding the prosecution of contractors who have a license, but whose license is presently suspended. SB 263 Page 6 The Author states that the CSLB and its industry partners are aware that contractors with suspended licenses are continuing to enter into contracts and creating a public safety risk. Many of these licenses were suspended due to failure to pay a civil judgment pursuant to BPC § 7071.17, where such judgments were usually for unsatisfactory workmanship or unscrupulous business practices. During 2012 alone, CSLB suspended 1,843 licenses for outstanding civil judgments, with a combined total of $115,546,000 in judgments owed to consumers and other contractors. Additionally, the CSLB works with partnering agencies, including the Franchise Tax Board and the Employment Development Department, to identify contractors who have outstanding tax liens against them, and to suspend their licenses pursuant to B&PC §7145.5. During calendar year 2012, CSLB suspended 877 licenses for outstanding tax liabilities for a combined total of $25,832,000 owed to the State of California. According to the Author, administrative sanctions are a deterrent for these violations, but it can take up to two years to implement once an offense is identified. Stronger, more clearly defined criminal sanctions would provide CSLB with an additional and more immediate enforcement tool to use against unscrupulous contractors who are violating their license suspensions. b. Contractor Recovery of Compensation . Existing law requires that a contractor must be a "duly licensed contractor at all times" while working on a contracted project in order to receive compensation (BPC § 7031). The CSLB indicates that the courts have interpreted the provisions of BPC § 7031 to deny all compensation to contractors who are in violation of the licensing requirements even though the failure to comply occurred during a brief period during which work was performed. In MW Erectors, Inc. v Niederhauser Ornamental and Metal Works Co., Inc., et al. the California Supreme Court held, in relevant part: "The words 'at all times' convey the Legislature's obvious intent to impose a stiff all-or-nothing penalty for unlicensed work by specifying that a contractor is barred from all recovery for such an 'act or contract' if unlicensed at any time while performing it." (Refer MW Erectors, Inc. v Niederhauser Ornamental and Metal Works Co., Inc., et al., Supreme Court of California, 30 Cal.Rptr.3d 755 (2005)] SB 263 Page 7 According to the Author, the amendments clarify that a contractor who is duly licensed at the time he or she enters into a contract could recover compensation for performing work on a project during the time he or she was properly licensed, even though during the course of the project the contractor performed work which (1) is outside the classification of the license, or (2) the license was temporarily suspended. For both of these instances the contractor could be barred from compensation, but only for the work performed during such periods. The proposed changes to the law would help ensure that the liability of the contractor is limited to the proportionate share of work that is performed in violation of licensing requirements, according to the Author. The Author states that the administrative penalties for most contracting violations are limited to a maximum of $5,000 (BPC § 7099.2). Applying the "denial of compensation" provisions of BPC § 7031 to relatively minor transgressions can result - and has resulted - in the effective imposition of grossly disproportionate unjust enrichment through civil redress. 1. Related Legislation. SB 261 (Monning), which will also be heard in this Committee on April 8, authorizes the Contractors State License Board to take administrative action against a licensed or unlicensed person who misuses or misrepresents a contractor license or aids and abets another person to do so. SB 262 (Monning), which will also be heard in this Committee on April 8, requires the person qualifying on behalf of a contracting firm to be responsible for exercising direct supervision and control in order to secure full compliance with the Contractors Law. Provides that failure to exercise direct supervision and control shall constitute a cause for disciplinary action and shall be punishable as a misdemeanor by imprisonment in county jail, by a fine of not less than $3,000, but not to more than $5,000, or by both a fine and imprisonment. AB 1920 (Berryhill, 2012) sought to narrow B&PC § 7031 to not apply if: (1) the contractor was previously licensed in the appropriate classification and the lapsed license was retroactively reinstated by CSLB; (2) not more than 20% of the value of any work performed was allegedly out of classification; (3) the court determines that a contractor has substantially complied with licensure requirements. That bill failed passage in Assembly Business, SB 263 Page 8 Professions and Consumer Protection Committee. AB 2027 ( Valado, 2012) would have authorized a court to determine that a person has substantially complied with the contractor licensure requirements if the person shows, at an evidentiary hearing, that he or she is duly licensed under the Contractors Law, as specified. That bill died in Assembly Business, Professions and Consumer Protection Committee. AB 249 (Berryhill, 2012) would have eliminated a person's ability to sue to recover all compensation for construction work performed by an "unlicensed contractor" whose license has lapsed, unless the lapse is due to the license being suspended or revoked. That bill died in Assembly Business, Professions and Consumer Protection Committee. 2. Arguments in Support. In sponsoring the bill the Contractors State License Board states that SB 263 clarifies, for purposes of possible criminal prosecution, the definition of "unlicensed" contractor. This clarification is primarily intended to address contractors who have had their licensed suspended either for failure to pay an outstanding civil judgment or for an outstanding tax liability. Making this change in the law will allow CSLB to pursue criminal charges when appropriate against a contractor who continues to contract for work while holding a license suspended for outstanding civil judgments or tax liabilities. The CSLB further contends that the bill would clearly state that contractors who are not licensed at the time a contract is signed are not entitled to any payment for work performed under that contract, and would revise the criteria for determining when a contractor is in substantial compliance with the licensing requirements. These amendments are intended to revise a provision of existing law whose reach has been expanded by court decisions. Under existing law, the administrative penalty for most contracting violations is limited to a maximum fine of $5,000. The provisions of Business and Professions Code Section 7031 can and are used to deny all compensation, even for what could be considered minor violations of the law. The proposed change would help ensure that the liability of a contractor is limited to the proportionate share of work performed in violation of the licensing requirements, according to the CSLB. The Spa & Pool Industry Education Council states that charging contractors who continue to do business with a suspended license with a misdemeanor will help keep the underground economy from SB 263 Page 9 growing. NOTE : Double-referral to Judiciary Committee second. SUPPORT AND OPPOSITION: Support: Contractors State License Board (Sponsor) California Association of Specialty Contractors California Chapter of the National Electrical Contractors Association California Legislative Conference of the Plumbing Heating and Piping Industry Construction Employers' Association Spa & Pool Industry Education Council Opposition: None received as of April 2, 2013 Consultant:G. V. Ayers