BILL ANALYSIS �
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|Hearing Date:April 8, 2013 |Bill No:SB |
| |263 |
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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
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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
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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
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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
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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.
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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)]
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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,
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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
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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