BILL ANALYSIS                                                                                                                                                                                                    Ó







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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