BILL ANALYSIS �
AB 1920
Page 1
Date of Hearing: April 24, 2012
ASSEMBLY COMMITTEE ON BUSINESS, PROFESSIONS AND CONSUMER
PROTECTION
Mary Hayashi, Chair
AB 1920 (Bill Berryhill) - As Amended: April 9, 2012
SUBJECT : Contractors: compensation.
SUMMARY : Prohibits a person from recovering funds on a
contract, as specified, from a licensed contractor who performs
unlicensed work on a project, as specified. Specifically, this
bill :
1)Prohibits an individual from suing a licensed contractor who
performs unlicensed work to recover funds, as specified, if
the contractor:
a) Was previously licensed in the appropriate
classification for work performed and Contractors' State
License Board (CSLB) retroactively reinstated a license for
the entire time that work was performed; or,
b) Possesses a valid license and contracted or performed
work outside of classification that did not exceed 20% of
the contract price. Limits the individual's recovery of
funds to work performed outside of classification.
2)Authorizes a contractor to sue to recover funds for work
performed if he or she:
a) Was previously licensed in the appropriate
classification for work performed and CSLB retroactively
reinstated a license for the entire time that work was
performed; or,
b) Possesses a valid license and contracted or performed
work outside of classification that did not exceed 20% of
the contract price. Limits the recovery of funds to work
performed in the correct classification.
3)Revises and recasts the list of actions a court may use to
determine whether a contractor has demonstrated substantial
compliance with licensure requirements as follows:
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a) The person who acted in the capacity of a contractor
has:
i) Been duly licensed and the loss of licensure did not
occur due to an affirmative disciplinary action resulting
from an accusation, arbitration, or citation;
ii) The contractor knew or should have known about the
loss of licensure;
iii) Took prompt action to request reinstatement of the
license after learning that it was invalid; and,
iv) Would be unjustly enriched for work performed.
b) There are aggravating factors for a loss of licensure,
including:
i) The seriousness of the violation that resulted in
the loss of licensure; and,
ii) The degree to which the loss of licensure harmed or
could have harmed the public.
4)Declares legislative intent that this bill affects only the
right to bring action to recover money in the performance of a
contract and shall not be construed to limit or modify, CSLB's
authority to take administrative, civil, or crimination
action, or a law enforcement agency's authority to enforce,
the provisions of the Contractors' State License Law (CSLL).
EXISTING LAW :
1)Establishes the CSLL and provides for the licensure and
regulation of contractors by CSLB. CSLB issues licenses for
the classification of a 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.
2)Makes it a misdemeanor for an unlicensed contractor to
advertise for any construction or work of improvement covered
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under the CSLL or to engage in the business or act in the
capacity of a contractor. Imposes specified civil penalties,
including fines and imprisonment against, and authorizes CSLB
to cite, the unlicensed contractor.
3)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. �Business & Professions Code (BPC) Section 7031].
4)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:
a) Had been duly licensed as a contractor in California
prior to performing work on the contract;
b) Acted reasonably and in good faith to maintain proper
licensure;
c) Did not know or reasonably should not have known that he
or she was not duly licensed when work on the contract
commenced; and,
d) Acted promptly and in good faith to reinstate his or her
license upon learning that it was invalid.
FISCAL EFFECT : Unknown. This bill is keyed non-fiscal.
COMMENTS :
Purpose of this bill . According to the author's office, "BPC
Section 7031 has led to some confusion and misinterpretation of
the law's intent. It is now being used as a legal excuse by one
contractor not to have to pay another contractor due to minor,
technical glitches in the other contractor's license history.
AB 1920 would narrow the application of BPC Section 7031 so that
it would not apply in the following situations:
"First, if the contractor was previously licensed in the
appropriate classification and the lapsed license was
retroactively reinstated by CSLB from a project commencement
date to a project completion date, the contractor would be
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allowed to bring a civil action against the property owner to
recover any compensation owed for work performed. Additionally,
a property owner could not bring a civil action to force the
contractor to refund all monies previously paid for work
performed if the contractor had been previously licensed in the
correct classification and CSLB had retroactively reinstated the
license.
"Second, if not more than 20% of the value of any work performed
was allegedly out of classification, a licensed contractor would
be allowed to bring an action to recover amounts owed by the
owner for that portion of the work performed that was within the
proper classification. Additionally, civil actions against a
contractor to recover money already paid for work performed
would be limited to the value of that portion of the work that
was not within the proper license classification, provided that
the total value of the work performed outside of classification
did not exceed 20% of the value of the project.
"Third, the bill revises the substantial compliance exception to
give the courts greater flexibility to determine that a
contractor has substantially complied with licensure
requirements. Rather than requiring the court to make specific
finding in an evidentiary hearing to establish substantial
compliance, this bill would allow the courts to consider
specified mitigating and aggravating factors in making a
substantial compliance determination. In addition to the
current factors, the court could consider the degree to which an
owner receiving the benefit of unlicensed work would be unjustly
enriched and the extent to which the lapse of licensure harmed
or could have harmed the public."
Background . Unlicensed contractors are prohibited from
advertising for or performing work on any construction contract.
Currently, under BPC Section 7031, anyone who hires an
unlicensed contractor can sue to recover compensation for the
amount of the entire contract. This bill limits the ability of
a person to sue a contractor to recover all compensation for a
contract to contractors who have never been licensed or whose
license was revoked or suspended when construction work was
performed.
This bill also prohibits a person from suing a licensed
contractor performing work outside his or her classification for
the entire amount of the contract when the value of the
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unlicensed work does not exceed 20% of the contract price.
Under this scenario, an individual's recovery of funds is
limited to work performed out-of-classification and the
individual is still liable for paying the contractor for the
work that was performed within classification.
Under this bill, an individual can only sue to recover the
entire amount of the contract if licensed contractor performs
out-of-classification work that exceeds 20% of the contract
price. An individual can still sue to recover the entire amount
of the contract if the work was performed by an individual who
was never licensed by the CSLB or an individual whose licensed
was suspended or revoked by CSLB for disciplinary reasons.
This bill would not restrict CSLB's authority to discipline a
licensed contractor who performed work outside of his or her
classification. Disciplinary action can include citation or
license suspension or revocation. Any contractor who uses to
recover funds for out-of classification work that is limited to
20% or less of the contract price under this bill is subject to
disciplinary action by CSLB.
CSLB issues licenses for the classification of a 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. Under this bill, contractors would be allowed to
perform work outside of their license classification if the
value of the work does not exceed 20% of the contract price. It
is unknown how this bill may impact the amount of work performed
outside of classification or whether this would provide an
opportunity for non-compliant contractors to adjust an invoice
to recover funds for work performed, since other civil penalties
exist to deter such work, and are discussed below.
The CSLL provides enforcement mechanisms for unlicensed work,
including work performed outside of a contractor's license
classification. Current law makes it a misdemeanor for an
unlicensed contractor to advertise for any construction or work
of improvement covered under the CSLL or to engage in the
business or act in the capacity of a contractor. The CSLL
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imposes specified civil penalties, including fines and
imprisonment against. (BPC Sections 7028 and 7028.7)
The sponsors contend that sophisticated general contractors
intentionally utilize the services of subcontractors that
perform satisfactory work and then sue the subcontractors for
recovery of all compensation due to minor licensing issues by
using a literal reading of the CSLL. The sponsors claim that
this has resulted in loss of income to contractors due to
employee errors or oversight caused in processing license
renewal, contractors' bond requirements, and workers'
compensation insurance that the contractors may have been
unaware of. Currently, CSLB can retroactively reinstate a
delinquent license up to 90 days after a license lapses.
Support . According to the sponsors, the California Fence
Contractors' Association, the Engineering Contractors'
Association, the Flasher Barricade Association, and the Marin
Builders' Association, "BPC Section 7031 requires that all
contractors be duly licensed while performing work. To ensure
compliance with the licensing requirement, the law requires that
any contractor suing for compensation demonstrate that he or she
was a duly licensed contractor at all times during the
performance of that act or contract. Furthermore, BPC Section
7031 allows for anyone who hired, inadvertently or purposefully,
a contractor who was unlicensed at any time during performance
of a construction contract, to sue the contractor and recoup all
monies paid to him or her.
"Unfortunately, due to its absolute provision, unscrupulous
contractors and owners use BPC Section 7031 against other
contractors with minor license problems. More often than not,
this ability is akin to a death sentence for the duly licensed
contractor experiencing a suspension due to a minor infraction
in that it often results in the wholly disproportionate penalty
of an owner or prime contractor not having to pay for work
performed or even worse - meaning, that they can demand that any
and all money that has already been paid to the contractor be
returned with interest no less! These draconian remedies apply
notwithstanding the quality of the work that was performed nor
the fact that the contractor was duly licensed during the
performance of even some of the work!"
According to the sponsor, the California Landscape Contractors
Association, "In addition to being barred from recovering
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compensation owed for work performed, a contractor may be sued
by the owner of the project to recover 100% of any monies
already paid to the contractor if the license lapsed at any time
during the project, or if any portion of the work was deemed to
be outside the contractor's license classification. Defending
these actions, commonly called 'disgorgement' actions, can
quickly force a law-abiding and financially healthy contractor
into bankruptcy because 100% of the labor and materials that
went into the project are at a risk.
"It is important to note that AB 1920 does not eliminate a
contractor's potential exposure to civil penalties for
violations of the CSLL. A person who has never been licensed or
who has performed out-of-classification work is still barred
from bringing an action against the owner and can be sued by the
owner to return all of the money previously paid for any
unlicensed or out-of-classification work. What AB 1920 does is
make the civil penalties authorized by BPC Section 7031
proportional to the contractor's wrongdoing.
"This bill revises the substantial compliance exception to give
the court greater flexibility in determining whether civil
penalties should apply to a lapse of licensure in situations
where CLSB did not grant retroactive reinstatement. In short,
this bill replaces mandatory findings that the contractor must
prove to establish a substantial compliance defense with factors
that the court may consider in reaching a decision, as long as
the contractor was previously licensed and the lapse of
licensure did not occur because of an affirmative disciplinary
action brought by CSLB."
Opposition . According to the Construction Employers'
Association (CEA), "Under existing law and given current CSLB
rules, it is difficult to envision a scenario whereby a
legitimate contractor would erroneously lose their CSLB license
and/or inadvertently perform work outside the scope of their
license and require the protections called for in this bill.
Instead, CEA believes that further interjecting the courts into
licensure decisions would likely benefit those contractors who
are not adhering to the rules. "
According to the California State Pipe Trades Council, the
California State Association of Electrical Workers, and the
Western States Council of Sheet Metal Workers, "It is not clear
what AB 1920 attempts to accomplish by adding paragraph (2) to
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BPC Section 7031. Under existing processes by the CSLB, a
contractor is already able to renew his or her license
retroactively up to 90 days after the renewal date? The
proponents of this legislation have yet to explain why the
existing three-month retroactivity process at the CSLB is
insufficient for correcting good faith mistakes.
"AB 1920 would limit the liability of a contractor performing
work outside the scope of his or her license to the value of the
unlicensed work if it does not exceed 20% of the contract price.
We believe this bill represents an unjustified attempt to
provide leniency to scofflaw contractors who violate the law and
place unsuspecting project owners and public agencies in serious
financial and legal jeopardy. When a project owner is duped
into hiring an unlicensed contractor, they suffer financial
damages far beyond the remainder of the project. In addition to
the cost associated with the project stoppage and delay, the
project owner is saddled with a myriad of unsuspecting costs.
Because of the inherent liabilities, contractors bidding to
complete work already begun by an unlicensed contractor will
likely charge a premium to takeover and complete the project.
Moreover, changing contractors mid-project presents a number of
complex issues regarding warranties on the work as well as how
future construction defect claims will be resolved. In short,
the current law is supposed to serve as a deterrent.
"Finally, AB 1920 greatly expands the factors by which a court
can consider to determine whether a contractor has substantially
complied with licensure. Under existing law, a court can
determine substantial compliance if, at an evidentiary hearing,
the contractor demonstrates a good faith effort to comply and
acted promptly to reinstate his or her license. For contractor
that the court has already found to be operating without a
license, AB 1920 allows the court to consider whether 'persons
receiving the benefit of the work performed would be unjustly
enriched' and 'the degree to which the loss of licensure harmed
or could have harmed the public' before awarding damages. We
object to these provisions, which allow scofflaw contractors one
last chance to avoid paying what is rightfully owed to project
owners."
Previous Legislation . AB 249 (Bill Berryhill) of 2011, 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
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the license being suspended or revoked. This bill was held in
the Assembly Business, Professions and Consumer Protection
Committee.
Double-referred . This bill is double-referred to Assembly
Judiciary Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
California Fence Contractors' Association (co-sponsor)
California Landscape Contractors Association (co-sponsor)
Engineering Contractors' Association (co-sponsor)
Flasher Barricade Association (co-sponsor)
Marin Builders' Association (co-sponsor)
California Professional Association of Specialty Contractors
Construction Industry Legislative Council
Opposition
California State Association of Electrical Workers
California State Pipe Trades Council
Construction Employers' Association
Western States Council of Sheet Metal Workers
Analysis Prepared by : Joanna Gin / B.,P. & C.P. / (916)
319-3301