May 2017 – Law and Civil Engineering

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A Dishonest Contractor Gets his Just Deserts
by Eugene Bass

California law provides that no person engaged in the business or acting in the capacity of a contractor may bring or maintain any action in a California court to recover compensation for the performance of any act or contract for which a contractor’s license is required without alleging and proving that it was licensed at all times during the performance of the act or contract. The purpose of the law is to protect the public from incompetence and dishonesty in those who provide building and construction services. The licensing requirements provide minimal assurance that all persons offering such services in California have the requisite skill and character, understand applicable local laws and codes and know the basics of operating a contracting business.

Later modifications of the law added further changes making the penalties for contracting without a license even more painful. The amended law provided that a person who uses the services of an unlicensed contractor may bring an action in court to recover all of the compensation paid to the unlicensed contractor for performance of any act or contract.

A contractor sued a homeowner in a dispute concerning an incomplete home remodeling job. The contractor claimed he was owed $11,000.00. The homeowner cross-complained against the contractor contending that the contractor was not licensed and thus was not entitled to sue for any unpaid work. The homeowner also sued for fraud and other related causes of action and asked for reimbursement of all money that had been paid to the contractor.

The court awarded the contractor nothing in the lawsuit. The homeowner was awarded approximately $27,000 in reimbursement plus $10,000 in punitive damages, $90,000 in contractual attorney fees and approximately $7,000 in costs.

At the trial it was shown that although the contractor was had worker’s compensation insurance, he intentionally under reported the amount of payroll paid. For example, during one period he reported a payroll of $312 while his actual payroll was $135,000. In addition, it was shown that the contract between contractor and homeowner provided that homeowners would pay labor and material costs, plus a 12 percent markup of those costs for overhead, plus an 8 percent markup of the cost-plus-overhead amount for profit. The amount for labor costs that the contractor reported to the owners, which the owners paid, was twice the amount that the contractor had actually incurred.

The trial court found that the contractor was not licensed because his license had been automatically suspended due to his failure to obtain and maintain workers’ compensation insurance. Although the contractor had workers compensation insurance, the court held that his intentional under reporting of the amount of payroll resulted in his not “obtaining” workers compensation insurance aa of the time that he under reported. The law states, in substance, that the failure of a licensee to obtain or maintain workers’ compensation insurance coverage, if required, shall result in the automatic suspension of the license by operation of law. As a result, the contractor was deemed to be unlicensed during the time that he performed the work for the homeowner and subjected himself to all the grief that that that followed from his lawsuit against the owner to recover what he was owed.

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