Christopher A. Henry and Mia Hughes | ConsensusDocs
The need for contractors to maintain the proper contracting license may seem like a mundane, clerical detail, and generally is just that. If, however, the contractor ignores or mishandles paperwork and the proper license is not in hand, licensing may go from a mundane, clerical detail to a financial catastrophe. An unlicensed contractor may be barred from asserting claims or collecting payments for work already performed; the contractor may even be required to return payments for unlicensed work performed.
A recent case in Georgia, a state that had no state-wide general contractor’s license requirement in effect until 2008 illustrates the risk of unlicensed work.[1] In Saks Management and Associates, LLC v. Sung General Contracting, Inc.,[2] the court ruled that without a license the general contractor did not have the right to enforce a contract. The contractor’s claims for payment failed, and the mundane, clerical error led a major financial loss. This disastrous result for the Georgia contractor is far from an outlier, and is a real risk in many states.
This article highlights some of the risks and requirements of contractor licensing laws and the consequences of failing to be properly licensed. Requirements in various states are cited as examples and to demonstrate that the critical yes, I think it is my work address need to check controlling law. This article is by no means a comprehensive recap of licensing requirements in any state or all states.
Know the State Licensing Law Where You Work!
Contractor licensing laws can vary greatly from state to state. Some states have highly regimented licensing requirements with multiple classifications that relate to specific types of work. For example, in Connecticut, contractors performing electrical, plumbing, and sheet metal work need a special type of license.[3] Alabama also has specific classifications of licenses for projects concerning concrete, masonry, and carpentry.[4] Additionally, states have various licensing requirements based on contract value. In California, contractors performing work for a project under a contract that is valued at more than $500 requires a license.[5] In Louisiana, a commercial license must be obtained for projects exceeding a value of $50,000 and a residential license must be obtained for project exceeding a value of $75,000.[6]
While plenty of states have various classifications for contractor licenses, other states have minimal or no licensing requirements. In Kanas, contractors are only required to obtain a state license if the contractor is drilling or handling asbestos.[7] In Nebraska, and Montana, general contractors must register their business with the state, rather than obtain a contracting license.[8]
States also vary on when exactly a contracting license is required. In some states, a contractor must obtain a license before they bid on a project, while other states do not require a license until performance begins. In Tennessee, Nevada, and Arizona, contractors must have a license before they begin the bidding process.[9] Other states, like North Dakota and California, require a license when contractors are actually performingwork.[10]
Contractors working on a federal project do not necessarily have to hold a contractor’s license in the state they are performing in order to recover. In Technica LLC ex rel. U.S. v. Carolina Casualty Insurance Co., a subcontractor, performing working on a federal prison in California, could seek payment under the Miller Act, even though that subcontractor was not licensed in California.[11] The Miller Act requires bond guarantees for federal projects, in an effort to protect unpaid contractors. The Technica court recognized that federal contractors work on projects throughout the country and to “[require] them to comply with contractor licensing requirements in [any given state] is contrary to the intent of the Miller Act, which was meant to reduce substantive and procedural hurdles.”[12]
Basic risk management requires contractors to make certain they maintain proper licensing and investigate licensing requirements when they begin working in a different state or begin taking on different types of work in the state in which the contractor already holds a license. The Associated General Contractors of America (AGC) and the American Bar Association (ABA) maintains an online Construction State Law Matrix[13], which acts as a starting point for contractors researching state construction laws. Another resource for such investigations is the website for the relevant state agency or board that is responsible for construction contracting licensing. In addition, the National Association of State Contractors Licensing Agencies has a licensing information page, which is a helpful preliminary reference for specific state laws.[14]
The consequences of lack of proper licensing and how strictly the requirements are enforced vary from state to state.
Substantial Compliance versus Strict Compliance
In addition to contractor licensing requirements varying from state to state, the consequences of lack of proper licensing and how strictly the requirements are enforced vary from state to state. The distinction is generally whether a state requires “strict compliance” or a lessor standard of “substantial compliance” with the licensing requirements.
Various state courts apply a strict compliance standard to their contractor licensing laws. Under strict compliance, a contractor who enters into an agreement without a valid license acts illegally and therefore cannot subsequently comply by obtaining a license after the fact. For example, it is illegal in North Carolina for a contractor to enter a bid without a license.[15] North Carolina courts apply the strict compliance doctrine when reading this particular licensing requirement. Specifically, in Brady v. Fulghum, an unlicensed contractor entered into a project agreement in February, started performing in March, but did not obtain a license until October.[16] The contractor later sought payment under the agreement, but the North Carolina Supreme Court held since the agreement was entered into illegally, “it [could not] be validated by the contractor’s subsequent procurement of a license.” North Carolina court’s application of strict compliance does not allow an unlicensed contractor to enforce a contract even if they subsequently obtain a license.[17]
In contrast to strict compliance, other states recognize the standard of substantial compliance. Under substantial compliance, a contractor’s attempt to enforce a project agreement may be salvageable if the contractor is found to be mostly compliant with the state’s licensing laws. Various state courts recognize that a contractor’s substantial compliance with licensing requirement is adequate when the purpose of the licensing law is not defeated. The Maryland court, in DeReggi Construction Co. v. Mate, recognized that strict compliance with the licensing laws “will lead to harsh and inequitable results[.]”[18] The DeReggi court advised the application of substantial compliance and called for trial courts to consider “(1) whether the contractor held a valid license at the time of contracting; (2) whether the contractor readily secured a license; and (3) the responsibility and competence of the contractor.”[19] According to DeReggi, if a trial court finds the contractor meets those three requirements, then the contractor is deemed substantially compliant with licensing law.
Other states have gone a step further by codifying the judicial standard of substantial compliance into contractor licensing laws. Specifically, in California, under Cal. Bus. & Prof. Code § 7031(e), courts may consider substantial compliance if the contractor (1) “[has] been duly licensing as a contractor in [California] prior to performance, (2) acted reasonably and in good faith to maintain proper licensure, and (3) acted promptly and in good fair to remedy failure to comply with licensing requirements.”[20] California’s codification of substantial compliance does not apply to contractors who have never been licensed in California before.[21] Nevertheless, by writing substantial compliance into law, California recognizes a more forgiving enforcement of contractor licensing requirements.
Ability to Cure
Not all hope is lost for contractors who may not have obtained a contracting license. In Tennessee, a corporation or partnership can engage in the business of contracting, if one or more of their full-time employees, major stockholders or partners has a valid license.[22] If for whatever reason, the individual with the contractor’s license leaves the business, the business has three months to cure and obtain a valid license.[23] Additionally, California licensing law allows a contractor to cure an expired or inactive license if the contractor transfers the project agreement to an entity that has a valid, equivalent license.[24]
In contrast, states such as Nevada, do not allow contractors to cure a licensing oversight or mistake.[25] Nevada law requires a contractor to be licensed before bidding on a job or engaging in business in the capacity of a contractor.[26] Generally, Nevada’s licensing requirement is found to be incurable. [27]
Enforcement and Consequences of Lack of Proper Licensing
Often, a grim future awaits those contractors who fails to obtain or maintain a contracting license. Most states maintain the authority to punish noncompliant contractors with administrative fines, and project shutdowns as was as criminal charges. In Louisiana, contractors working without a license are guilty of a misdemeanor and as a result, can incur a fine up to $500 per day of violation, up to three months in prison, or both.[28] Even harsher than Louisiana’s law, in Colorado, a plumber or electrician working without a license is guilty of a misdemeanor, faces three to twelve months in jail, and a fine between $250 and $1,000.[29] Any additional offense thereafter is considered a felony, where a plumber or electrician could be in jail for over a year or pay between a $1,000 and $10,000 fine.[30]
In addition, to criminal charges, fines and jail time, contractors who work without a license may also be barred from pursing claims or payment under the contract, which they performed. This is especially heartbreaking for contractors who complete a project, but never see a dime of the money they are owed for want of a valid license. As mentioned earlier, the Georgia Court of Appeals, in Saks Management and Associates v. Sung General Contracting, a contractor was unable to enforce the payment provision of a contract for want of a valid contractor’s license. Under the relevant Georgia statute, an unlicensed contractor shall have an unenforceable claim in law and in equity. Usually, equitable claims, like quantum meruit and unjust enrichment, offer contractors an alternative avenue to recover payment for work performed when there is no valid contract in place. Unfortunately for noncompliant contractors in Georgia, all avenues, both in law and in equity are unenforceable. The decisions barred the contractor from payment for $680,000.00 on a $2.3 million contract. Georgia is not the only state that prohibits an unlicensed contractor from pursuing a claim, whether it in law or equity.
Florida law, for example, also mandates that an unlicensed contractor may not enforce a contract in law in equity.[31] The Federal District Courts have recognized and applied relevant state contractor licensing law in contractor dispute cases.[32]
Paying Back What You Have Already Been Paid? – Disgorgement!
Even more damning than being barred from pursuing a claim or seeking payment is California’s implementation of disgorgement. Under California law, a contractor who performs without a license is not only barred from bringing a claim, but may also have to refund any payments made under the relevant project agreement.[33] The California Business & Professional Code specifically states that “a person who utilizes the services of an unlicensed contractor may bring action… to recover all compensation paid to the unlicensed contractor for performance of any act or contract.”[34] California courts have routinely preserved this statute in an effort to deter non-licensed contractors from seeking payment for their services.[35]
However, California’s disgorgement penalty is not without limitations. In a recent case, Eisenberg Village of the Los Angeles Jewish Home for the Aging v. Suffolk Construction Co., Inc., the court held that disgorgement actions must be brought within one year from the date the unlicensed contractor stops working.[36] Under Eisenberg, unlicensed contractors, who completed work on a project over a year ago, may be relieved from delayed disgorgement actions brought against them.
Possibility of Licensing Reciprocity among States
Some states recognize the validity of other states’ contractor licenses. If there is a reciprocity agreement in place, a contractor can apply for a reciprocal license in more than one state.[37] For example, those contractors who hold a California license can apply for reciprocity in Nevada, Utah and Arizona.[38] Similarly, Georgia’s Commercial General Contractors Division license holders can apply for a reciprocal license with Louisiana, Mississippi and Tennessee.[39] Reciprocal license applications are often approved quicker than normal license applications and are advantageous for those contractors performing work in multiple states.[40]
Practical Considerations
Contractors should give themselves plenty of time to obtain a valid license, as the bureaucratic process is often slow moving. Contractors seeking a license must submit a fair amount of paperwork and credentials to meet states’ standards. For example, in Tennessee, a contractor must submit an audited financial statement, a letter of reference, proof of insurance, proof of corporation, LLC or partnership registration (if applicable), and a contractor’s affidavit.[41] Multiple states require contractors to pass a background check[42] or attend an interview[43] to acquire a license. In addition to the paperwork and thorough screening process, many states also require a contractor to pass an exam in order to obtain a license.[44] In some states the final issuance of a license might be tied to approval at a formal meetings of the licensing board, which may not be a regular or frequent occurrence. Once a contractor has obtained a valid license, they may have some relief before license renewal is required. In Florida, all general contractors are required to renew their license every two years.[45] It is important to make note of particular states’ renewal requirements, because failure to renew may render a contractor’s license void.
Conclusion
Contractors should be mindful that laws change. States that once had no licensing requirement may no longer be as lenient. For example, until 2008, Georgia did not have a statewide general contractor licensing requirement in effect, but now unlicensed contractors in Georgia cannot sue for payment.[46] Additionally, as mentioned earlier, states like California enact laws to limit forgiving judicial interpretations like substantial compliance.[47] In order to avoid heartache, financial loss, and potential administrative or even criminal penalties, contractors should consistently conduct compliance checks, so to always be in accordance with the applicable licensing laws.
Finally, this article strictly focuses on contracting licenses. There may be other business licenses and registrations that are required to do business in a particular state or locality.
[1] See O.C.G.A § 43-41-17(b). [2] Saks Management and Associates, LLC v. Sung General Contracting, Inc. et al, 356 Ga. App. 568, 849 S.E.2d 19 (Ga. Ct. App. 2020). [3] https://www.levelset.com/blog/connecticut-contractor-licensing-guide/#Electrical_contractors. See also, Texas special classification requirements, https://www.nextinsurance.com/blog/texas-general-contractor-license-and-insurance-requirements/. [4] See Ala. Admin. Code § 230-X-1-.27. [5] Cal. Business and Professions Code § 7048. https://www.nextinsurance.com/blog/general-contractor-license-requirements/. [6] La. R.S. 37:2150.1(4)(a) and La. R.S. 37:2150.1(11). https://www.levelset.com/blog/contractors-license-guide-all-states/#Louisiana. [7] https://www.levelset.com/blog/contractors-license-guide-all-states/#Kansas. [8] https://dol.nebraska.gov/conreg/. https://erd.dli.mt.gov/work-comp-regulations/montana-contractor/construction-contractor-registration. [9] https://www.levelset.com/blog/contractors-license-guide-all-states/#Tennessee; A.R.S. § 32-1123(A); Nev. Rev. Stat. 624.700. [10] North Dakota Contractor Compliance Check List, https://www.nd.gov/tax/data/upfiles/media/Contractor%20Check%20List_Sept%202015%20Update.pdf?20170912075446; The Guide to California Licensing for Contractors | Levelset. [11] Technica LLC ex. rel. U.S. v. Carolina Casualty Insurance Co., 749 F.3d 1149 (9th Cir. 2014) https://www.equipmentworld.com/better-roads/article/14954948/unlicensed-contractors-on-federal-construction-projects-are-entitled-to-payment-under-the-miller-act. [12] Id. [13] https://www.agc.org/industry-priorities/contracts-law/state-law-matrix. [14] https://www.nascla.org/page/LicensingInfo. [15] N.C. Gen. Stat. Section 87-1. [16] Brady v. Fulghum, 308 S.E.2d 327 (NC 1983). [17] Currin & Currin Construction, Inc. v. Lingerfelt, 158 N.C.App. 711, 714 (2003) and Ron Medlin Construction v. Harris, 199 N.C.App. 491, 493 (2009). [18] DeReggi Const. Co. v. Mate, 130 Md.App. 648, 660 (2000). [19] Id. [20] Cal. Bus. & Prof. Code § 7031(e). [21] Id. [22] Tenn. Code Ann. § 62-6-115. [23] Id. [24] Judicial Council of Cal. v. Jacobs Facilities, 2016 Cal. Super. LEXIS 10712. [25] Nev. Rev. Stat. 624.700. [26] Id. [27] Common Sense Construction, pg. 98, fn 14. [28] LA Rev. Stat. § 37:2160. [29] CO Rev. Stat. § 12-58-116. [30] Id. [31] Earth Trades, Inc. v. T & G Corp., 108 So.3d 580, 587 (Fla. 2013). [32] Am. Builders & Contractors Supply Co. v. Precision Roofing & Consulting, LLC, 2017 WL 3431844, (M.D. Ala. 2017).https://www.lgwmlaw.com/news-media/FEDERAL-COURT-HOLDS-AN-ALABAMA-SUBCONTRACTOR-WITHOUT-A-PROPER-LICENSE-CANNOT-ENFORCE-ITS-CONTRACT-WITH-A-ROOFING-SUPPLIES-DISTRIBUTOR/. [33] CA Buis. & Prof. Code § 7031(a-b). [34] Id. [35] Jeff Tracy, Inc. v. City of Pico Rivera, (2014) 240 Cal. App. 4th 510, 520.; E.J. Franks Construction, Inc. v. Sahota (2014) 226 Cal. App. 4th 1123, 1129; Hydrotech Systems, Ltd. v. Oasis Waterpark (1991) 52 Cal.3d 988, 995. See also, https://www.tysonmendes.com/california-contractor-licensing-law-update-disgorgement-claims-against-unlicensed-contractor-expire-in-one-year/. [36] Eisenberg Village of the Los Angeles Jewish Home for the Aging v. Suffolk Construction Co., Inc. (2020), 53 Cal. App. 5th 1201, 1214-1215; See also, https://www.natlawreview.com/article/landmark-contractor-licensing-case-limits-disgorgement-remedy-california. [37] How to Renew your General Contractors License in Florida (activatemylicense.com). [38] California Contractor License Reciprocity! – Digital Constructive [39] Plb | Licensing (ga.gov). [40] Can a Contractor’s License Carry From One State to Another? (chron.com) [41] https://www.tn.gov/commerce/regboards/contractor/licensing-steps.html. [42] Crooked contractors: Some states use background checks for home repair (app.com). [43] https://www.tn.gov/commerce/regboards/contractor/licensing-steps.html. [44] Georgia – https://blog.suretysolutions.com/suretynews/how-to-get-your-georgia-contractors-license; Florida – http://www.myfloridalicense.com/dbpr/servop/testing/documents/exam_applic_pack.pdf; Arizona – https://generalcontractorlicenseguide.com/arizona-contractors-license/; Tennessee – Licensing Steps (tn.gov); Missouri – Missouri Contractor License Courses, Classes, & Exam Prep (contractortrainingcenter.com); Louisiana – Louisiana Contractors License | Exam Preparation Courses (contractors-license.com); California – What You Need to Know About Obtaining a Contractor’s License in California | California Construction Law Blog | Nomos LLP (calconstructionlawblog.com) [45] How to Renew your General Contractors License in Florida (activatemylicense.com).[46] Saks Management and Associates, LLC v. Sung General Contracting, Inc. et al, 356 Ga. App. 568, 849 S.E.2d 19 (Ga. Ct. App. 2020). [47] Cal. Bus. & Prof. Code § 7031(e).