Bewared the Unlicensed Contractor Trap
Homeowners and homeowner associations often face expenses to maintain or repair their property. It makes sense to look for the most affordable contractor available to do the work. Many times, through friends or relatives, a homeowner will come across an unlicensed contractor during their search for a person to do the work. The unlicensed contractor will provide a bid that is much lower than bids from licensed contractors and promises to do the same work. It sounds so appealing to save money but still get great workmanship that many people and boards fall into the trap and hire the unlicensed contractor. However, the cheapest contractor available may be the one that will cost the most in the long run.
It is not surprising that an unlicensed contractor would be less expensive than a licensed contractor. Unlicensed contractors have advantages that enable them to provide the lowest prices. They do not have to pay licensing fees, they do not have to obtain a bond to protect their work, and more often than not they do not purchase liability or workers compensation insurance. Without these added expenses the unlicensed contractor can provide their services at a rate lower than a legitimately licensed professional.
It is true that having a contractor’s license is not a guarantee that work will be done well, or even properly. Because there is no guarantee that a licensed contractor will do a better job, why should a homeowner or association care if the contractor has a license? The answer is simple—to protect the homeowner or association from a myriad of problems that could arise.
When is a License Required?
The Contractors State License Board, a division of the California Department of Consumer Affairs, governs the issuance and supervision of contractors’ licenses. The State License Board specifies a number of classifications for licensing and sets the standards necessary to receive those licenses. A contractor can legally only perform the work associated with the classification of the license he or she holds. Further, a contractor must hold a valid contractor’s license for any work that will cost more than $500 in labor and material for any work that would fall into the classifications set by the License Board.
Many professions require a special license or admittance to an organization for that specific profession. Lawyers, doctors, teachers, and contractors are just a few of the professions that immediately come to mind. For those of us who have to obtain a license or join a trade association, it feels that the purpose of licensing may be to keep out competition from other states and to generate revenue for the state. But the truth is much simpler. Citizens want at least a minimal level of certainty that their doctor is competent, or that their lawyer actually knows at least a little bit about the law. The general goal of professional licensing is to ensure that the person in the profession has a minimal level of competence in their field. Does this mean that a person with a license will be the absolute best at what they do? Of course not. It is a minimal assurance that the persons working on your home have more experience than that gained by simply watching TLC and Discovery programs on home renovation and thinking that they can do that work.
Hiring a contractor that has a license also provides an avenue of grievance if a dispute arises. These disputes do not necessarily have to arise out of poor workmanship or a construction defect, but could be a matter of a a contract dispute, a problem with the final bill, etc. California Contractors State License Board requires mandatory arbitration for disputes under $12,500 (consequently the same amount that is required for the mandatory bond). A licensed contractor must participate in the mandatory arbitration in an attempt to resolve the dispute. With disputes between $12,500 and $50,000 the licensed contractor can opt for voluntary mediation to resolve the dispute. A voluntary dispute resolution process can be a much cheaper and less time-consuming venture than litigation. If a dispute arises with an unlicensed contractor, your only recourse would be to file a lawsuit. And if the unlicensed contractor is particularly shady, good luck finding him or collecting any award you might obtain.
The California Contractors State License Board keeps records and publishes any complaints against a contractor. This actually does a number of things. First, any prospective client can go to the Contractors State License Board’s website and research a contractor. Filed complaints or sanctions imposed on a contractor will be listed for anyone to see. Secondly, if there are enough complaints the contractor can lose the license he worked hard and spent a lot of money to obtain. If your future livelihood depends upon it, it is a powerful incentive to do a competent professional job
Protecting Property Values
Many building and renovation projects require city, county or state permits to complete the work. Unlicensed contractors rarely apply and obtain the proper permits required for the work that they will be doing. This could have serious consequences. When a home is sold, certain facts must be disclosed to the buyers. In some cases, having work done without a permit or that is not to code might have to be disclosed to the buyer. This could have an impact on the value of the property. And failing to disclose certain important information could lead to liability of the seller.
Further, since unlicensed contractors rarely have liability insurance or a bond, there is nothing to guarantee that there will be money available to repair any defects in construction that are found after the contractor is paid and the construction completed. This would mean that the entire burden of fixing the mistake could fall on the homeowners.
Protection from Injury to Contractor or Workers
A licensed contractor must have workers compensation insurance for its employees or show the State Licensing Board that the contractor does not have any employees. Why is this important? In California, under Insurance Code §2750.5, an unlicensed worker performing services for which a license is required is not an independent contractor. This means that when an unlicensed contractor is hired by a homeowner or homeowner association that contractor, and potentially any employees of that contractor, is considered to be an “employee” of the homeowner or homeowner association.
In Mendoza v. Brodeur a homeowner hired a neighbor to do a roofing project. The neighbor fell and was seriously injured. The neighbor sued the homeowner. The Court of Appeals affirmed that simply because the neighbor’s status was not within the statutory definition of “employee” as set forth in Insurance Code §§3351 and 3352, he was nonetheless an employee of the homeowner and could sue the homeowner as his employer.
The implications of this are obviously critical. If a serious injury were to occur to an unlicensed contractor the person that hired the unlicensed contractor could potentially be liable for paying the workers compensation benefits. This could turn a simple $1,000 repair into a bill for tens of thousands more.
Protection from Damage to Third Parties
The implications of using an unlicensed contractor go beyond the risks associated with the property worked on and injury to the workers. A homeowner or association that hires an unlicensed contractor can also be liable for the negligence of the contractor. A neighboring property, a passerby or other property that is negligently damaged by the contractor can lead to liability to the person that hired the contractor. As the contractor’s employer the hiring party is responsible for the contractor’s actions during the course of that employment.
The bottom line for a homeowner or homeowner association is to protect yourself and your assets. When you hire anyone to work on your property, make sure that they are a licensed professional. You can check the status of a contractor’s license in California by visiting the Contractors State License Board website.
Always get references and multiple bids on the work. And if something is too good to be true, it probably is.
Timothy Smith is an attorney at the law firm Berding/Weil in Alamo, an ECHO-member firm.