During these tough economic times it is more important than ever to manage your business costs. However, it is always wise to avoid cost-cutting schemes that could end up being an expensive lesson. In fact, failure to properly maintain your license and conduct your business as required by the California Contractors License Law (Business and Professions Code Sections 7000 – 7199) could end up costing you a great deal more than any savings anticipated by trying to "outsmart the system." From a purely business perspective, it simply is not worth the risk, as demonstrated by the following precedent-setting case. Read further to learn how a contractor whose license record had not shown a break in service was determined by the courts to be unlicensed, and ordered to return approximately $27,000 to the homeowner, pay $10,000 in punitive damages and approximately $97,000 in attorney fees and costs.

In Laurence Wright v. Ghyath Issak et al., a dispute arose over an incomplete remodeling job and the contractor sued for breach of contract to recover $11,000. The homeowners answered the complaint by alleging that Wright was not a licensed contractor. Under state law, an unlicensed contractor cannot sue for unpaid work that requires a license. The homeowners (defendants) also counter-sued for fraud and related causes of action to regain the entire amount they had paid to the contractor. The trial court found for the defendants on the basis that, by under-reporting payroll to the workers' compensation insurance carrier, the contractor had been unlicensed during the project and was not entitled to an action for compensation and could be forced to repay all funds paid to him (Business and Professions Code Section 7031). Review of the appellate court decision provides important insight into the trial court's ruling.

Upon appeal, the contractor argued that he had been licensed at all times, had a workers' compensation insurance policy, and never received a notice of suspension from the Registrar of Contractors for not obtaining a policy. However, the court of appeal disagreed with the contractor regarding his license status. As the court explained:

In relevant summary, Section 7125.2 states that a contractor's license is automatically suspended as of the date the contractor was required to obtain workers' compensation insurance but did not. This language cannot be clearer. Its effect is that, because plaintiff underreported his payroll and, thus, did not obtain workers' compensation insurance in 2004, plaintiff's license was suspended before, during, and after he performed work on defendants' home.

Bottom line: the contractor was found to be unlicensed before, during, and after he performed work on the defendants' home and at least as far back as 2004 because, regardless of what is reflected in the license record, his license had been automatically suspended by operation of B&P Code Section 7125.2 (automatic suspension for failure to obtain or maintain workers' compensation insurance). Because of his duplicity, the contractor's suit to recover $11,000 resulted in a $137,000 debt.