Recent Decisions Highlight Severe Consequences To Contractors Working Without A License

Most contractors understand the importance of a contractor’s license. Two recent decisions highlight the severe penalties imposed against contractors who failed to closely follow the license requirements.  One case involved a contractor’s failure to coordinate transfer of a license to a subsidiary, while the other involved the failure to comply with the requirements for a license qualifier, also known as a Responsible Managing Employee (“RME”).   

In Judicial Council of California v. Jacobs Facilities, Inc. (2015) 14 C.D.O.S. 9347, the Court of Appeal found that a contractor (“Jacobs”) violated California’s Contractors License Laws (“CCLL”), even though it was licensed when work commenced.  Jacobs, a licensed contractor, entered into a written contract to perform facilities management and repairs.  Subsequently, as part of a corporate restructuring and “branding initiative,” all of Jacobs’ employees and assets were transferred to a subsidiary.  The subsidiary took over the work on the job, but Jacobs continued to bill and process payments without transferring the contract to the subsidiary until a year after Jacobs’ license expired.  Thus, even though the subsidiary was licensed during its work, the Court of Appeal concluded that Jacobs violated the CCLL because Jacobs was not licensed at all times during the work.  As a result, Jacobs likely will lose the $4.7 million it had been awarded and will be ordered to return the $18.3 million it was paid on the job.

In Jeff Tracy, Inc. v. City of Pico Rivera (2015) 14 C.D.O.S. 10397, the Court addressed the dire consequences that can result from the failure to comply with the CCLL requirements related to the duties of an RME.  In Tracy, the owner claimed that the contractor, Tracy, used a “sham RME” to obtain its “A” license, and that as a result, Tracy was an unlicensed contractor.  Specifically, the owner claimed that Tracy did not actually employ the RME and the RME did not exercise direct supervision over the work.  The Court of Appeal remanded the case to the trial court to make these determinations.  If the RME does not satisfy these requirements, Tracy will be considered an unlicensed contractor and will forfeit any claim for damages and will be required to reimburse the owner for all monies paid.  In addition, despite the fact that Tracy performed landscaping work while holding a valid C-27 license, the Court of Appeal held that Tracy could not segregate out the landscaping work and charges because its contract with the owner required a valid “A” license.  Therefore, if Tracy’s RME does not meet the CCLL requirements, Tracy will forfeit payment for all work performed on the project.

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