Are You or Your Subcontractors Properly Licensed?

LEGAL MATTERS

Jeffrey W. King Legal Counsel for the WFCA Jeffrey King has more than 35 years’ experience in complex litigation with a focus on contracts, employment, construction, antitrust, intellectual property and health care. He serves as legal counsel for WFCA and other trade associations, and is a LEED Accredited Professional. For more information, contact him at (561) 278-0035 or jeffw@jkingesq.com.

Are You or Your Subcontractors Properly Licensed?

Many states and local governments require construction contractors to have licenses or register before undertaking any construction or home improvement work. Unlicensed or unregistered contractors often can be subject to fines and find it difficult to get paid. It is not just the contractor at risk. A flooring retailer that uses an unlicensed or unregistered contractor to install floor can be subject to fines and liability.

Licensing and Registration Requirements

Licensing and registration requirements vary from state to state. Some states, such as Idaho, Kansas, Colorado, New York, Wyoming, and Texas, do not require general contractors to be licensed. However, there may be licensing requirements at the local level in these states. Even if a general contractor does not need a license, states like Connecticut, Delaware, and Nebraska require the contractor to register with a state agency. Iowa, for instance, requires all general contractors, subcontractors, and handymen performing more than $2,000 in work over the course of a year to register their business with the state Division of Labor. In states requiring licenses, the requirements vary. States like Alaska and Arkansas require either the prime contractor or the subcontractor have a license. Other states, including California, require both the general contractor and the subcontractors to be licensed or registered.

The license and registration requirements also can vary on whether the work is for residential or commercial construction. It is common for a state to require a residential contractor license for contractors who work only on residential housing, while contractors working on commercial projects need a general contractor’s license. Many states and localities also require licensing for specialty trades, like mechanical, plumbing, HVAC, refrigeration, sheet metal, and hydronic contractors. These specialties can include the flooring installation, such as tile work, stone installation, masonry, and other trades.

It is important for every flooring retailer, contractor, and installer to understand the state or local licensing or registration requirements where they are installing floors. Being licensed in one state does not authorize the contractor to work in another state. Failure to follow the licensing and registration requirements can expose the flooring retailer, contractor, and installer to liability and fines.

Many states and local governments require construction contractors to have licenses or register before undertaking any construction or home improvement work.

As explained below, flooring installers that fail to comply with licensing or registration requirements expose themselves to serious financial losses.

Fines and Penalties: An installation contractor that is not licensed or, where allowed, working under the retailer’s or general contractor’s license can face serious fines. In Michigan, for example, operating without a license where one is a requirement is a misdemeanor, punishable by a fine of $5,000 to $25,000) and one year in prison. Similarly, a first offense in Florida is a first-degree misdemeanor punishable with up to a year of jail or probation. Subsequent offenses could result in a third-degree felony, with a maximum jail sentence of 5 years and civil penalties up to $10,000. Unlicensed and unregistered contractors in Iowa face a $500 citation for the first violation and up to $5,000 for subsequent violations. Other states have similar fines and penalties.

Unenforceable Claims: Fine may be the least problem faced by an unlicensed and unregistered contractor. Almost all states preclude an unlicensed and unregistered contractor from filing or enforcing a mechanics lien. (For more information on Mechanic Liens, see “Mechanic’s Liens— Little Mistakes, Big Problems,” Premier Flooring Retailer Magazine (2nd Qtr., 2020). Similarly, an unlicensed or unregistered contractor is likely to be prohibited from suing to get paid. The courts have often held that an unlicensed or unregistered has no recourse for non-payment.

Disgorgement: Not only is an unlicensed or unregistered contractor precluded from bringing an action to collect payment, they may have to repay all the money they have received. In California, the law allows the client to recoup all compensation paid to the contractor that was not properly licensed at any stage during the project, even if the client knew the contractor was unlicensed.

In other states. even without a specific statute like the one in California, the unlicensed or unregistered contractor can be required to repay all payment they received. The courts have strictly interpreted licensing requirements and have held that an unlicensed contractor should not be allowed to keep payment of unlicensed work. For example, Carlson Construction Company entered into an agreement to renovate the Dupont West Condominium Buildings in Washington, D.C. Carlson commenced work on the project and had received progress payments of $108,000 for the work performed. Dupont West then refused to pay the remaining $75,500 due because they became aware that Carlson was not licensed in the District of Columbia. Carlson sued for breach of contract seeking the remaining $75,500. Dupont West counterclaimed, seeking repayment of the entire $108,000 they had paid to Carlson. The court determined Dupont West was entitled to reimbursement of the entire progress payments paid to Carlson, notwithstanding the work had already been performed. The courts in other states have come to a similar conclusion requiring an unlicensed construction contractor to pay back any money it was paid.

Working Under Another’s License

Caution needs to be taken if the installer is working under another’s license. States with licensing requirements, like California, Florida, and North Carolina, require the license holder to supervise the work, and the licensed contractor cannot simply “rent” its license to another contractor. The purpose of licensing to ensure the work is performed or supervised by a competent contractor that has met the licensing standards. If the licensed contractor does not provide the required supervision, the installer will be considered as working

It is not sufficient that an individual owner or employee of the subcontractor holds a license—the subcontractor with whom the retailer contracts must be licensed.

without the license and subject to fines and penalties, losing its rights to file a mechanic’s lien, and possible disgorgement of the money it already received.

When working under another’s license, it is important that the construction license is held by the entity doing the work. For example, William Opp was a California licensed builder and the President of Mountain Connections, Inc. (“MCI”). MCI did not have a California contractor’s license. MCI entered into a subcontract to work on a construction project. Opp signed the contract as MCI’s president. He inserted his individual contractor’s license number where the subcontract called for that information. Opp claimed that he was individually licensed, and that was sufficient. The Court disagreed and dismissed Opp’s entire claim seeking payment. The Court held that the California Law required that a “contractor” may bring or maintain an action only if it is licensed in the State of California. Since MCI was the contractor and it did not have the license, it could not sue for payment.

Flooring Retailer

Whether acting as the general contractor or simply hiring an installer, the retailer must be careful with regards to licensing or registration requirements. First, a retailer acting as the general contractor that uses an unlicensed or unregistered subcontractor may be subject to the same fines and penalties as the subcontractor. Second, the retailer may be liable for any damages caused by the unlicensed subcontractor and could have problems in getting paid.

Third, and maybe most problematic, is the impact on whether the installer is determined to be an independent contractor or an employee. Under California law, for example, a contractor, licensed or unlicensed, who engages the services of unlicensed subcontractors or construction workers is, by statute, the employer of those unlicensed subcontractors or workers, even if the subcontractors or workers are independent contractors under the usual rules.

If the subcontractor or installer is found to be a statutory employee, the retailer is responsible for reporting the wages paid to the employee and paying Unemployment Insurance and Employment Training Tax on those wages. In addition, the retailer is required to withhold and remit State Disability Insurance and California Personal Income Tax due on the wages paid. The general contractor is liable for the unpaid wages that were due to the unlicensed subcontractor and its employees. In summary, without a valid contractor’s license, a person performing services in the construction trade is an employee of the contractor who either holds a license or is required to be licensed.

It is not sufficient that an individual owner or employee of the subcontractor holds a license—the subcontractor with whom the retailer contracts must be licensed. The California Employment Development Department provided the following example specifically citing flooring:

A general contractor who holds a valid contractor’s license hires a subcontractor that is a partnership to install carpets. One of the partners holds a valid contractor’s license; however, the partnership is unlicensed. All workers, including the partners and their employees, are statutory employees of the general contractor… because the partnership does not hold a valid contractor’s license. The [Contractors State License Board] … must have issued a separate license for the partnership in order for the license to be considered valid. This concept also applies to corporations and joint ventures as the entities must be separately licensed.

While most states do not have laws like California’s statute, using unlicensed installers may impact whether the installer is an independent contractor or an employee. This is especially true if the installer is using the flooring retailer’s or contractor’s construction license. In evaluating whether an installer is an independent contractor, the court will look at whether a contractor acts as an independent business, including whether it has its own licenses to do the work.

Summary

Given the potential costs of not complying with licensing or registration requirements, it is recommended that flooring retailers, contractors, and installers undertake the following steps:

● Ensure you understand all state and local requirements in all the locations you are installing floors. ● If possible, the retailer should require all installers or installation contractors to have the required licenses or registrations. ● In your contract with the consumer, the retailer should clearly state whether or not it has a license and that the actual construction work will be done by a subcontractor who is licensed. ● The agreement with the installation subcontractor should specifically state that the subcontractor represents that it is the license or registered contractor and that the retailer is relying on that representation. ● The installation subcontractor’s license number should be included in the contract with the installer. ● The subcontractor agreement should also provide that the subcontractor will

“hold harmless, indemnify and defend” the floor covering retailer in the event that there is a dispute regarding the subcontractor’s license. ● Finally, the retailer can check with the local licensing divisions to determine if the installation subcontractor is appropriately licensed in your state.

In addition, it is always important to get competent legal counsel to review your contracts and the licensing requirements to ensure you are fully compliant with all legal obligations. ❚ While most states do not have laws like California’s statute, using unlicensed installers may impact whether the installer is an independent contractor or an employee. This is especially true if the installer is using the flooring retailer’s or contractor’s construction license.

Notice: The information contained in this article is abridged from legislation, court decisions, and administrative rulings and should not be construed as legal advice or opinion and is not a substitute for the advice of counsel.