Liability in the Bargain?
The Dangers of Hiring an Unlicensed Contractor
by Timothy Smith, Esq.
Homeowners and homeowners'
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 fall into the
trap and hire the unlicensed contractor. However, the cheapest
contractor available might be the one that will cost the most in the
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 the legitimately licensed
It is true that having a
contractor's license is not a guarantee that the work will be done
well, or even properly. Since 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
When is a License Required?
In California, the Contractors State License
Board (CSLB), a division of the California Department of Consumer Affairs,
governs the issuance and supervision of contractors' licenses. The
CSLB specifies a number of classifications for
licensing and sets the standards necessary to receive the license.
The contractor can only legally perform the work associated with the
classification of the license they hold. 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 joined 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. Everyone wants 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 person working on your
home has more experience than that gained by simply watching TLC and
Discovery programs on home renovation and thinking that they can do
Hiring a contractor that has a
license also provides an avenue of grievance if a dispute arises.
California Contractors State License Board requires mandatory
arbitration for disputes1 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 them
or collecting any award you might obtain.
The CSLB 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 they worked hard and spent a lot of money to obtain. It is a
powerful incentive to do a competent professional job if your future
livelihood depends upon it.
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 homeowner.
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 homeowners'
association, that contractor, and potentially any employees of that
contractor, is considered to be an "employee" of the
homeowner or homeowners' association.
In Mendoza v. Brodeur2, a homeowner hired a neighbor to do a roofing project. That 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 or more.
Protection from Damage to
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
The bottom line for a
homeowner or homeowners' 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 on the web at: https://www2.cslb.ca.gov/OnlineServices/CheckLicenseII/CheckLicense.aspx.
Always get references and
multiple bids on the work. And if something is too good to be true,
it probably is.
1 The dispute does not have to arise out of poor workmanship or a
construction defect. It could be a contract dispute, a problem with
the final bill, etc.
2 Mendoza v. Brodeur, 142 Cal. App. 4th 72 (2006)
Dan A. Derkum is the owner of DAD's Construction, a leading South Orange County, California design-and-build remodeling and renovation contractor.