Contractor Licensing: Wright v. Issak

A California Appeals Court recently held that an unlicensed contractor denied workers' compensation insurance for underreported payroll may not sue for unpaid work.

In this case, the plaintiff contractor Laurence Wright filed a collection action for unpaid work against homeowners Issak and Weber in a breach of contract suit. Defendants filed a cross-complaint for fraud, and the trial court found in favor of defendants. The homeowners were awarded reimbursement, punitive damages, fees and costs. Wright contended the court erred in finding he was an unlicensed contractor.

During services for defendants, Wright had reported a zero or next to zero payroll for every period in his application for workers' compensation insurance. He employed five workers and worked 4000 man hours to remodel the home of Issak and Weber. They paid Wright his reported cost for labor, which was twice the amount he actually incurred.

Business & Professions Code [B&P] §7125.2 provides that "the failure of a licensee to obtain or maintain workers' compensation insurance coverage, if required under this chapter, shall result in the automatic suspension" of the contractor's license. Further, B&P §7031 provides that an "unlicensed contractor may not sue for unpaid work that requires a license."

Wright argued he still had a valid license because the registrar never sent him the required notice explaining the "pending suspension." However, even if Wright proved lack of notice, the statute distinguishes between failure to "maintain" and failure to "obtain" insurance. Because Wright underreported his payroll, he never obtained the required insurance and was therefore outside the registrar's system for notice. As such, he was an unlicensed contractor who could not sue for compensation in the courts. Issak and Weber, in fact, were properly reimbursed for their payments to Wright for unlicensed work during the remodeling.

This is important for contractor's to note: in collection actions, the worker's comp. reporting may be compared against the actual labor cost incurred on subject projects. If there is an underreporting, the contractor may be deemed unlicensed (§7125.2) and thus will not be able to proceed with the collection action (§7031).