Are you a supplier or an unlicensed contractor? If you’re wrong, the penalties are harsh

Question: We own and operate a custom kitchen cabinet shop and showroom. We sell directly to contractors, as well as to homeowners. Our business has grown to the point that we have started making house calls, taking custom orders, delivering the finished cabinets to jobsites, and making arrangements with licensed contractors to perform the installations. We believe this to be the reason for our success. Recently, we had a dispute with a homeowner who threatened to file a lawsuit claiming that we are contracting without a license and do not have properly registered salespeople. How can that be? We have never had any problems until now. Are we doing something wrong?

Answer: Your question presents a common misconception that a nonlicensed craftsperson, such as a cabinetmaker, can charge for installation as long as they have a licensed contractor perform the work. If all you do is supply cabinets to contractors or homeowners, you do not need a contractor’s license. But, I am not sure what you mean by “making arrangements with licensed general contractors.” It is these details that could hurt you.

By definition, a contractor is anyone who “submits a bid to, or does herself or himself or by or through others” construct, alter, repair, add to, subtract from, improve, move, wreck or demolish any building or other structure or improvement, or any part thereof. (See Bus. & Prof. Code § 7026). Thus, if you started expanding your business to include installation — even if done by a licensed contractor — you may have stepped over the line into being a contractor. This is important enough to repeat: if you enter into agreements with homeowners — or anyone else, including a general contractor — where you are supplying and providing installation of the cabinets, even if the installation is done through a licensed contractor that you hire, you are performing the function of a contractor.

Even providing unfinished cabinetry, and then staining them after they are installed by someone else, may also be considered work that requires a license. This is important to understand because, if you act as a contractor without your company itself being properly licensed, the penalties are very harsh and you stand to lose not just the money you were paid for the installation, but the entire value of the cabinets as well. It may not sound fair, but that is the law.

An unlicensed contractor can’t collect payments for work that requires a license, and the law requires that any compensation paid for labor and materials provided be paid back. For example, assume you did a cabinet project worth $50,000, and you charged only $1,500 of that for installation performed by a licensed contractor that you hired. The law requires you to pay back the entire $50,000, even though your “mistake” of providing installation was only worth $1,500. Laws requiring the money to be paid back are designed to discourage anyone from contracting without a proper license. Presumably, an unlicensed contractor has not demonstrated the basic knowledge needed to perform their work because they have not been tested for it.

Also, a licensed contractor is required to post a bond for $12,500 to help pay for any damage the contractor may do to a homeowner. Though this amount is far less than the damage an unknowledgeable contractor may cause to an unwary homeowner, it does provide some protection. Also, licensed contractors are required to carry workers compensation insurance if they have employees. This protects the homeowner in case the contractor’s employees are injured on the job. There is no way to force an unlicensed contractor to carry such insurance, and the liability of an injured employee may fall on the homeowner who contracts with an unlicensed company. There are also criminal penalties that you may be at risk for. Usually, contracting without the proper license is a misdemeanor. But, it is a felony if done with a homeowner whose home was either damaged or destroyed in the recent wild fires.

The improperly registered salesperson accusation that the homeowner is referring to comes from the Contractors State License law which requires your employees to obtain a Home Improvement Salesperson (HIS) registration if your employees solicit, sell, negotiate and execute home improvement contracts outside the contractor’s normal place of business. The HIS registration is required only for licensed contractors. Going back to the first part of the question, if you are only supplying the cabinets, you would not be considered a contractor, thus your sales people do not have to be registered with the CSLB.

You need to stop handling the installation part of your cabinet orders unless your company obtains the proper license. If you have such a license, then you are free to do installation work with your own employees or hire the work out to any other properly licensed contractor. As you can see, it is important to understand the license laws and how they may affect you. Your business depends on it.

If you have a construction question, submit it to: info@construction-laws. com

General disclaimer The information in this article is based upon California law and is for general information only. Any information or analysis presented here is intended solely to inform and educate the reader on general issues. Nothing presented or referenced to, regarding facts, documents, or applicable laws, constitutes legal advice. Before acting or relying on any information, including any information presented here, consult with a qualified attorney for your specific situation.

Scholefield, Esq., holds an active PE license in Colorado, an undergraduate engineering degree from the University of Florida, and received her JD from the University of San Diego. Source Code: 20080228tca

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