An unlicensed contractor is someone who does repairs or makes improvements to your home without the appropriate license to do business in your state. Typically, unlicensed contractors work for less than licensed contractors because they avoid worker’s compensation and liability insurance requirements.

What Are the Risks of Hiring an Unlicensed Contractor?

While an unlicensed contractor may provide you with a low price, there are many risks involved in dealing with one:  

  • Unlicensed contractors cannot get permits, so their work is not inspected and may not be up to local code.
  • If an unlicensed contractor improperly installs an appliance, such as a water heater that explodes, your insurance will not cover it.
  • If an unlicensed contractor installs an appliance, such as a water heater, dishwasher, and so on, the product warranty may be voided.

How Do I Tell If My Contractor Is Unlicensed?

There are some signs that may suggest your contractor is unlicensed.  They include:

  • The contractor asks for a large down payment before work begins and makes multiple requests for money in the early phases of construction.
  • The contractor says permits and inspections are not required or he asks you to obtain the permit.
  • The contractor gives a verbal contract only.  He is not willing to put terms in writing.
  • The contractor does not have proof of insurance.
  • The contractor only works weekends or after-hours.
  • The contractor asks you to make checks payable to a person or "cash" rather than a company.
  • The contractor’s advertisements, vehicles, cards, and so on do not display a license number.

Protect yourself by asking about a contractor’s license before hiring him.  Ask to see the license and his worker’s compensation and liability insurance.

What Happens If I Hire an Unlicensed Contractor and There Is a Problem?

Problems may occur during your construction project. Work may be low quality, the contractor may abandon the job, or you may refuse to pay the contractor. States handle such disputes with unlicensed contractors differently: 

  • Some states follow a strict rule that does not allow an unlicensed contractor to recover on the contract. In those cases, contracts with unlicensed contractors are illegal and unenforceable by the contractor. 
  • Other states follow a rule of substantial compliance.  If the contractor follows most of the rules a licensed contractor must follow, he can enforce the contract. This is because the public was not harmed by the violation as the contractor complied with the appropriate standards. These states may allow restitution to unlicensed contractors who are not paid if a licensed contractor supervised their work, the reason they have no license is minor, such as forgetting to renew, or the contractor posted a performance bond.
  • Some states say that if you knowingly enter into a contract with an unlicensed contractor, you are not allowed to use the fact that the contractor is unlicensed as a defense for non-payment. Note that an unlicensed contractor can still file suit for fraud and deceit 

Should I Contact a Lawyer About my Problem with an Unlicensed Contractor?

Because the law varies from state to state, it may be helpful to contact a real estate lawyer to determine your rights and remedies. A lawyer can defend you if an unlicensed contractor sues you for payment, and a lawyer can also help you sue an unlicensed contractor if they breached your agreement.