Consequences of Hiring Unlicensed Contractors

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 What Is an Unlicensed Contractor?

An unlicensed contractor is a person who performs repairs or improvements to a home without having the professional license, business license or insurance coverage required by law to do this work in the state in which they operate.

In some states, not only are there few unlicensed contractor rights, the law penalizes unlicensed contractors severely and they can find themselves in a world of legal trouble for undertaking construction work without a license.

For example, in California, state law prevents a contractor from bringing any legal action for compensation for performing work for which a license is required unless the contractor was duly licensed “at all times” during the project. As a practical matter, this means that if an unlicensed contractor is not paid by their customer, they cannot pursue payment in court. There are very few exceptions to this rule.

California has some of the strictest laws regarding contractor licensing in the nation. In California, both general contractors and subcontractors must be licensed. However, suppliers, manufacturers, laborers and equipment lessors are not required to be licensed. There are severe fines and penalties for contractors who do construction work without a license. The agreement of a contract between any contractor and an unlicensed subcontractor is viewed as a misdemeanor criminal act.

Furthermore, any person who hires an unlicensed contractor may file a court action to recover all payments made to the unlicensed contractor. And if the contractor should try to sue the person who hired them for payment, the person can counter-sue to recover any money they did pay to the contractor. A person who hires an unlicensed contractor is a victim of a crime and may seek restitution of economic losses, even if the person knew that the contractor was unlicensed.

The laws regarding unlicensed contracting are less harsh in Maryland, but still unlicensed contractors can be found guilty of a misdemeanor for working without a license. A first offense can be punished by a fine of up to $1,000 and 30 days in jail. Subsequent offenses can bring a fine of up to $5,000 and two years in jail.

Other states have the rule of substantial compliance, which may excuse the unlicensed contractor for the lack of a license in some cases. This is discussed at length below.

If a person needs some work done on their home or other property, it is extremely important that they hire a contractor who is licensed, bonded, and adequately insured. Often, an unlicensed contractor can seem like an appealing option to homeowners, because they tend to cost less than their licensed counterparts.

Unfortunately, the reason they may cost less is at least in part because unlicensed contractors typically avoid the expense of obtaining the proper licensing and liability insurance required to work in a certain state. This can leave a homeowner open to liability for legal issues and resulting financial losses.

Therefore, it is strongly recommended that a person only hire licensed, bonded, and insured contractors to perform work on their home. This ensures that the property owner and other parties are protected from most of the legal risks and financial losses they could face because of a contractor’s mistake.

What Are the Risks of Hiring an Unlicensed Contractor?

While the price for an unlicensed contractor may be attractive for financial reasons, a person is taking a number of risks when they agree to work with one. Some penalties for hiring unlicensed contractors can result due to the following:

  • Lack of Necessary Building Permits: Because an unlicensed contractor cannot obtain necessary building permits, the work that they do will not be properly inspected. So, not only could the work be unsafe because it was not built to code specifications, but also when the property is sold, the owner would have to disclose to prospective buyers that work on the property was not done to code and is not covered by a building permit. Lack of permits can then affect the resale value of the property;
  • Warranties and Appliance Installation: If the unlicensed contractor is asked to install an appliance, such as a dishwasher, water heater, or washing machine, the warranty on the product may be voided because the contractor was not licensed;
  • Appliance Breakdown: Additionally, if the unlicensed contractor improperly installs an appliance and the appliance breaks, a person’s insurance will not cover the cost of making repairs, because the owner assumed the risks of working with someone who did not have a proper license;
  • Lack of Insurance and Bonding: Any costs that are normally covered by contractor or construction bonds will most likely have to be paid for by the person who hired the unlicensed contractor themselves. For example, if the work is performed in a faulty manner or the contractor disappears without completing the work, the homeowner would have to absorb the loss and cannot appeal to the insurance company of the contractor. This could lead to significant financial losses, including higher homeowners insurance premiums;
  • Liability for Injuries to Workers: One of the biggest risks to an owner is potential liability if a worker is injured while on the job on their property. If a contractor is unlicensed and uninsured, the contractor and his employees are automatically considered employees of the property owner. Thus, if a worker is injured while working on the property, the injured worker may sue the homeowner. An injured employee might be able legally to collect worker’s compensation from the homeowner’s insurance policy.

This would be possible if they worked for the necessary number of hours or earned a certain minimum amount. The employee may also be able to collect directly from the homeowner in a negligence lawsuit. These are possibilities that a homeowner most certainly wants to avoid.

How Do I Tell If My Contractor Is Unlicensed?

As discussed above, one way that a person may be able to tell that a contractor does not have a proper license is by the price they charge for their services. For example, if the standard rate in the area to hire a contractor is $25 per hour and one particular contractor charges only $15 per hour, this could be a sign that they do not have the proper licenses and insurance required by the state.

Some other factors that may indicate that a contractor is not licensed include the following:

  • The contractor claims that a building permit and/or inspection by permitting authorities are not required for the work being done. Or, they may ask the person hiring them to obtain a permit for them;
  • The contractor requests that the person hiring them make a large down payment before they begin the work or asks them to make multiple payments for the work throughout the early stages of the construction project;
  • The contractor refuses to enter into a written contract and will only agree to the terms by verbal consent (e.g., an oral contract in this instance);
  • The contractor cannot provide proof of liability insurance or surety bonds;
  • The contractor asks that the person hiring them make checks payable to a particular person, usually the contractor themselves, as opposed to providing the name of an actual company to which a check can be made out;
  • The contractor only works on the project on the weekends or during “after-hours,” e.g., 7pm to 11pm;
  • The contractor’s ads, vehicles, business cards and other documentation do not contain their license number or do not indicate that they are licensed, bonded and insured.

The surest way to avoid a problem is for a person hiring a contractor to ask to see a contractor’s licenses, workers’ compensation policy, and bond and liability insurance policies before hiring them for a construction project. A person should look at the documentation carefully to see the effective dates of insurance policies and licenses. If a person does not feel comfortable or competent to take care of this, they can consult an attorney who is experienced in construction contracting.

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

One option a person has if they experience an issue is to report an unlicensed contractor. Again, the law on contractor licensing varies from state to state and locality to locality within states, but all states have state agencies that handle business licensing, contractor licensing and consumer protection. These are the agencies that a person would want to contact. In addition, because unlicensed contracting can be a crime in certain states, a person might even report an unlicensed contractor to their local police or sheriff.

In Florida, for example, it is illegal to work as an unlicensed contractor. A person can file a complaint against an unlicensed contractor with their local sheriff or police, if fraud is involved. A person can also file a complaint with the Florida Department of Business and Professional Regulation. A person can also verify a contractor’s license or file a complaint online in Florida and probably in most other states as well.

Another option in Florida and other states is to file a complaint with the consumer affairs division in the county in which a person lives, if the county has one, or with the state agency that handles consumer problems.

There are a number of problems that can come up in connection with a construction project. For instance, the work performed may be of low quality. Or, the contractor may decide to abandon the project before it is finished. A person may even feel the need to refuse to pay the contractor if their work is of poor quality. These issues can become more complicated if the contractor does not have the proper license or insurance.

As previously mentioned, every state has its own laws regarding contractor licensing requirements. This also means that each state has its own laws regarding the impact of a contractor’s lack of a license on the legal process for resolving problems.

Some common examples of the different methods that a state may use to handle a dispute involving an unlicensed contractor include:

  • Strict Licensing Regulations: Some states have strict licensing regulations, which may prevent an unlicensed contract from recovering damages for breach of a construction contract. In such cases, the construction contract will be deemed invalid and therefore unenforceable in a court of law because hiring an unlicensed contractor is considered illegal;
  • Substantial Compliance Rules: Other states may have rules that allow for substantial compliance. For example, an unlicensed contractor who obeys most of the rules that a licensed contractor must follow may be able to enforce a contract. The rationale for this is the fact the public was not harmed by the licensing violation because the contractor mostly complied with the appropriate standards.
    • States that follow the substantial compliance rule may allow an unlicensed contractor to collect restitution in a contract lawsuit, if a licensed contractor supervised their work and the reason for not having a license is minor, e.g., they forgot to renew it or the contractor who supervised them posted a performance bond to protect against losses.
  • Contractor’s Legal Defenses: Some states have legislation providing that when someone knowingly enters into a contract with an unlicensed contractor, they are then not allowed to use the fact that a contractor is not licensed as a defense to avoid paying them. It should be noted that an unlicensed contractor may also file a claim against their employer for fraud and/or deceit.

Should I Contact a Lawyer about My Problem with an Unlicensed Contractor?

Laws regarding licensing requirements vary from state to state and even from locale to locale within a state. The laws may also be different for different types of work. Therefore, if you are experiencing issues that involve an unlicensed contractor, it may be in your best interest to hire an experienced, local contract lawyer as soon as possible.

Of course, one good way to avoid problems would be to consult your lawyer before the project begins so that the contractor’s documentation can be reviewed and the contract written in a way that best serves your interests.

And if an issue develops, a real estate lawyer who has experience with such matters will be able to offer guidance on the legal rights and remedies you have in your particular circumstances. Your lawyer will also be able to determine whether you have a valid claim against an unlicensed contractor, and if so, can assist you in filing a lawsuit and recovering damages for any losses you may have suffered as a result of their actions.

Or, if an unlicensed contractor has brought suit against you for payment for work that they have completed on your property, your lawyer can mount the best possible defense available under the law of the state in which you live.

Finally, regardless of whether your legal matter ends up in court or leads to a settlement agreement, your lawyer will be able to provide representation on your behalf in either scenario.

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