Unlicensed Contractors in California are NOT entitled to Compensation

The Hydrotech case confirms that contractors who do work without a license are not entitled to compensation for work performed. In fact, the unlicensed contractors are obligated to disgorge all the money that they may have received for working without a license. Because the Hydrotech case is a few years old, the "substantial compliance" exception may be treated differently today.

A typical example: A custom cabinet shop makes made to order kitchen cabinets. When the cabinets are completed, they have to be installed. The cabinet shop, which does not have a contractors license, and does not need a contractors license to fabricate cabinets, contracts with a licensed contractor to install the finished cabinets. As expected, the cabinet shop pays the installer for their services. The cabinet shop then bills the customer for both the cabinets and the installation labor. The cabinet shop is contracting without a license. Why? Because they were acting in the capacity of a general contractor, even though they hired a licensed installer to perform the work. The cabinet shop will have to disgorge all the money collected for both the cabinets and the labor. This actually happened and is not just a hypothetical example. The cabinet maker had to pay back the customer for the total cost of the cabinets and labor, and the customer got to keep the cabinets. The cabinet maker should have done one of two things; let the customer contract directly with the installer (losing any mark-up he could have gotten on the installation supervision), or obtain a contractors license to either act as a general contractor or self perform the installation.

Hydrotech Systems, Ltd. v. Oasis Waterpark, 52 Cal. 3d 988
--In an action by an out-of-state subcontractor to recover for labor and materials supplied on a construction project, the trial court properly sustained defendant project owners' demurrer as to the subcontractor's contract causes of action, because the subcontractor had failed to obtain a license as required by Bus. & Prof. Code, § 7031. Section 7031 bars all actions that seek compensation for unlicensed contract work. Exceptions have been allowed for contractors who have substantially complied with licensing regulations, but the subcontractor had made no effort to obtain favorable official determination of its qualifications. Also, § 7031 applied notwithstanding the subcontractor's claim that it had provided a unique service (a wavemaking machine), and had engaged in one isolated transaction in California. Section 7031 applies to construction projects whether unique or not, and bars subcontractors as well as contractors from suing to collect on any contract for which a license is required, regardless whether performance of the contract is an isolated transaction.