California has enacted Senate Bill 342, which modifies the state’s contractor licensing laws by creating a limited exception to the longstanding rule that unlicensed contractors cannot recover compensation for work requiring a contractor’s license. The law becomes effective January 1, 2027.
Background
Under California’s Contractors State License Law, a contractor generally cannot recover compensation for work requiring a contractor’s license unless the contractor was properly licensed at all times during performance of the work. Likewise, a person that hired an unlicensed contractor may generally seek recovery of all compensation paid to that contractor.
These rules have historically been applied strictly, often resulting in contractors losing the right to recover payment for an entire project because of a licensing lapse during part of the work.
New Exception for Certain Construction Projects
Effective January 1, 2027, SB 342 creates an exception for certain contracts involving:
- Public works of improvement; and
- Commercial or institutional construction projects.
For these covered projects, a contractor may maintain an action to recover compensation if the contractor:
- Was properly licensed when the contract was executed; and
- Was properly licensed during the portion of the work for which compensation is being sought.
As a result, a contractor may be able to recover payment for work performed while properly licensed even if a licensing lapse occurred during another portion of the project.
Recovery Limited to Licensed Work
The new law does not eliminate licensing requirements or excuse periods of unlicensed work.
Instead, it permits recovery only for the portion of the contract performed while the contractor was properly licensed. Compensation related to work performed while unlicensed remains subject to challenge.
Accordingly, maintaining continuous licensure remains critically important for contractors performing covered projects.
Recovery Actions Against Contractors Also Limited
SB 342 similarly narrows the circumstances under which a customer may seek reimbursement of compensation already paid.
Under prior law, a person that used the services of an unlicensed contractor could generally seek recovery of all compensation paid to that contractor.
For covered public works, commercial, and institutional construction contracts, the law now limits that remedy. A customer may seek recovery only of the compensation paid for work performed during the period in which the contractor was unlicensed.
This change prevents recovery of payments attributable to portions of the project performed while the contractor held a valid license.
Employers and Businesses Impacted
The legislation is particularly relevant to:
- Licensed contractors;
- Public works contractors;
- Commercial construction companies;
- Institutional construction contractors;
- Developers;
- Property owners;
- General contractors; and
- Project owners involved in covered construction projects.
Employer Takeaway
Effective January 1, 2027, contractors performing qualifying public works, commercial, and institutional construction projects may have greater protection against losing compensation for an entire project because of a temporary licensing lapse. Likewise, project owners may no longer be able to recover all compensation paid under a covered contract if a contractor was unlicensed for only part of the project. However, compensation remains recoverable only for work performed while the contractor was properly licensed, making ongoing license compliance essential.