Unlicensed contracting

Working in another state can expose you to significant potential liability

Before bidding or working on a roofing project in another state, you must be aware of the state's licensing and registration requirements. Each state's requirements differ, sometimes substantially, and failure to plan ahead may result in lost opportunities or breached contracts.

Contractor licensing

Licensing requirements vary significantly among states. Some states require only residential contractors to be licensed. Some require roofing contractors to obtain specialty roofing licenses for all construction projects, and others only require licenses for general contractors or when a project exceeds a certain dollar threshold.

In Mississippi, for example, a license is required for commercial work only if the price is $50,000 or more. For residential work, a license is required if the price is $50,000 or more for new construction or $10,000 or more for work on an existing residence. Some states, such as Pennsylvania, do not impose any contractor licensing requirements for nonhazardous construction. Other states, such as New York, handle contractor licensing at the local level rather than the state level.

When a license is required, obtaining one may entail, among other things, taking an exam, producing a financial statement, and/or demonstrating experience and competency. In particular, in many states, exams only are offered periodically, which may significantly slow the process of obtaining a license. Be wary of promising to adhere to a schedule or meet a deadline before licensing requirements are known; you risk delays and liquidated damages if you are not able to acquire a license in time to begin the work as scheduled.

In many states, performing contracting work without a license is a misdemeanor, subjecting the violator to fines, imprisonment or both. Increasingly, even bidding on a job without a license may be a violation.

For example, the Illinois Roofing Industry Licensing Act states it is unlawful for any person to act in the capacity of or hold himself or herself out in any manner as a roofing contractor unless he or she is licensed. Something as simple as submitting a proposal or inspecting a property for the purpose of developing a proposal could be viewed as holding oneself out as a roofing contractor, which could violate the statute. Other state statutes expressly define contracting as including offering to provide construction services, leaving no doubt that simply submitting a bid is a violation.

In some cases, reciprocity agreements between states may relieve some, but usually not all, burdens of obtaining a license. Essentially, these agreements allow one state to recognize a license granted in another state. Reciprocity agreements vary and should be confirmed with local licensing boards.

Louisiana has reciprocity agreements with 12 states, pursuant to which the trade exam but not the business and law exam may be waived. Conversely, Florida does not have reciprocity agreements with other states.


Failure to register with a contractor licensing board can carry an array of legal consequences. Some states assess administrative sanctions, such as the imposition of fines or denial of the future right to practice construction contracting in the state.

For example, Iowa statutes provide a person who violates the requirement that a contractor be registered may be issued a citation by the Iowa Division of Labor Services with an administrative penalty no greater than $5,000.

Many states make the act of unlicensed contracting a misdemeanor offense with financial penalties and/or imprisonment as potential consequences. It is rare—but not unheard of—for an unlicensed contractor to be criminally charged and imprisoned. Perhaps the most prevalent consequence of unlicensed contracting—and the greatest deterrent—is the inability to use a state's judicial system to obtain payment for services.

Florida's licensing law includes what commonly is referred to as a "forum closing statute," which provides any contractor or subcontractor performing construction work without first being properly licensed is prohibited from using the courts of that state to enforce a contract regardless of a particular claim's merits.

Effectively, an unlicensed roofing contractor is left without any judicial remedy to enforce a contract or lien in the event he or she is not paid. Similarly, if an unlicensed roofing contractor is sued by an owner, the contractor may not rely on any contractual rights or defenses he or she might otherwise have, such as the right to compel arbitration.

In Deep South Systems Inc. v. Heath, Deep South Systems, Green Cover Springs, Fla., retained Quality Architectural Metal Sales & Roofing, Birmingham, Ala., as a sub-subcontractor to install roof, wall and soffit panels on two public school facilities. Deep South Systems paid Quality Architectural Metal Sales & Roofing the amount requested in 24 payment installments but refused to pay the retainage when the work was completed.

Reversing the trial court's grant of judgment in favor of Quality Architectural Metal Sales & Roofing, the District Court of Appeals found the contract was unenforceable because of Quality Architectural Metal Sales & Roofing's failure to maintain a license. Two years of payments did not create a waiver or implied agreement to pay regardless of Quality Architectural Metal Sales & Roofing's lack of a license, and Quality Architectural Metal Sales & Roofing was not permitted to use the Florida courts to obtain retainage owed under the contract.

California's licensing statutes take the "forum closing" concept a step further. Not only are contractors prohibited from bringing actions to collect payment if they were not licensed at any time during work performance, but also a person who uses the services of an unlicensed contractor may bring an action to recover all compensation paid to that unlicensed contractor. In other words, regardless of the stage of completeness or quality of installation, an owner may demand reimbursement of all payments made to the contractor while continuing to enjoy the benefit of the work performed. Further, unlicensed contracting is a misdemeanor carrying a fine up to $5,000 and/or imprisonment up to six months for a first conviction.

Particularly illustrative of the harshness of California's penalties against unlicensed contractors is the 2010 case Alatriste v. Cesar's Exterior Designs Inc.

In that case, Esaul Alatriste, a homeowner, paid $57,500 to Cesar's Exterior Designs, San Diego, for certain landscaping work at his home. Alatriste then sued Cesar's Exterior Designs seeking reimbursement of the $57,500.

Cesar's Exterior Designs was unlicensed when work began and obtained a license in the middle of the project. Alatriste, who had been acquainted with Cesar's Exterior Designs' president for 12 years, knew the company was unlicensed and the president's son was studying for and scheduled to take the exam at a later date, but Alatriste nonetheless contracted with Cesar's Exterior Designs for the work.

Granting summary judgment in favor of Alatriste, the court found Alatriste's knowledge of the contractor's unlicensed status irrelevant and ordered reimbursement of the full $57,500 plus interest. Cesar's Exterior Designs was not entitled to an offset or credit for work performed after the license was obtained nor was it entitled to be reimbursed its costs paid for materials used in the project.

Given California's rejection of any defense based on fraud or knowledge of unlicensed status, it is possible an unscrupulous owner could intentionally contract with an unlicensed contractor with the intention of later recouping all payments and still prevail.

In contrast, in Tennessee, an unlicensed contractor is entitled to recoup actual, documented expenses that can be proved by clear, convincing evidence. The statute permitting this recovery was enacted in an effort to ameliorate the harshness of Tennessee's earlier rule, which, as in Florida, held an unlicensed contractor had no right to recover under a contract whatsoever.

Although California's approach of requiring unlicensed contractors to return payments is a minority position, a number of states prohibit or substantially limit a contractor's ability to enforce a contract. Further, in many states, these rules apply if a contractor is unlicensed at any time during the project. It is, therefore, particularly important you obtain and maintain any necessary licenses throughout a project to preserve your legal remedies.

Obtaining certification

In addition to licensing statutes, most states require corporations legally organized in another state (known as "foreign" corporations) to obtain a certificate to transact business before commencing work. A certificate to transact business, commonly referred to as a certificate of authority, typically can be obtained through a secretary of state's office. As with contractor licenses, the consequences of failing to obtain a certificate of authority vary among states.

An out-of-state contractor who performs work without a certificate of authority typically is not permitted to use local courts to obtain relief until the certificate of authority is obtained. Many states impose a fine, which may continue to accrue each day, week or month the out-of-state contractor continues to transact business without a certificate of authority and must be paid to obtain a certificate. However, not all states are so forgiving.

In Alabama, failure to obtain a certificate of authority precludes a contractor from maintaining any action on a contract entered into before the contractor obtains the certificate of authority, and there is no opportunity to "cure" the violation by obtaining a certificate of authority later. Similar to the Florida and California licensing statutes, a contractor is irrevocably denied a legal remedy on a contract for failing to register with a secretary of state.

When you plan to conduct business in a state for the first time, become familiar with its requirements to transact business before you begin work. Failure to do so may result in forfeiting your right to receive payment for work performed even if such work is performed according to contractual terms and conditions.

Nonresident contractor statutes

If you work outside your home state, you also must be aware of nonresident contractor statutes. These statutes are intended to protect a state's collection of sales or use tax from nonresident contractors who perform construction work within the state. Most of these statutes require nonresident contractors to post a bond with the state's Department of Revenue. Failure to post the bond or otherwise comply with any applicable nonresident contractor statute can result in the nonresident contractor being barred from using the state courts to recover payment for work performed or may result in the imposition of fines, imprisonment or both.

Workers' compensation insurance

Before performing work in another state, contact your insurance adviser to discuss local requirements pertaining to workers' compensation insurance. Several requirements may differ among states, including the minimum amount of insurance that must be maintained and whether exceptions are available based on the number of employees.

Some states, known as monopolistic states, do not allow employers to purchase workers' compensation insurance from private insurance companies. Instead, the state establishes rates, issues coverage and administers claims in a manner similar to private insurance companies. Employers working in monopolistic states must purchase workers' compensation insurance from the state fund or, if permissible, self-insure because the employer's home state workers' compensation insurance policy probably will not extend coverage into a monopolistic state. North Dakota, Ohio, Washington, Wyoming, Puerto Rico and the U.S. Virgin Islands are monopolistic states.

Failure to maintain proper workers' compensation coverage may expose you to liability for injuries sustained by your employees on the job. In addition, you may be denied the protection of immunity from employee lawsuits provided within any applicable workers' compensation legislation.

If injured employees no longer are bound by that legislation, they may bring suit against you for the full value of the injuries they sustained without constraint by any pre-defined maximum benefit. You may be required to defend against such a suit at your own expense. Further, without proper coverage, you may be exposed to penalties or fines.

Educate yourself

Because some states consider bidding a project without a license equivalent to performing unlicensed contracting, it is imperative all licensing requirements be investigated as early as possible. Consult an attorney the first time you intend to perform work in another state or if work to be performed is of a different character or significantly higher dollar value than earlier work performed. With the appropriate advice and consultation, you should face few difficulties expanding your business into neighboring states.

David M. Gersh is an attorney with Atlanta-based law firm Hendrick, Phillips, Salzman & Flatt.


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