Business and Professions Code 7031: “Shield and Sword” Against California’s Unlicensed Contractors

Unlicensed Contractors Can Be Forced to Disgorge All Money Received

With limited exceptions, California’s “Contractors’ State License Law” ¹ empowers consumers to refuse to pay unlicensed contractors and to claw back prior payments made for both labor and materials. Courts have described these statutes as both a “shield” and a “sword” against unlicensed contractors. These legal actions can be taken even if the contractor was unlicensed during only a portion of the work, and even if the unlicensed contractor’s work was satisfactory, and even if these consumers had known in advance that the contractor was not licensed, and even when consumers’ legal demands appear “harsh and unfair”:

• “California’s contractor licensing statutes severely penalize unlicensed contractors. Even a brief license disruption may result in a contractor being unable to collect unpaid invoices or having to disgorge money received for past work. …‘Section 7031 of California’s Business and Professions Code serves as a ‘shield and sword’ for consumers litigating with their contractors. The shield, subdivision (a), deprives the unlicensed contractor of standing to seek compensation for services requiring a license. This applies even if the consumer knows the contractor is not licensed and encourages performance nonetheless. The sword, subdivision (b), allows the consumer to sue for disgorgement of all amounts paid under the contract. This includes both labor and materials. The legislature considers the ‘harsh and unfair results’ to contractors outweighed by ‘the important public policy of deterring licensing violations and ensuring that all contractors are licensed.” ²

Introduction – Contractors State License Board

California’s Contractors State License Board (CSLB) licenses and regulates about 300,000 construction contractors working in 70+ distinct “classifications” and “limited specialty classifications”. ³ While the majority of these licensed contractors carry out their work in a manner that never attracts disciplinary review, CSLB investigates numerous consumer complaints against licensed and unlicensed contractors:

• “Protection of the public shall be the highest priority for the Contractors State License Board in exercising its licensing, regulatory, and disciplinary functions. Whenever the protection of the public is inconsistent with other interests sought to be promoted, the protection of the public shall be paramount.” ⁴

To this end, CSLB revokes 400 to 500 licenses yearly for egregious violations of the Contractors’ State License Law. ⁵  In addition, CSLB’s “Statewide Investigative Fraud Team” (SWIFT) goes after unlicensed contractors via proactive stings and sweeps carried out throughout California. ⁶

Discussion – Business and Professions Code § 7031

(Disclaimer: the following discussion is educational and introductory in nature and is neither intended nor authorized for case-specific use by attorneys, licensed contractors, unlicensed contractors, building and property owners, construction managers, consumers, or other participants in the design, construction, and litigation fields. Any party seeking any legal guidance regarding the intent, meaning, and implementation of BPC § 7031’s provisions should consult an attorney.)

In their entirety, subdivisions ‘a’ to ‘f’ of BPC § 7031 currently state: [bold emphases added]

“7031. (a) Except as provided in subdivision (e), no person engaged in the business or acting in the capacity of a contractor, may bring or maintain any action, or recover in law or equity in any action, in any court of this state for the collection of compensation for the performance of any act or contract where a license is required by this chapter without alleging that they were a duly licensed contractor at all times during the performance of that act or contract regardless of the merits of the cause of action brought by the person, except that this prohibition shall not apply to contractors who are each individually licensed under this chapter but who fail to comply with Section 7029.” ⁷

• Discussion: an effect of BPC 7031.(a) is to deprive unlicensed contractors of legal standing to enforce outstanding debts for their services. ⁸

“7031. (b) Except as provided in subdivision (e), a person who utilizes the services of an unlicensed contractor may bring an action in any court of competent jurisdiction in this state to recover all compensation paid to the unlicensed contractor for performance of any act or contract.”

• Discussion: California’s Supreme Court has ruled that unlicensed contractors remain subject to full disgorgement even if “induced to enter and perform an illegal contract by a false promise to pay.”⁹

“7031. (c) A security interest taken to secure any payment for the performance of any act or contract for which a license is required by this chapter is unenforceable if the person performing the act or contract was not a duly licensed contractor at all times during the performance of the act or contract.”

• Discussion: except for the very limited exceptions delineated at Section 7031.(e), “security interests” (such as mechanics liens) are enforceable only by contractors who were “duly licensed …at all times during the performance of the act or contract.”¹⁰

“7031. (d) If licensure or proper licensure is controverted, then proof of licensure pursuant to this section shall be made by production of a verified certificate of licensure from the Contractors State License Board which establishes that the individual or entity bringing the action was duly licensed in the proper classification of contractors at all times during the performance of any act or contract covered by the action. Nothing in this subdivision shall require any person or entity controverting licensure or proper licensure to produce a verified certificate. When licensure or proper licensure is controverted, the burden of proof to establish licensure or proper licensure shall be on the licensee.”

• Discussion: BPC Section 7031 requires the contractor – never the consumer – to prove licensure if the issue is challenged.

“7031. (e) The judicial doctrine of substantial compliance shall not apply under this section where the person who engaged in the business or acted in the capacity of a contractor has never been a duly licensed contractor in this state. However, notwithstanding subdivision (b) of Section 143, the court may determine that there has been substantial compliance with licensure requirements under this section if it is shown at an evidentiary hearing that the person who engaged in the business or acted in the capacity of a contractor (1) had been duly licensed as a contractor in this state prior to the performance of the act or contract, (2) acted reasonably and in good faith to maintain proper licensure, and (3) acted promptly and in good faith to remedy the failure to comply with the licensure requirements upon learning of the failure.”

• Discussion: an unlicensed contractor cannot assert in court that it deserves payment because the nature and quality of its completed work had “substantially complied” with requirements of the “Contractors’ State License Law”. Similarly, a contractor with even a short gap in its CSLB-licensure status during the entirety of its construction work may still be subject to full disgorgement of payments received.11

“7031. (f) The exceptions to the prohibition against the application of the judicial doctrine of substantial compliance found in subdivision (e) shall apply to all contracts entered into on or after January 1, 1992, and to all actions or arbitrations arising therefrom, except that the amendments to subdivisions (e) and (f) enacted during the 1994 portion of the 1993–94 Regular Session of the Legislature shall not apply to either of the following:

“(1) Any legal action or arbitration commenced prior to January 1, 1995, regardless of the date on which the parties entered into the contract.
“(2) Any legal action or arbitration commenced on or after January 1, 1995, if the legal action or
arbitration was commenced prior to January 1, 1995, and was subsequently dismissed.”

• Discussion: none.

Summary Review and Recommendations for Wary Consumers

With limited exceptions, Business and Professions Code § 7031 protects (‘shields’) homeowners and businesses by empowering the public to not pay unlicensed contractors for their work. BPC § 7031 also provides consumers a ‘sword’ by which all prior payments (for both labor and materials) to unlicensed contractors can be clawed back. Contracts made with unlicensed contractors are void. Duly licensed contractors can be forced to disgorge payments received for unlicensed subcontractors.¹²

Consumers can knowingly hire unlicensed contractors and still refuse to pay them – even when these contractors were only briefly unlicensed during the course of the work. The Legislature has adopted these extraordinary provisions to combat the societal distress and financial losses being caused statewide by unlicensed contractors.

For wary consumers, the first step for any proposed construction project should be to check the status of their contractor’s license number at CSLB’s database.¹³  By law, all contractors must include their license number on their proposed contracts, their business cards, their website, their vehicles, and any other form of advertising or marketing. CSLB’s website will show whether or not a contractor’s license number is “active” (duly licensed to carry out construction work), “inactive” (not authorized for construction work), “expired”, “cancelled”, or “suspended” or permanently “revoked” for violations of State law:

• Unless this CSLB search reveals the existence of an “active” license with the correct classification (e.g., electrical, plumbing, roofing, or general contractor), this contractor is not duly licensed to carry out the intended construction work– as such, any work that might be carried out by this individual or firm would be subject to the consumer “shield and sword” protections of BPC § 7031.

Further, after wary consumers have identified the existence of an “active” contractor’s license under the proper CSLB classification, they should then confirm that the individual with whom they are interacting is the actual “qualifier”¹⁴ who was granted this particular contractor’s license.¹⁵

• California is plagued by “rent-a-license” scammers who possess “active” CSLB licenses, but instead “rent” their licenses to unlicensed contractors without themselves “exercising supervision and control” of the construction work, as required by BPC § 7068.1: “(a) The person qualifying on behalf of an individual or firm under …Section 7068 shall be responsible for exercising supervision and control of their employer’s or principal’s construction operations to secure compliance with this chapter and the rules and regulations of the board.”
• As such, when browsing CSLB’s “Check a License” site, wary consumers should examine a license’s “Personnel List” to identify the particular “qualifying individual” for this license and then confirm that this specific person “shall be responsible for exercising supervision and control” of the work.

Finally, wary consumers should also confirm (via the CSLB “Check a License” site) that their contractor
has Workers’ Compensation Insurance coverage¹⁶ in the event that a worker becomes injured.

• While “Workers’ Comp” coverage is not required for licensed contractors who have no employees, all
  jobsite personnel (even “day laborers” and part-time “helpers”) working under a contractor’s direction are considered “employees”¹⁷ and therefore entitled to workers compensation benefits if injured.
• Commonly throughout California, unwary consumers are sued by injured laborers whose contracting employers had not secured the Workers’ Compensation Insurance coverage required by law.¹⁸

*****
Lonnie Haughton, GC, MCP, CASp (September 2, 2025) ©
AVELAR Senior Partner — Principal Codes Consultant

¹ Business and Professions Code, Chapter 9, §§ 7000-7191.
² “Where Law Meets Equity: Evidentiary Hearings Under California Business and Professions Code Section 7031”, Loyola of Los Angeles Law Review, Winter 2-1-2021.
³ https://www.cslb.ca.gov/About_Us/Library/Licensing_Classifications/
⁴ Business and Professions Code § 7000.6.
⁵ https://www.cslb.ca.gov/About_Us/library/Revoked/
⁶ https://www.cslb.ca.gov/consumers/report_unlicensed_activity/How_Can_I_Report_Unlicensed_Contractors.aspx
⁷ Reference BPC 7029: “A joint venture license is a license issued to any combination of individuals, corporations, limited liability companies, partnerships, or other joint ventures, each of which holds a current, active license in good standing. A joint venture license may be issued in any classification in which at least one of the entities is licensed. An active joint venture license shall be automatically suspended by operation of law during any period in which any member of the entity does not hold a current, active license in good standing.”
⁸ Reference “Where Law Meets Equity: Evidentiary Hearings Under California Business and Professions Code Section 7031”,
Loyola of Los Angeles Law Review, Winter 2-1-2021.
⁹ Ibid.
¹⁰ Ibid.: “The degree to which a consumer can leverage his or her contractor’s CSLL violation depends on the violation’s timing and severity. Most vulnerable to attack is a contractor that began working on a project without an active license. This often occurs when a contractor accepts work while waiting for the Board to process his or her initial application and expecting to receive a license mid-project. If sued, the contractor cannot establish the first substantial compliance factor, i.e., that it was licensed ‘prior to the performance of the act or contract.’ Likewise, the contractor cannot maintain a cross-claim against the consumer because he or she cannot allege he or she ‘was a duly licensed contractor at all times during the performance.’”
¹¹ Ibid.: “The briefest suspension may prove fatal if the contractor cannot piece together a credible factual narrative that satisfies subdivision (e)’s three-factor test.”
¹² Some California courts have ruled that there is a one year statute of limitations (beginning upon completion or cessation of
work on a project) within which an aggrieved consumer can initiate a “disgorgement” claim against an unlicensed contractor.
¹³ https://www2.cslb.ca.gov/OnlineServices/CheckLicenseII/CheckLicense.aspx
¹⁴ BPC § 7025. “(c)‘Qualifying person,’ ‘qualifying individual,’ or ‘qualifier,’ as used in this chapter, means a person who qualifies for a license pursuant to Section 7068.”
¹⁵ BPC § 7068. “(a) The board shall require an applicant to show the degree of knowledge and experience in the classification applied for, and the general knowledge of the building, safety, health, and lien laws of the state and of the administrative principles of the contracting business that the board deems necessary for the safety and protection of the public.”
¹⁶ BPC § 7125:
“(a) Except as provided in subdivision (b), the board shall require as a condition precedent to the issuance, reinstatement, reactivation, renewal, or continued maintenance of a license, that the applicant or licensee have on file at all
times a current and valid Certificate of Workers’ Compensation Insurance or Certification of Self-Insurance in the applicant’s or licensee’s business name.”
¹⁷ Labor Code § 2775.
¹⁸ Labor Code § 3700.5: “(a) The failure to secure the payment of compensation as required by this article by one who knew, or because of his or her knowledge or experience should be reasonably expected to have known, of the obligation to secure the payment of compensation, is a misdemeanor punishable by imprisonment in the county jail for up to one year, or by a fine… not less than ten thousand dollars ($10,000), or by both that imprisonment and fine.”