Underground Economy CSLB Enforcement

What would a level playing field look like for contractors? How do partnerships help the State clamp down on unlicensed contractors and illegal activities? What is the CSLB doing to help legitimate contractors during this severe economic downturn? These were among the issues addressed on June 18th at the Holiday Inn Capitol Plaza in Sacramento.

When I first received my invitation to the CSLB sponsored Underground Economy Conference, I thought, “what a great idea!” I was pleasantly surprised to find about 150 people waiting to hear a variety of leading experts discuss how to combat those contractors who don’t carry Worker’s Compensation insurance; fail to pay proper payroll taxes and avoid securing proper building permits.

Cindy Mitchell, the new CSLB Chair and herself a licensed specialty contractor of 20 years was the first speaker. In her prepared remarks, she set the tone for the remainder of the Conference by pointing out that “as the economy goes downhill, more and more contractors are making bad decisions.” She went on to say that the problem is not just unlicensed contractors but also employees being paid in cash, employers claiming fewer workers than are actually on payroll, and failure of some businesses to pay unemployment insurance. David Fogt, Chief of Enforcement for the CSLB, followed Ms Mitchell to the lectern. Mr. Fogt, a licensed contractor since 1986, discussed the role of Building Departments in identifying unlicensed contractors and clamping down on improper “owner builders”.

The theme for many of the remaining speakers was how state and local government agencies are working closely together on Joint Enforcement Efforts. Pete Guisasola, Chief Building Official in the City of Rocklin, talked about his work with the CSLB to identify unlicensed contractors. He “wants a level playing field and is tired of seeing shoddy work and people who are being cheated” by those not playing by the rules.

Another expert, Lt. Dan Stroski, with the Yolo County District Attorney’s Office pointed out that in his many years of law enforcement, “fraudsters rarely commit fraud in (only) one area of their lives”. With a picture of Bernie Madoff in the background, Lt. Stroski discussed how his agency not only works closely with the CSLB and Dept. of Industrial Relations, but also a multitude of tax and revenue agencies including the EDD, IRS, FTB and Board of Equalization. He firmly believes that through these joint efforts and the Yolo Unlicensed Rapid Apprehension Team (YoURAT), many unlicensed contractors avoid Yolo County because of its “aggressive enforcement”.

This was an informational conference where some questions were left unanswered. Speaker after speaker assured the audience; of contractors, association representatives, public employees and others that they were doing their best with limited resources to put a dent in the underground economy. When one speaker asked, “how many public agency representatives are NOT experiencing cutbacks?” No one raised a hand. From the State on down, those fighting illegal contracting activities are being asked to do more with less staff. Also, as I discussed with one speaker, unlicensed contractors are only one of the targets for agencies that are required to pursue criminal activity in other professions.

At the end of the day, what I came away with was:

  1. Some local governments do an excellent job partnering with state agencies;
  2. Cooperation among State enforcement agencies does work to combat illegal and unlicensed activities;
  3. Much more needs to done by local and state governments to eliminate what Mark Lopez, a criminal investigator with the Tulare County Districts Attorney’s office, summarized as “Unfair Business Practices”; and
  4. Those working to put a dent in the Underground economy rely on us – those playing by the rules – to help fight those gaining an unfair economic advantage through illegal activities.

Leased Employees & Workers Compensation

There is little that brings me more satisfaction than readers who respond with great insight to some recent questions and answers. We begin by expanding on one answer. We continue with this theme as another reader ‘questions’ a point regarding an ‘exception’ to a CSLB rule, that may give some contractors an unfair advantage in bids…

Q: You and I have spoken before and I frequently read your column. Although unsolicited, I suggest there may be additional considerations regarding one of the questions in a recent column. This dealt with a “B” contractor who had his bid challenged because he was subcontracting too much work.

In many public works invitations to bid, including Cal Trans, the awarding agency includes a minimum “self-perform” requirement in the specifications. Many times it is 50%, with specific exclusion for pure specialty items (e.g. playground equipment installation).

While you were completely correct in your answer as to the license applicability, the ‘asking’ contractor may be appropriately licensed, but not meet the particular project specifications. I wish you continued success and appreciate your column and service to the contracting community at large.

A: On the contrary, your response was solicited. Implicit in all my columns is the expectation that if I do not properly or fully respond to a questioner, my readers will contribute as you have with a correction, clarification, or expansion of the answer. The questioner stated he was recently awarded a job where he intended on sub contracting most of the work. My response that the other bidder was “like Don Quixote, tilting at windmills” may have been off the mark.

You bring up a very good point that was not in the contractor’s email and I did not consider in my response. Public agencies can specify all manner of project specifications, including a minimum ‘self-perform’ requirement. The project in question may have been one such bid; however, if not, you still expanded everyone’s knowledge base. Thank you for your insight and for being a regular reader of my column.

Q: I am writing regarding a question in one of your columns regarding Worker’s Comp. Just because the CSLB shows a contractor has no Workman’s Comp coverage doesn’t necessarily mean his workers are not covered. I know of companies that lease their employees through a payroll service. As far as CSLB is concerned, they have no employees because they’re not actually employed by the contractor. They are leased and the payroll/leasing company takes care of the withholding and provides the Workman’s Comp coverage. The contractor pays for this through his lease. Your reader needs to make sure of his facts before he automatically suspects fraud.

A: Thank you for your input regarding this issue. You are correct that some contractors do lease employees through a payroll service; however, from discussions over the years with contractors and the CSLB, this is the exception, not the rule. While the reader may not have researched this particular contractor, I believe it’s important to address what many in the construction industry see as a significant problem. The reality is that a number of contractors who file an “Exemption from Workers Compensation” gain an unfair advantage since in fact they have employees.

By way of a real world example, a few years ago, I contacted several “C-33” contractors to paint the outside of my home. All three were “properly” licensed; all three had “Exemption” forms on file with the CSLB and, when they came out to bid the job, all three admitted to having employees. Needless to say, I went with a contractor who had proper coverage.

I will bring up this topic at the Underground Economy Conference in Sacramento on June 18th and let you know how the issue of leased employees is being addressed by the State.

California License Age Requirement

When I get feedback from a column “Q&A” we all benefit from knowing, whether it’s the exception or the rule. Truly, we are never too old to learn, or in some cases, too young to be licensed. Unfortunately, as another contractor teaches us, your livelihood can suffer if you allow a license to actually ‘die’. Our last inquiry gives one contractor no reason to ‘protest’ the answer…

Q: Regarding your response to the Landscape Contractor trying to license his 19-year-old son. You stated you had never seen someone so young get his or her license.

According to CSLB records my original license was issued in June 1973 and my date of birth is in October 1954. Using new math, I believe that made me 19 years old when I got my Contractors License. So now, you have heard of the CSLB granting a license to a 19 year old. Made my old brain think a little when I read your column, and that’s what makes this business enjoyable.

A: Thank you for the email and for showing me why writing this column is so enjoyable. Just when I think I’ve seen it all…. I started my company in 1982; however, I have heard stories that the Board was — shall I say — more accommodating to contractors back in the sixties and seventies. It appears they looked at the entirety of your background rather than just your age. Congratulations. It is quite an accomplishment to have been actively contracting for over 35 years.

Q: I have a question about a California Contractor’s license and was wondering if your company can assist me in this matter. I had a Class “B” General Contractors license that I let ‘expire’ in 2002. We moved out of the State in 2001 and I just let the license go. Now I may be moving back to California and will need an active license again. I have read the information provided by CSLB and it states that any expired license over 5 years will require a new application and passing the required exams. Since I have been out of State and have had no business in California since the expiration, is there any provision in California law that will allow me to ‘revive’ my old license without having to retake the exams or start this process from the beginning again.

A: Sorry, but you will be required to re-take the law and trade exams. Moving out of CA has no bearing on state law, which only allows a 5-year grace period. If your prior license was a sole proprietorship, you can request that your old number be reassigned. Otherwise, you are back to ‘square one.’

Q: We were just awarded a public job and were protested based on licensing. We hold a “C-20” HVAC and were under the impression, based on the CSLB Definitions, that a “C-20” could complete HVAC systems hot or cold. The company protesting claimed we needed to also have a “C-36” to do the chilled water that hooked into the chiller and fan coils.

I’m under the impression that complete HVAC means just that. Even so, wouldn’t the “incidental and supplemental” clause support whatever scope wasn’t covered? We’ve been in business for over thirty years and have never been confronted with this issue. Do you think I should be concerned?

A: A review of B&P Code 7059 should put your mind ‘at ease’. If the project is primarily HVAC then you should be able to properly perform all work, including the “incidental and supplemental” you describe. More important than my opinion or the protest, is the decision by the public awarding authority on what classification is proper for the job. If the public agency has determined this is the “C-20”, then there is your answer.

CSLB Enforcement Workers Comp

When it comes to unlicensed contractors or unfair competition, the CSLB is on the hunt in California. You can bet when they get a clue, SWIFT action follows. Concern about those cheating legitimate licensed contractors in the ‘underground economy’ goes all the way to the top, as State officials will be happy to explain. Finally, a quick review of how ‘qualifiers’ might be utilized on a corporate license…

Q: I am a contractor and have noticed that my competition has no Workman’s Comp for his employees. I know this because I have checked with the CSLB. Does anyone check on these companies? Who can I call about this?

A: Its unfortunate, but some licensed contractors, in an effort to gain an unfair advantage, will officially state they are exempt from Worker’s Compensation Insurance while actually employing one or more people. The CSLB can look into these types of issues if brought to their attention. You may want to report this contractor by completing a Statewide Investigative Fraud Team (S.W.I.F.T.) LEAD REFERRAL. For readers of this column, if you need a “referral” form, visit the CSLB web site or call my office and I’ll forward you one. This form can also be used to report any unlicensed activity.

The day after I received your email, I received a letter from Stephen Sands, Registrar of Contractors, inviting contractors, members of builders associations and others to attend the upcoming CSLB Underground Economy Conference. It’s scheduled for Thursday June 18, from 8:30 a.m. until 4:00 p.m. at the Holiday Inn Capitol Plaza, in Sacramento (300 J Street). For anyone wanting an event flyer, contact me and I’ll fax or email one to you immediately. I understand seating is limited.

According to the Registrar’s letter, “licensed, law-abiding contractors are finding it increasingly difficult to compete against unfair competition, specifically those who have reduced their costs by failing to provide Worker’s Compensation Insurance and do not withhold state taxes from paychecks.”

The CSLB has organized this conference to educate licensed contractors, building industry associations, local building officials, and local law enforcement on how to effectively partner with the CSLB and other agencies to combat illegal construction activity.

Representatives from other agencies including the Department of Insurance, Employment Development Department, and the Department of Industrial Relations will be making presentations on common violations of law that undercut legitimate licensees.

Q: I’ve recently read about acquiring an RME. We are a corporation licensed with a “B” general contractor license and are interested in knowing the specifics for a Responsible Managing Employee (RME). I’ve read that an “exam” is required. Is this the CSLB Licensing exam, or one specific to the RME? Does the incoming person need a new license first if he’s already a general contractor? What about if we want a new classification? Is there a specific CSLB form/application? Thank you in advance.

A: The Responsible Managing Employee (RME) is a designation chosen by the contractor when applying for a contractor’s license. The RME is one type of qualifying individual. Other qualifiers may be listed as a Responsible Managing Officer (RMO) — as with your company President; qualifying partner on a partnership license or owner for a sole proprietorship.

If you intend on replacing your current RMO you can do so with another officer or employee (RME). If you intend on adding a second license classification, again, the designation is dependent on whether the person is an Officer of the corporation. An exam might be required depending on whether the incoming RME has previously held a contractor’s license in the classification you want to add (or replace). The specific CSLB form depends on what your company wants to accomplish; however, there is no need for the RME to first apply for his own license.

General California Contractors

Attention! I will address some “general” questions for the troops. At ease! We brief contractors and conquer some misconceptions about the General Building license and how it can be used. Another contractor wants his son to take a big ‘stride forward’ to follow his father’s footsteps. However, we all learn that getting started may be tougher than they thought…

Q: I have a General Building (“B”) license and want to start a new company using the word “mechanical”. You wrote me a letter stating that the Contractors Board would not allow this. Why?

A: The CSLB has a policy, which specifies that only 5 classifications will be allowed to use the “mechanical” designation in their business name. These include: “C-4” (Boiler); “C-20” (HVAC); “C-36” (Plumbing); “C-38” (Refrigeration) and the “A” (General Engineering). While the “B” can handle much of the work in these specialty classes, the Board will not allow a company to use the word mechanical without one of these classifications being on the license.

Q: I have a General Building license. I recently was awarded a job where I intend on sub contracting most of the work. One of the other bidders complained that I was not self-performing enough work. Is there somewhere in the law that states which trades I can (or must) handle in-house and which I can sub out?

A: Other than the “C-16” (fire protection) and “C-57” (well drilling) classifications, there are very few restrictions. As a General Builder, you can choose to self-perform all trades; partially handle some and sub out others; or sub contract all work on a project. The other bidder is just ‘shadow boxing’, or like The Man of La Mancha, Don Quixote, he’s ‘tilting at windmills’ in seeing a battle where none exists.

Q: I’m a licensed “C-27” (landscape) contractor. I recently became a Responsible Managing Employee (RME) in a general contracting firm with the intention of getting my son licensed to qualify my corporation. My son who is 19 (but has worked for me for years) spoke with the CSLB and they said it might take 6 to 9 month for him to get licensed. Can I somehow get another license for me so I can continue my family business?

A: I think it will take quite a bit longer for your son to qualify for his own license. In my 27 years of handling applications I have never seen or heard of the CSLB granting a license to a 19 year old. In fact, just once have I even seen anyone under age 21 qualify a license. Your son can always apply; but expect the application to ultimately be denied (after 6-9 months).

Applicants are required to show 4 years of journeyman level (or above) experience in order to qualify to sit for an exam. Since it’s assumed that the applicant does not start from day one as a journeyman, he or she would need at least one year of apprenticeship training. The CSLB also does not normally count experience obtained as a teenager (assuming they are still in high school until age 18 and at best working part time).

In the meantime, if your priority is to continue your family business with your son on the license, you’ll need to remove yourself as qualifier of the General contracting firm. You can then add your son as an officer to your own corporation. The Board will not allow you to be RME on one license while also qualifying a second license.