Summary
Generally all contractors and subcontractors must have some form of license and those without a license risk civil and criminal penalties and may be prevented from enforcing their contract, bond or mechanic’s lien rights. A general contractor that hires an unlicensed subcontractor faces consequences as well.
Virginia: All persons engaging in contracting work must be licensed. A general contractor can be subject to sanctions and fines for hiring an unlicensed subcontractor. In cases of fraud or misrepresentation, a contractor may also face criminal prosecution. Although the general contractor may have a defense against paying an unlicensed subcontractor, there is a limited safe harbor provision where an unlicensed subcontractor may be able to enforce payment from the general contractor.
Maryland: There is a distinction between commercial construction and home improvement work. A license is required for general construction work and a home improvement contractor license is required for home improvement work. A general construction license cannot be used for home improvement work, only commercial work. However, a home improvement contractor license does permit commercial work. Regardless of which type of work is performed, a license is required. License requirements apply to subcontractors as well, whether they do commercial or home improvement work. Failure to have a license or hiring an unlicensed subcontractor can result in civil and/or criminal penalties. In addition, lack of a subcontractor license may not be a defense against a subcontractor’s claim against the general contractor.
District of Columbia: Like VA and MD, all contractors working in DC must have a basic business license. The license must have an endorsement for the appropriate category of work such as a general contractor, construction manager or a specialty subcontractor. Those that perform home improvement work must have a basic business license for the home improvement category. As with VA and MD, working without a license can lead to civil and/or criminal penalties. Similar to VA, lack of a subcontractor license can be a defense against a subcontractor’s claim.
Virginia
Under the Virginia Code, “no person shall engage in, or offer to engage in, contracting work in the Commonwealth unless he has been licensed.”[1] The Virginia Administrative Code also prohibits “contracting with an unlicensed or improperly licensed contractor or subcontractor in the delivery of contracting services.”[2] This provision was added in 2001 by the Virginia Department of Professional and Occupational Regulation (“DPOR”) Board for Contractors. It is a strict liability provision of which general contractors should be aware as it would subject a general contractor to sanctions and possibly criminal penalties.[3]
In the civil context, the penalty for working without a contractor’s license is the inability to recover the balance due for work performed or inability to enforce its mechanic’s lien. [4] Therefore a general contractor can withhold payment from an unlicensed subcontractor. However, subsequent cases and further legislative amendments have made it clear that the purpose of the licensing statute is "to strike a balance: to penalize those whose violations of the statutory scheme are knowing, but to excuse those who perform in good faith and whose violations are inadvertent.”[5] The current form of the safe harbor provision states that “no person shall be entitled to assert the lack of licensure or certification as required by this chapter as a defense to any action at law or suit in equity if the party who seeks to recover from such person gives substantial performance within the terms of the contract in good faith and without actual knowledge that a license or certificate was required.”[6] Therefore general contractors should know that unlicensed subcontractors may be able to recover under this safe harbor provision.
Effective July 1, 2015, the Virginia Department of Labor and Industry (“DOLI”) announced a new policy to address Worker Misclassification in Virginia,[7] such as classifying a worker as an independent contractor who in fact should be an employee. Misclassification can result in payroll fraud, reduced workers compensation and unemployment insurance protections and other laws designed to protect workers. As part of this policy, if the Virginia Occupational Safety and Health Division, an agency of DOLI has reasonable cause to believe that worker misclassification has occurred, the following will apply:
In construction multi-employer worksite situations, each contractor (e.g., general contractors, prime subcontractors and lower tier subcontractors) will be asked to provide proof of their DPOR contractor's license and for proof of the DPOR license for any of its' subcontractors.
When it is determined that a construction employer has contracted with an unlicensed subcontractor, VOSH will make a written referral to DPOR for the contractor and its unlicensed subcontractor (DPOR sanctions for contracting with unlicensed subcontractors may include fines, probationary terms, suspension or license revocation).
Contractors should be aware of this policy. DOLI intends to step up its efforts to inspect both public and private sector employers to ensure compliance with various laws, standards and regulations in the Commonwealth. This could also result in DPOR investigations if contractors on a project lack proper licenses.
Maryland
Maryland law requires a construction license for any person or business organization that does construction business in the state.[8] However, this does not allow home improvement work. All persons or entities who work on home improvement projects as a contractor or subcontractor must have a Maryland Home Improvement Commission (“MHIC”) license to perform home improvement work.[9] It is important to note this distinction. A contractor that has an MHIC license does not need to have a general construction license for commercial work. Therefore a contractor that does only commercial work needs a construction license.
To the extent a contractor or subcontractor acts without a license or hires an unlicensed subcontractor, the contractor or subcontractor may be found guilty of a misdemeanor and subject to a fine of $1,000 or imprisonment up to 6 months or both. A second or subsequent conviction, subjects the contractor to a fine of $5,000 or imprisonment up to 2 years or both.[10] Although there are a number of cases where an unlicensed contractor or subcontractor has been convicted, no cases were found where a contactor was convicted for hiring an unlicensed subcontractor.
In the civil context, a general contractor could withhold payment if a subcontractor was not licensed on the basis that the subcontract was illegal and therefore unenforceable. However, that has changed since a 2011 case,[11] in which the subcontractor that performed the work was not licensed. When the subcontractor filed suit against the general contractor for nonpayment, the general contractor claimed that the subcontract was illegal and not enforceable so no payments were due. The Court of Special Appeals noted that the licensing statute is for the protection of the public from unscrupulous home improvement contractors and not for the protection of general contactors from unlicensed subcontractors. It held that the subcontractor could pursue its claim for nonpayment against the general contractor. The court found that even though the subcontractor was not licensed either at the time of entering the contract or during performance of the contract, it was licensed at the time payment was due and the lawsuit was filed. The lesson to be learned is that a general contractor should make sure that its subcontractors are licensed and that lack of a subcontractor license may not be a defense against a subcontractor claim.
District of Columbia
At a minimum, all contractors must have a Basic Business License (“BBL”) to conduct business in the District of Columbia (“DC”).[12] This means that all contractors must have a basic business license with an endorsement either as a general contractor, construction manager or a specialty subcontractor. Those that perform home improvement work must have a basic business license with an endorsement for the home improvement category. A license can have more than one endorsement. A contractor with a BBL with a general contractor endorsement is not required to have a home improvement contractor license if the contractor complies with certain requirements under the home improvement category.[13]
A subcontractor is any person that performs construction related services for a general contractor, construction manager or another subcontractor.[14] All subcontractors hired by the general contractor must be licensed and registered as required under DC law. To the extent a contractor violates any provision of the DC licensing laws and regulations the contractor can be fined up to $300 or imprisoned for up to 90 days or both upon conviction.[15] This includes contractors and subcontractors as the case may be.
With respect to enforcement of contracts against general contractors or homeowners by subcontractors, courts have held that violation of a licensing statute or regulation that is designed for a regulatory purpose to protect the public will result in a contract being void and unenforceable.[16] Therefore a contractor will not be able to recover monies for work performed or exercise any mechanic’s lien rights.[17] Courts have also held that a contractor cannot recover on an unjust enrichment or quantum meruit theory.[18] Therefore a general contractor will be able to withhold payment from an unlicensed subcontractor.
[1] Va. Code Ann. § 54.1-1103 (2015)
[2] 18 Va. Admin. Code § 50-22-260(B)29 (2016)
[3] In Turzac Const. Corp. v. Commonwealth, 2007 Va. App. Lexis 17 (2007), the DPOR’s Board of Contractors had imposed sanctions on the contractor for hiring 4 unlicensed subcontractors. For each hire, Turzac was fined $1000 for A total of $4000. The trial Court affirmed the Board’s decision. The Court of Appeals of Virginia reversed the decision on the basis that the new rule was not in effect at the time of the violations. The Board had attempted to use another provision under the 1999 regulations which prohibited anyone in “assisting an unlicensed/uncertified contractor to violate any provisions of Chapter 1 or Chapter 11 of Title 54.1 of the Code of Virginia or these regulations . . .” See 18 Va. Admin. Code § 50-22-260(B)14 (1999), revised in 2001 as 18 Va. Admin. Code § 50-22-260(B)18. The contractor had claimed that it did not know that the subcontractors were not licensed. In addition “the contractor argued that absent some knowledge or intent to violate the regulations, the contractor’s hiring of the subcontractors was not equivalent to “assisting” an unlicensed contractor to violate the regulation prohibition.” Turzac at 1. The Court agreed that there was no such showing. The Court confirmed that under the added 2001 B(29) provision, Turzac would have violated the law.
[4] Bowen Electric Co. v. Foley, 194 Va. 92, 72 S.E. 2d 388 (1952); Lower v. Cranch, 32 Va. Cir. 110 (Loudoun County); 1993 Va. Cir. LEXIS 741
[5] J.W. Woolard Mechanical & Plumbing, Inc. v. Jones Development Corp., 235 Va. 333,339, 367 S.E.2d 501, 505 (1988). Case involved an individual licensed contractor that was not aware that he had to change the license to a corporate license when he incorporated.
[6] Va. Code Ann. §54.1-1115C. The question of substantial performance is a question of fact that is dependent on the circumstances of each case as noted in All Am. Contractors Inc. v Betonti,53 Va. Cir. 24; 2000 Va. Cir. LEXIS 159. The key to determine if a contractor can use the safe harbor provision is whether the contractor had actual knowledge of the licensing requirements. Courts have held that a contractor who acted in good faith, has substantially performed and acted without actual knowledge of the licensing requirement may recover payment. See In re Anderson, 349 B.R. 448, 2006 U.S. Dist. LEXIS 62582 (E.D. Va. 2006); All Am. Contractors Inc. v Betonti,53 Va. Cir. 24; 2000 Va. Cir. LEXIS 159; Dodson Roofing Co. v. Johnson, 32 Va. Cir. 400 (Richmond 1994).
[7] http://www.doli.virginia.gov/vosh_enforcement/employee_misclassification.html
The policy was designed to improve protections for workers and to level the playing field for employers who already provide all legal protections for workers against those who misclassify workers.
[8] Md. Code Ann. Bus. Reg. §17–602
[9] Md. Code Ann. Bus.Reg. §8-301; If a contractor hires a subcontractor for the work under its contract with a homeowner, the subcontractor must have an MHIC contractor or subcontractor license as well. It is illegal for any unlicensed contractor or unlicensed subcontractor to provide home improvement services. The code specifically states that “a person may not perform or sell a home improvement with or through another person who is required to be licensed under this title but is not licensed.” Md. Code Ann. Bus.Reg. §8-612.
[10] Md. Code Ann. Bus.Reg. §8-601
[11] Stalker Bros., Inc. v. Alcoa Concrete Masonry, Inc., 422 Md. 410 (2011).
[12]DC Code §47-2851.01 et seq.
[13] DCMR §17-3900.7
[14] DCMR §17-3999.1
[15] DCMR §16-800.7 & DCMR §17-3909.2
[16] Truitt v. Miller, 407 A.2d 1073 (D.C. 1979); Bathroom Design Institute v. Parker, 317 A.2d 526 (D.C. 1974)
[17] Highpoint Townhouses, Inc. v. Rapp, 432 A.2d 932 (D.C.1980)
[18] Cevern, Inc. v. Ferbish, 666 A.2d 17, (D.C. 1995); Marzullo v. Molineaux, 651 A.2d 808 (D.C. 1994); Erwin v. Craft, 452 A.2d 971 (D.C. 1982); See Remsen Partners, Ltd. v. Stephen A. Goldberg Co., 755 A.2d 412 (D.C. 2000), where an unlicensed contractor was required to return any payments that were received from the homeowner.