Even a Licensed Contractor Can Lose It all if They Hire an Unlicensed Subcontractor
Many licensed general contractors assume they’re safe from California’s harsh penalties for unlicensed work – but that’s not always true. In Kim v. TWA Construction, Inc. (2022) 78 Cal.App.5th 808, the Court of Appeal confirmed that even a properly licensed general contractor can face the same “no compensation” and disgorgement penalties if they hire an unlicensed subcontractor.
The Rule Under Business and Professions Code Section 7031
Business and Professions Code section 7031(a) makes it clear: a contractor who is not “duly licensed” at all times during performance may not recover any compensation for the work performed. Subsection (b) goes further — allowing the property owner to sue for disgorgement, forcing the contractor to refund all money paid for the work.
The Kim court held that a general contractor cannot escape these penalties simply by claiming their own license was valid. If the general hires an unlicensed sub, the general is considered to have performed the unlicensed work — and loses the right to compensation for that portion of the project.
The Court’s Reasoning
In Kim, the homeowner sued for disgorgement after learning that the general contractor’s subcontractor was unlicensed. The court sided with the homeowner, finding that section 7031 applies to the entire “construction enterprise,” not just the individual who signs the contract.
The Court explained that allowing generals to benefit from unlicensed subs would defeat the purpose of California’s strict licensing laws, which are intended to protect the public from unqualified contractors and ensure accountability at every level.
The Consequences Are Severe
Even a short period of unlicensed subcontracting can trigger:
Loss of the right to payment for the affected work;
Disgorgement of money already paid under section 7031(b); and
Potential disciplinary action by the CSLB for aiding or abetting unlicensed activity.
Practical Takeaway
For general contractors, the message is clear: verify every subcontractor’s license before work begins — and monitor it throughout the project. A lapse by your sub can put your entire payment at risk.
For property owners, the Kim case reinforces that California’s licensing laws offer strong protection. If your contractor used unlicensed subs, you may have a right to recover what you paid.