Answers to License Requirement Questions for Contractors

License requirements vary from state to state, so the question "Do I need to be licensed?" isn't easy to answer. In some states, like Wyoming, New York and Florida, licensure is handled at the local level. Some states have virtually no regulation of contractors. At the opposite extreme, California and Arizona heavily regulate the industry at the state level, requiring work experience and testing. If you are looking to start a contracting business or expand into a new territory, find out what the requirements (state, county, and municipal) are.

Potential Ramifications

What is the downside to not being licensed? Again, that depends on where you do business, but in heavily regulated states the results can be disastrous. And there are unscrupulous people who will manipulate the law and you. Consider this anecdote:

I know a subcontractor who worked for years for a company and was particularly good at his trade. Then he decided to go out on his own. He was retained by a "savvy" general contractor for a job; the subcontractor fronted the materials and did the job perfectly. He submitted his pay application to the GC, and the GC ignored it. After several attempts to collect, he decided to file a lawsuit. However, he never got his license. The GC filed to dismiss the lawsuit on the basis that state law prohibits anyone from suing to collect on a construction contract unless they can prove they were licensed. Further, this state permits the "prevailing party" in a lawsuit to collect attorneys' fees. Not only was the subcontractor not paid, but he ended up having to pay the attorney fees for the GC.

Or consider the following example involving a guy who wasn't even a full-time contractor. He worked full-time as a firefighter; he used to be a contractor but let his license lapse. He built himself an addition to his house, which legally he could do in his state. His neighbor asked him to build a similar addition on his own house. The firefighter initially resisted but eventually gave in. He built the addition and the neighbor then refused to pay, claiming all sorts of defects. The neighbor complained to his local city prosecutor, and the firefighter ended up being convicted of a misdemeanor for contracting without a license. On top of that, he had to pay restitution to the neighbor. Not only did he effectively pay for the building his neighbor's addition, but today he has a criminal conviction.

What about the "handyman" exemption? In some states where licensure is required, there is an exemption for projects under a certain value, often referred to as the "handyman" exemption because the limit is fairly low and intended for the contractor doing limited construction. Often, the work is associated with other services; for example, the person will do dry-out work after a flood, and as an adjunct will remove and replace wet flooring or drywall. While this exemption provides some flexibility and cost savings, it can be a trap because the handyman exemption is generally defined "per job" or "per project," or both. He can be caught violating the license when he is hired to do one job, agreeing later on to do additional work "while he is there." Even if these are billed as separate jobs, they may be deemed outside the exemption.

Different Documentation

Remember, too, that there are different types of licenses out there. Some places regulate the trade itself, while others issue business licenses simply to ensure that the business is paying tax. Even jurisdictions that do not regulate the trade will generally require local registration where the contractor is doing its work. Failure to register, and subsequent failure to pay municipal, county and/or state taxes, can have its own implications, varying from interest and penalties to "cease and desist" orders that shut the business down.

Finally, most states regulate the handling of asbestos, since this cancer-causing product becomes particularly dangerous when disturbed, such as when removing old tile flooring. The failure to have a proper license and to follow proper protocol can lead to criminal sanctions. This is one instance where the absence of a license can threaten both livelihood and life. The same can be said about lead, which is regulated federally by the Environmental Protection Agency's (EPA) Renovation, Repair and Painting (RRP) rule for pre-1978 housing.

Even if you have been doing business for years, you should expect to return to this question regularly, because answers about licensure questions change as your jobs change, your job locations change, and your state, county or local laws change. How do you keep abreast of these changes? Aside from doing your own review on the web, at your local library or in person at your local government offices, you can join a local contracting organization (ideally one that has a lawyer or someone who is dedicated to keeping the organization abreast of changes in the law), or you can contact a lawyer in the location where you are doing business. The latter solution, while perhaps more expensive, can provide a bit of piece of mind, as reliance on legal counsel's advice can in some instances mitigate your exposure to penalties. It also offers the possibility that the lawyer's malpractice insurance could help correct the results of the lawyer's mistaken advice.