Stiffer Penalties for Business and Professions Code section 7068.1 Violations Still Warrant School and Community Colleges To Be Aware of Phantom Responsible Managing Employees and Improper Licenses

It is not an uncommon practice for unscrupulous and unlicensed contractors to “borrow” a licensed contractor’s license by designating a genuine licensee as a responsible managing employee (“RME”), even though that RME has little to do with supervising the work or managing the company.  Some of our school and community college district clients have suffered from poor work done by contractors engaging in this illegal practice.  In an effort to address this issue, changes to the Business and Professions Code section 7068.1 have been made this year to stiffen the penalties for these violations.

A contractor, in order to perform construction contracts in excess of $500, must hold a license, regardless of its business form.  The contractor may hold a license either through personal appearance or through a qualifier.  If the contractor is a sole proprietorship, he or she may be licensed by personal appearance or through an RME.  A RME must be a bona fide employee of the contractor and must be actively engaged in the classification of work for which he or she holds the license on behalf of the contractor.

If the contractor is a partnership or limited partnership, it can qualify through personal appearance of a general partner or a RME.  If the contractor is a corporation, it can qualify by the appearance of a responsible managing officer (“RMO”) or a RME.   And if the contractor is a limited liability company, it can qualify by personal appearance of a responsible managing officer, a responsible managing manager, a responsible managing member or a RME.    

The person qualifying must be responsible for exercising direct supervision and control of his or her employer’s or principal’s construction operations to secure compliance with the licensing law at Business and Professions Code section 7100 et seq. and the rules and regulations of the Contractor State License Board (”CLSB”).  Indeed, each licensee with a qualifier must submit to the Board detailed information on the qualifying individual’s duties and responsibilities for supervision and control of the licensee’s construction operations.

The general rule is that an individual can act as a qualifier for only one entity whether it is a partnership, limited partnership, corporation, or limited liability company (collectively “firm”) at a time.  There are, however, limited exceptions (except a qualifying individual cannot act as the qualifier for more than 3 firms in one year) under the following circumstances:  

  • There is a common ownership of at least 20 percent of the equity of each individual or firm for which the person acts in a qualifying capacity.
  • The additional firm is a subsidiary of or a joint venture with the first.
  • The majority of the partners, officers, or managers are the same.

This year, the State Legislature severely stiffened the penalty for violations of the rules set forth in section 7068.1.  Violation of this section is punishable as a misdemeanor by imprisonment in a county jail not to exceed six months, by a fine of between $3,000 and $5,000, or both.  Accordingly, contractors must not only have a license, but also make sure they properly manage their qualifiers.

Despite the Legislature’s actions to stiffen the penalties for these violations, school and community college districts should continue to be aware of the issue of phantom RMEs and other indicia of improper licensure because these often lead to substandard work.  If a contractor lists an individual as a RME on the CLSB website, but the school or community college district never sees any evidence of this person’s involvement in the supervision or management of the project or company, this may be a situation involving a phantom RME.  If the school or community college district believes the work is substandard, the school or community college district should consider asking the contractor to produce evidence of the RME’s involvement with the contractor’s business.  If the contractor refuses to provide this evidence, a school or community college district could consider requesting that the CSLB investigate the contractor, or even consider basing a termination for cause on the grounds of improper licensure.

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