Opinion
A129548
10-26-2011
PAUL ZINCHIK et al., Plaintiffs and Appellants, v. JAMES W. MOORE, Defendant and Appellant.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.
(Alameda County Super. Ct. No. RG-09-452521)
Following a trial before the court sitting without a jury, a judgment was entered that plaintiffs must be partially reimbursed by defendant, a contractor, for compensation paid for work performed after his license was suspended by operation of law for failing to provide workers' compensation coverage for an employee. Defendant argues in his appeal that his office worker was an independent contractor rather than an employee, and therefore he was not required to obtain workers' compensation coverage for her. He also claims that he substantially complied with the licensing requirements of the Contractors' State License Law (CSLL), Business and Professions Code section 7000 et seq., so he is not required to disgorge compensation to plaintiffs. In their appeal, plaintiffs seek reimbursement for all compensation paid to defendant under the contract, not just the amount paid for work performed after the license suspension.
All further statutory references are to the Business and Professions Code unless otherwise indicated.
We conclude that defendant violated the mandate to obtain workers' compensation coverage for his employee, and did not substantially comply with the contractors' licensing laws. In accordance with defendant's concession, we further conclude that the trial court erred by awarding plaintiffs only partial rather than full reimbursement. We therefore modify the award to grant plaintiffs full reimbursement of payments made to defendant, and otherwise affirm the judgment.
STATEMENT OF FACTS
In September of 2007, the parties entered into a contract for defendant to construct a new single family residence on undeveloped property owned by plaintiffs at 15 Ormindale Court in Oakland. The estimated cost for construction of the residence was $1,477,919.87, including a fee of $100,000 for defendant's profit and overhead. Defendant agreed that construction would be completed within one year. When the contract was executed defendant held a valid general contractor's license, and placed on file with the State Contractors' Licensing Board (the Board) a workers' compensation certificate of exemption that attested he did not have any employees.
Defendant also had similar agreements to build two other homes on the same court.
At the inception of the work on the "Ormindale project" defendant hired Beatriz Perez-Stable as an independent contractor for a flat rate of $25 per hour to "help with [the] paperwork and preparing bids and things like that," as she had done on another project for defendant in the past. Her office duties "started out fairly slowly," but evolved to include ordering and paying for construction materials, billing and budgeting, assisting with bids and estimates, drafting contracts, soliciting and obtaining bids from subcontractors, preparing work sheets, invoices and change orders, and sending notices to subcontractors which informed them to provide certificates of workers' compensation for their employees on the job site. Defendant testified that Perez-Stable had authority to enter into "some contracts" for him, but with all major decisions and operations of the business she acted under his authority and at his direction. Defendant's arrangement with Perez-Stable was that she worked on the Ormindale project on an as "needed" basis, and was terminable at will. Defendant would have charged plaintiffs more for the project if Perez-Stable had been an employee. Perez-Stable was also free to work with someone else if "it didn't interfere with her work" for defendant on the Ormindale project.
Perez-Stable previously worked for other construction companies as an independent contractor.
Defendant did not take out payroll deductions or expenses for Perez-Stable, and did not provide her with any employee benefits. He also failed to maintain a "workers' compensation policy" or file "1099s" for Perez-Stable, as he characterized her as an independent contractor rather than an employee. Defendant historically paid for workers' compensation coverage for employees of his company, and was aware of the "requirements of workers' compensation." However, defendant testified that he did not have any employees at the Ormindale Court site, and "hadn't had employees for a number of years before this." Perez-Stable stopped working in any capacity for defendant at the end of August 2009.
Perez-Stable had been an employee of defendant in the past, and when she was defendant provided her with "W-2's" and workers' compensation coverage. Defendant also maintained a general liability policy for any injuries incurred on the job site.
Pursuant to section 7125, in August of 2008 defendant filed a certificate of exemption from the "workers' compensation laws" with the Contractors' Licensing Board in connection with renewal of his license, which stated he had no employees in his contracting business and thus was exempt from the workers' compensation requirements. He was aware that if he hired any employees he must notify the Board and obtain workers' compensation insurance within 90 days.
Perez-Stable testified that she had no employees, no business cards, no stationary, no business name, and no special equipment. She operated only with a desk, computer and printer out of her home. She filled out daily timecards that reflected her hours of work. Her arrangement with defendant was to work as necessary to complete her tasks, and her monthly hours varied. Perez-Stable worked almost exclusively at home, and visited the job site "very seldom," for a few of the weekly meetings with plaintiffs and to check on progress of the construction work. She "liked the freedom" of status as an independent contractor for defendant, and "didn't want to be his employee." She did not carry workers' compensation insurance, and knew that as an "independent contractor" she "would be responsible" for any injury she suffered on the job. Perez-Stable filed tax returns as an independent contractor, and took "minimum mileage" deductions for her car use as a business expense. Perez-Stable testified that she was responsible for her own work on the Ormindale project, and had authority to sign contracts on behalf of defendant. She worked exclusively for defendant in 2008. During most months in 2008 she worked 40 hours or more per week.
Felix Lantsman, who owned the property next to plaintiffs' parcel and managed the construction projects on the three sites in Ormindale Court, testified that he dealt with Perez-Stable "a lot" during the course of the project. Lantsman had a dispute with defendant over the cost of grading on the project. Defendant told Lantsman that Perez-Stable may have "messed up something" related to the grading invoice, and they would meet with her thereafter to examine the invoices for every payment. Defendant referred to Perez-Stable as his "employee," and told Lantsman to contact her if he had "any problem." According to Lantsman, defendant was often unavailable or unresponsive to him, so Perez-Stable regularly assisted with billing questions, orders, bidding, subcontractors, and other matters. Lantsman also testified that he observed Perez-Stable at the construction site and spoke with her on the telephone "every single day."
Paul Zinchik, plaintiffs' son, testified that he hired defendant to construct the house at 15 Ormindale Court. Construction began in October of 2007. By February 21, 2008, Zinchik examined invoices and became concerned with both the slow progress of the construction work and "going out of budget" on the excavation phase of the project, so he contacted defendant. Zinchik did not feel that defendant "had a handle on the project," in terms of costs and billings. In response, defendant referred Zinchik to Perez-Stable. Thereafter, at plaintiffs' request Perez-Stable was present at meetings to discuss invoices, subcontractors, and cost analyses. Perez-Stable had the necessary information and "really seemed to know what all the numbers" meant. She called Zinchik and sent e-mails to him regularly that informed him of the progress and costs of the work. Zinchik testified that all of the bidding, orders for materials, and negotiating with subcontractors "always went through" Perez-Stable. Perez-Stable also testified that she reviewed orders and bids directly with Zinchik.
Plaintiffs terminated their contract with defendant on February 4, 2009, and subsequently filed an action against defendant for breach of construction contract, fraud, and negligence, among other claims. A claim for disgorgement and recovery of compensation paid to defendant due to license suspension (§§ 7125.2, 7031) was subsequently added to the complaint. The trial was bifurcated and proceeded on plaintiffs' disgorgement claim alone.
Following the presentation of evidence the trial court found that after February 21, 2008, Perez-Stable acted as defendant's employee, rather than an independent contractor. The trial court based this date on the response by defendant to billing inquiries made by Paul Zinchik and the subsequent directives by defendant to Zinchik regarding the role of Perez-Stable. As a consequence, defendant's failure to obtain a policy of workers' compensation for Perez-Stable resulted in suspension of his contractor's license by operation of section 7125.2. The court further found that defendant failed to prove substantial compliance with the requirement to maintain status as a duly licensed contractor at all times during the performance of the contract, and therefore he must disgorge the sum paid to him under the construction contract with plaintiffs after the date Perez-Stable became an employee. The court awarded plaintiffs $590,310.20, representing the amount paid to defendant by plaintiffs under the contract for work performed after February 21, 2008. Defendant and plaintiffs have both filed appeals from the judgment.
DISCUSSION
Defendant's Appeal
I. The Finding that Perez-Stable was an Employee of Defendant.
Defendant challenges the trial court's finding that Perez-Stable became his employee during the course of the Ormindale Court construction project. Defendant maintains that Perez-Stable at all times remained an independent contractor rather than his employee. Therefore, he argues, he was not required to obtain workers' compensation insurance coverage for Perez-Stable, his contractor's license was not subject to suspension pursuant to section 7125.2, and the court's order of disgorgement of payments to him under the contract with plaintiffs cannot stand.
Established statutory law in the CSLL requires contractors to be licensed, and treats unlicensed contractors harshly. (Oceguera v. Cohen (2009) 172 Cal.App.4th 783, 789 (Oceguera).) " 'Section 7031, subdivision (a) is the primary enforcement mechanism for the CSLL.' [Citation.]" (Ball v. Steadfast-BLK (2011) 196 Cal.App.4th 694, 700 .) It "provides: 'Except as provided in subdivision (e), no person engaged in the business or acting in the capacity of a contractor, may bring or maintain any action, or recover in law or equity in any action, in any court of this state for the collection of compensation for the performance of any act or contract where a license is required by this chapter without alleging that he or she was a duly licensed contractor at all times during the performance of that act or contract, regardless of the merits of the cause of action brought by the person . . . .' " (WSS Industrial Construction, Inc. v. Great West Contractors, Inc. (2008) 162 Cal.App.4th 581, 588 (WSS Industrial).)
The primary purpose of the licensing law and its sanctions " 'is to protect the public from incompetence and dishonesty in those who provide building and construction services. [Citation.] The licensing requirements provide minimal assurance that all persons offering such services in California have the requisite skill and character, understand applicable local laws and codes, and know the rudiments of administering a contracting business.' [Citation.]" (Ball v. Steadfast-BLK, supra, 196 Cal.App.4th 694, 700.)
"Courts interpreting section 7031(a) have long held that a contractor 'is ineligible to recover any compensation under the terms of that statute, if, at any time during performance of an agreement for contractor services, he or she was not duly licensed.' " (Alatriste v. Cesar's Exterior Designs, Inc. (2010) 183 Cal.App.4th 656, 669 (Alatriste), quoting from MW Erectors, Inc. v. Niederhauser Ornamental & Metal Works Co., Inc. (2005) 36 Cal.4th 412, 425 [30 Cal.Rptr.3d 755, 115 P.3d 41] (Niederhauser).) " 'Regardless of the equities, section 7031 bars all actions, however they are characterized, which effectively seek "compensation" for illegal unlicensed contract work. [Citation.] Thus, an unlicensed contractor cannot recover either for the agreed contract price or for the reasonable value of labor and materials.' [Citation.]" (Banis Restaurant Design, Inc. v. Serrano (2005) 134 Cal.App.4th 1035, 1043 .)
Not only does section 7031, subdivision (a) furnish a complete defense "shield" for parties who are sued by unlicensed contractors for compensation, but subdivision (b) of section 7031 adds a "sword remedy to the hiring party's litigation arsenal" by providing, " 'Except as provided in subdivision (e), a person who utilizes the services of an unlicensed contractor may bring an action in any court of competent jurisdiction in this state to recover all compensation paid to the unlicensed contractor for performance of any act or contract.' [¶] By adding this remedy, the Legislature sought to further section 7031(a)'s policy of deterring violations of licensing requirements by 'allow[ing] persons who utilize unlicensed contractors to recover compensation paid to the contractor for performing unlicensed work. [Citation.]' [Citation.]" (Alatriste, supra, 183 Cal.App.4th 656, 666.) "The obvious statutory intent is to discourage persons who have failed to comply with the licensing law from offering or providing their unlicensed services for pay." (Hydrotech Systems, Ltd. v. Oasis Waterpark (1991) 52 Cal.3d 988, 995 [277 Cal.Rptr. 517, 803 P.2d 370]; see also ICF Kaiser Engineers, Inc. v. Superior Court (1999) 75 Cal.App.4th 226, 233-234 (Kaiser).)
While defendant indisputably possessed a valid contractor's license when the Ormindale project commenced, the crucial inquiry is whether his license was suspended by operation of law for his failure to obtain workers' compensation coverage for an employee. "Business and Professions Code section 7125.2 provides for the automatic suspension by operation of law of the license of a contractor who fails to obtain or maintain workers' compensation insurance coverage." (Loranger v. Jones (2010) 184 Cal.App.4th 847, 849 , fn. omitted.) Under subdivision (a)(1) of section 7125.2, a contractor's license is considered "automatically suspended as of the date the contractor was required to obtain workers' compensation insurance but did not." (Wright v. Issak (2007) 149 Cal.App.4th 1116, 1121 (Wright); see also Loranger, supra, at p. 856.) Further, under the language of section 7125.2, "a contractor whose license is subject to suspension for failing to obtain workers' compensation insurance is subject to automatic suspension without notice." (Loranger, supra, at p. 856, second italics added.)
Subdivisions (a) and (b) of section 7125.2 provide: "The failure of a licensee to obtain or maintain workers' compensation insurance coverage, if required under this chapter, shall result in the automatic suspension of the license by operation of law in accordance with the provisions of this section, . . .
"(a) The license suspension imposed by this section is effective upon the earlier of either of the following:
"(1) On the date that the relevant workers' compensation insurance coverage lapses.
"(2) On the date that workers' compensation coverage is required to be obtained.
"(b) A licensee who is subject to suspension under paragraph (1) of subdivision (a) shall be provided a notice by the registrar that includes all of the following:
"(1) The reason for the license suspension and the effective date.
"(2) A statement informing the licensee that a pending suspension will be posted to the license record for not more than 45 days prior to the posting of any license suspension periods required under this article.
"(3) The procedures required to reinstate the license."
Subdivision (b) of section 7125.2 requires a registrar's notice for suspension of a contractor's license only if the suspension is for failure to maintain workers' compensation insurance. (Wright, supra, 149 Cal.App.4th 1116, 1122.)
Defendant's contention that he was not required to obtain workers' compensation coverage for Perez-Stable implicates subdivision (b) of section 7125, which "carves out an exception to these requirements for contractors who do not employ workers. It provides: 'This section does not apply to an applicant or licensee who has no employees provided that he or she files a statement with the [CSLB] on a form prescribed by the registrar that he or she does not employ any person in any manner so as to become subject to the workers' compensation laws of California.' " (Smith v. Workers' Comp. Appeals Bd. (2002) 96 Cal.App.4th 117, 124 .) Defendant may avoid the obligation to obtain workers' compensation coverage for Perez-Stable if she is classified as an independent contractor rather than an employee. The requirements of the Workers' Compensation Act extend only to an " 'employee.' " (S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341, 349 [256 Cal.Rptr. 543, 769 P.2d 399] (Borello).) " ' "Employee[s]" include most persons "in the service of an employer under any . . . contract of hire" (§ 3351), but do not include independent contractors.' [Citation.]" (Lara v. Workers' Comp. Appeals Bd. (2010) 182 Cal.App.4th 393, 398 (Lara); see also Antelope Valley Press v. Poizner (2008) 162 Cal.App.4th 839, 852 .) Thus, the status of defendant's license is dependent upon whether Perez-Stable remained an independent contractor for the entirety of the contract with plaintiffs or, as the trial court determined, she became an employee, subject to the requirement of workers' compensation coverage.
Defendant insists that both he and Perez-Stable viewed her status as an independent contractor, and acted accordingly. He points out that she worked at home, provided her own equipment, "set her own hours," and was "in charge of her own work" on the Ormindale project. Defendant also refers to evidence that Perez-Stable signed documents on his behalf to claim that she remained an independent contractor.
"An 'employee' is defined for purposes of workers' compensation as, in relevant part, 'every person in the service of an employer under any appointment or contract of hire or apprenticeship, express or implied, oral or written, whether lawfully or unlawfully employed . . . .' (Lab. Code, § 3351.) A person rendering service for another is presumed to be an employee for purposes of workers' compensation, unless that person is an independent contractor or otherwise expressly excluded under the workers' compensation law. (Id., § 3357.)" (Angelotti v. The Walt Disney Co. (2011) 192 Cal.App.4th 1394, 1403 (Angelotti).) In contrast, " ' "An independent contractor is one who renders service in the course of an independent employment or occupation, following his employer's desires only as to the results of the work, and not as to the means whereby it is to be accomplished." [Citations.] . . . "However, the owner may retain a broad general power of supervision and control as to the results of the work so as to insure satisfactory performance of the independent contract—including the right to inspect [citation], the right to stop the work [citation], the right to make suggestions or recommendations as to details of the work [citation], the right to prescribe alterations or deviations in the work [citation]—without changing the relationship from that of owner and independent contractor or the duties arising from that relationship." [Citation.]' " (Fireman's Fund Ins. Co. v. Davis (1995) 37 Cal.App.4th 1432, 1442-1443 , quoting from Automatic Canteen Co. v. State Board of Equalization (1965) 238 Cal.App.2d 372, 386-387 .)
" ' "The principal test of an employment relationship is whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired. . . ." [Citations.]' [Citation.] 'The existence of such right of control, and not the extent of its exercise, gives rise to the employer-employee relationship. [Citations.]' [Citations.]" (Lara, supra, 182 Cal.App.4th 393, 399.) "A secondary factor also constituting strong evidence in support of an employment relationship is the right to discharge at will without cause." (Angelotti, supra, 192 Cal.App.4th 1394, 1404.)
Numerous additional "secondary factors, derived largely from the Restatement Second of Agency [citation], include, inter alia, '(1) whether or not the worker is engaged in a distinct occupation or an independently established business; (2) whether the worker or the principal supplies the tools or instrumentalities used in the work, other than tools and instrumentalities customarily supplied by employees; (3) the method of payment, whether by time or by the job; (4) whether the work is part of the regular business of the principal; (5) whether the worker has a substantial investment in the business other than personal services; (6) whether the worker hires employees to assist him. [Citations.]' [Citations.] Borello[, supra, 48 Cal.3d 341] listed some additional factors, culled partly from other jurisdictions, among which are (a) whether the parties believe they are creating the relationship of employer-employee; and (b) the degree of permanence of the working relationship. (Borello, supra, at p. 355.)" (Lara, supra, 182 Cal.App.4th 393, 399; see also Lujan v. Minagar (2004) 124 Cal.App.4th 1040, 1048 .) "Each service arrangement must be evaluated on its facts, and the dispositive circumstances may vary from case to case." (Borello, supra, 48 Cal.3d 341, 354; see also Estrada v. FedEx Ground Package System, Inc. (2007) 154 Cal.App.4th 1, 10-11 .)
Our review of the trial court's finding that Perez-Stable was defendant's employee as of February of 2008 is quite constrained. The " 'determination of employee or independent-contractor status is one of fact . . . .' [Citation.] As a result, appellate case law in this area arises primarily in the context of substantial evidence review of the determinations of the relevant fact finder. [Citations.] Consequently, as is generally the case, appellate courts have no authority to simply second-guess the conclusion reached by the fact finder; instead, the substantive 'determination (employee or independent contractor) is one of fact and thus must be affirmed if supported by substantial evidence.' [Citation.]" (Cristler v. Express Messenger Systems, Inc. (2009) 171 Cal.App.4th 72, 78 .) " ' "Substantial evidence is defined as 'enough relevant information and reasonable inferences from this information that a fair argument can be made to support a conclusion, even though other conclusions might also be reached.' " [Citations.] . . . "Substantial evidence shall include facts, reasonable assumptions predicated upon facts, and expert opinion supported by facts." ' [Citation.]" (Uphold Our Heritage v. Town of Woodside (2007) 147 Cal.App.4th 587, 596 .) We "resolve all conflicts and indulge all reasonable inferences in favor of the prevailing party." (Deegan v. City of Mountain View (1999) 72 Cal.App.4th 37, 45 .)
The evidence presented, while conflicting in some respects, revealed that defendant had at least the right to control the manner and means by which Perez-Stable performed her work. Perez-Stable was often left to perform office duties on her own, but both she and defendant testified that he ultimately directed her and maintained control over her decisions and actions. Substantial evidence at trial permitted a finding that the nature of her work was indicative of an office employee of a general contracting business: budgeting, ordering and billing, contacting the clients and subcontractors, preparing bids and estimates. She worked essentially full-time and exclusively for defendant, and was paid hourly in accordance with time cards she submitted to him. She was terminable at will at any time, which is strong evidence in support of an employment relationship. (Cristler v. Express Messenger Systems, Inc., supra, 171 Cal.App.4th 72, 77.) Although Perez-Stable worked almost entirely from her residence, using her own computer and printer, she had no discrete business name, no employees, no stationary, no cards and no other indicia of status as an independent contractor. She did not obtain or even seek employment from anyone other than defendant. While defendant and Perez-Stable believed they had created an independent-contractor relationship, their label is not dispositive, particularly where it is inconsistent with the nature of the work and the overall arrangement of the parties. (Borello, supra, 48 Cal.3d 341, 350-351; Angelotti, supra, 192 Cal.App.4th 1394, 1404; Antelope Valley Press v. Poizner, supra, 162 Cal.App.4th 839, 852.) Acknowledging the conflict in the evidence, we cannot disturb the trial court's finding, supported as it is by substantial evidence, that Perez-Stable was defendant's employee after February of 2008. (Lujan v. Minagar, supra, 124 Cal.App.4th 1040, 1048.)
II. The Substantial Compliance Doctrine.
We turn to defendant's contention that his substantial compliance with licensing requirements exempts him from the sanctions of section 7031. "Section 7031, subdivision (e), provides the sole exception to the contractor's licensure requirements." (WSS Industrial, supra, 162 Cal.App.4th 581, 588.) "Section 7031, subdivision (e) allows a person who is unlicensed, when work is performed, to rely on the substantial compliance defense to a refund claim when all four of the following factors are present. [Citation.] First, the person or entity must have previously been licensed as a contractor prior to performance under the contract. Second, the entity or person must have acted reasonably and in good faith to maintain proper licensure. Third, the person must not know or reasonably should not have known that he or she was not duly licensed when performance of the act or contract commenced. And, fourth, the individual must have acted promptly and in good faith to reinstate his or her license upon learning it was invalid. Section 7031, subdivision (e) requires all four elements of the substantial compliance defense to be present." (Oceguera, supra, 172 Cal.App.4th 783, 792.)
Subdivision (e) of section 7031 reads: "The judicial doctrine of substantial compliance shall not apply under this section where the person who engaged in the business or acted in the capacity of a contractor has never been a duly licensed contractor in this state. However, notwithstanding subdivision (b) of Section 143, the court may determine that there has been substantial compliance with licensure requirements under this section if it is shown at an evidentiary hearing that the person who engaged in the business or acted in the capacity of a contractor (1) had been duly licensed as a contractor in this state prior to the performance of the act or contract, (2) acted reasonably and in good faith to maintain proper licensure, (3) did not know or reasonably should not have known that he or she was not duly licensed when performance of the act or contract commenced, and (4) acted promptly and in good faith to reinstate his or her license upon learning it was invalid."
Defendant emphasizes that he was "licensed when the contract commenced," and was subjectively unaware that Perez-Stable acted in the capacity of an employee for him during performance of the Ormindale project. Defendant also maintains that he was never provided with notice of his noncompliance with section 7125.2 or any suspension of his license while the construction project ensued. Only as a result of the present action was he definitively determined to be in violation of the requirement of obtaining workers' compensation coverage for Perez-Stable. Therefore, defendant claims he had "no reason to know" of the noncompliance until then, and no reason to seek reinstatement of his license. He suggests that we interpret the substantial compliance defense in subdivision (e) of section 7031, at least in the context of the present case, to require disgorgement of payments only for "future contracting work" performed after his license was found by the court to be "invalid for lack of insuring Perez-Stable as an employee." Defendant submits that his proposed result is consistent with the purpose of the licensing requirements and avoids unjust enrichment of the property owners who have received work performed by a licensed contractor.
"Under the plain language of the relevant part of the statute, the trial court 'may determine that there has been substantial compliance with licensure requirements . . . if it is shown at an evidentiary hearing that the person who engaged in the business or acted in the capacity of a contractor . . . did not know or reasonably should not have known that he or she was not duly licensed. . . .' (§ 7031, subd. (d).)" (Kaiser, supra, 75 Cal.App.4th 226, 241.) "The trend in changes to section 7031 over many years has been to severely limit the doctrine of substantial compliance; it only applies if all three requirements of subdivision (e) are met. [Citations.] The statutory policy embodied in the CSLL is intended 'to discourage persons who have failed to comply with the licensing law from offering or providing their unlicensed services for pay.' [Citation.] 'Because of the strength and clarity of this policy,' the Supreme Court has observed 'section 7031 applies despite injustice to the unlicensed contractor. "Section 7031 represents a legislative determination that the importance of deterring unlicensed persons from engaging in the contracting business outweighs any harshness between the parties, and that such deterrence can best be realized by denying violators the right to maintain any action for compensation in the courts of this state. [Citation.] . . ." [Citations.]' [Citation.]" (WSS Industrial, supra, 162 Cal.App.4th 581, 589, italics omitted.)
Defendant established that he was duly licensed when the project began. Further, nothing in the evidence suggests that he was actually aware of either the workers' compensation or licensing violations. Both defendant and Perez-Stable imparted their beliefs in her status as an independent contractor rather than an employee, and their shared aspiration for that classification to continue. While their mutual conception of the nature of the relationship is not determinative, it certainly reflects somewhat favorably upon at least the element of defendant's good faith belief that he maintained valid licensure.
The more problematic element of the substantial compliance defense from defendant's perspective is the requirement of proof by the contractor that he or she "did not know or should not have known" of the licensing deficiency. (Oceguera, supra, 172 Cal.App.4th 783, 794, italics added.) The test is not entirely a subjective one; a contractor cannot avoid the sanctions of section 7031 merely by remaining unreasonably ignorant. Substantial compliance is unavailable as a defense if the contractor "did not know or reasonably should not have known that it was not licensed." (Pacific Custom Pools, Inc. v. Turner Construction Co. (2000) 79 Cal.App.4th 1254, 1262 (Custom Pools), italics added.) The test is what defendant "should have known," not what he "actually knew." (Kaiser, supra, 75 Cal.App.4th 226, 241.) If a contractor "reasonably could and should have determined" the violation of the licensing laws, substantial compliance is not established. (Construction Financial v. Perlite Plastering Co. (1997) 53 Cal.App.4th 170, 179 .) With the substantial compliance exception, "the Legislature intended to create only an extremely narrow exception to the licensure requirement, which would apply only where a contractor was without a license owing to circumstances truly beyond his control." (Id. at p. 182.) Moreover, contractors "are presumed to have knowledge of the law's requirements," and "cannot circumvent section 7031(a) . . . ." (Alatriste, supra, 183 Cal.App.4th 656, 665.)
The evidence demonstrates that defendant knew he had the obligation to protect his employees with workers' compensation coverage, and had done so in the past. He was aware that Perez-Stable worked exclusively for him on a full-time basis, performing the very tasks normally expected of an office employee under his supervision. Defendant acknowledged that while Perez-Stable signed documents for him, he directed and supervised her work, particularly as it related to any discretionary or important decisions. Testimony was also presented that defendant referred to Perez-Stable as his "employee," and often channeled to her inquiries from plaintiffs and their agents about the progress and direction of the work. In light of the pertinent facts, defendant had ample reason to know, as the project progressed and developed, that Perez-Stable's status as an independent contractor was at least subject to obvious and serious doubt. Nevertheless, he made no effort to determine through the Board or other appropriate agency if Perez-Stable was properly classified as an independent contractor for purposes of the workers' compensation laws.
Thus, defendant cannot be excused from his noncompliance. Substantial evidence supports the finding that defendant failed to prove he reasonably could not and should not have known of the obligation to obtain workers' compensation insurance for Perez-Stable. In contrast to Kaiser, supra, 75 Cal.App.4th 226, 241-242, this case is not one in which the contractor had no reason to know of the noncompliance. An inquiry to the Board and disclosure of attendant circumstances would likely have elicited a response that the existing Certificate of Exemption was improper and Perez-Stable should be covered by workers' compensation insurance as an employee to avoid license suspension. The facts here do not suggest that defendant acted reasonably to maintain his valid licensure. (Custom Pools, supra, 79 Cal.App.4th 1254, 1263-1264.)
Nor does the evidence establish that the violation was beyond defendant's control, as in Slatkin v. White (2002) 102 Cal.App.4th 963, 966 , where the contractor was duly licensed when work commenced on the contract, but received notice two years thereafter that his license had been suspended due to the cancellation of a bond. The contractor was unaware of the suspension or any defect in the bond, and the plaintiffs did not contend that the contractor failed to act reasonably and in good faith to maintain a valid license. (Id. at p. 967.) Further, upon receiving notice of the suspension, the contractor immediately attempted to acquire a new bond, but was delayed in doing so by the vagaries of the construction bond market. (Ibid.) Here, defendant created the noncompliance by employing Perez-Stable in the effective capacity of an employee without providing the necessary workers' compensation coverage for her. The substantial compliance exception does not grant a contractor discretion to unilaterally classify an employee as an independent contractor, and thereby avoid the consequences of failure to adhere to the mandate to provide workers' compensation insurance.
The doctrine of substantial compliance applies only if all the requirements of section 7031, subdivision (e) are met. (WSS Industrial, supra, 162 Cal.App.4th 581, 588-589.) Substantial evidence supports the trial court's finding that defendant failed to prove he did not know or reasonably should not have known he was unlicensed once Perez-Stable commenced the duties of an employee. In light of our limited reviewing function, we cannot disturb the trial court's finding that defendant is not entitled to the benefit of the substantial compliance doctrine after the date Perez-Stable assumed the status of an employee without workers' compensation coverage. We recognize that a critical burden is placed on contractors to correctly assess the status of their workers at the risk of license suspension and resulting loss of compensation for work performed, but that clearly seems to be the aim of the Legislature in severely limiting and narrowing the doctrine of substantial compliance. (See id. at p. 589.) We therefore conclude that the trial court properly ordered defendant to forfeit compensation paid to him by plaintiffs due to the loss of his license by automatic suspension for failing to obtain workers' compensation insurance for an employee. (Oceguera, supra, 172 Cal.App.4th 783, 794; Wright, supra, 149 Cal.App.4th 1116, 1121.)
Plaintiffs' Appeal
The remaining issue is the extent to which defendant must relinquish compensation already paid to him. Plaintiffs have filed an appeal in which their sole claim is that the trial court erred by failing to order reimbursement to them of all of the payments made to defendant pursuant to the agreement. The court ordered apportioned reimbursement to plaintiffs, in the amount of $590,310.20, representing the compensation earned by defendant after the date Perez-Stable effectively became an employee and defendant's license was suspended by operation of law. Defendant was allowed to retain the compensation paid to him for work performed before his license was suspended. Plaintiffs contend that under the statutory scheme the court is without authority to order partial reimbursement. Instead, they claim "California follows a strict 'all or nothing' rule for disgorgement of compensation" paid to an unlicensed contractor.
Defendant conceded at oral argument that he is not entitled to partial compensation. The law is established that under the language of the "shield" provision of section 7031, subdivision (a), " 'a contractor may not sue to collect compensation for performance of "any act or contract" requiring a license without alleging that he or she was duly licensed "at all times during the performance of that act or contract." ' [Citations.]" (WSS Industrial, supra, 162 Cal.App.4th 581, 587, italics added.) Referring to the language of section 7031 that " 'no person . . . may bring or maintain any action, or recover in law or equity in any action . . . for the collection of compensation for the performance of any act or contract [requiring] a [contractor's] license' unless he or she alleges (§ 7031(a) . . .), and can prove (§ 7031, subd. (d)), his or her due licensure 'at all times' during such performance (§ 7031(a))" the California Supreme Court in Niederhauser, supra, 36 Cal.4th 412, 426, declared that "The words 'at all times' convey the Legislature's obvious intent to impose a stiff all-or-nothing penalty for unlicensed work by specifying that a contractor is barred from all recovery for such an 'act or contract' if unlicensed at any time while performing it." Reading the companion subdivisions of section 7031 together, which contain similar "at all times" and "act or contract" language, the court explained that these provisions "make clear the general rule denying recovery of all compensation for work requiring a contractor's license if a valid license was not in place when performance began, or if licensure lapsed at any time during the work." (Niederhauser, supra, at p. 428, italics omitted; see also Pacific Caisson & Shoring, Inc. v. Bernards Bros. Inc. (2011) 198 Cal.App.4th 681, 688 .) "The Legislature's use of the phrase 'in law or equity' and the unqualified terms 'any' and 'all' mean that section 7031, subdivision (a) applies '[r]egardless of the equities.' [Citation.] The statutory language demonstrates the Legislature's 'intent to impose a stiff all-or-nothing penalty for unlicensed work . . . .' [Citation.] The statute's harsh results are justified by the importance of deterring violations of the licensing requirements." (White v. Cridlebaugh (2009) 178 Cal.App.4th 506, 518-519 .)
The "sword" provision of subdivision (b) of section 7031 grants the right to reimbursement for payments made to a contractor in distinctly different terms, however, by providing that "a person who utilizes the services of an unlicensed contractor may bring an action in any court of competent jurisdiction in this state to recover all compensation paid to the unlicensed contractor for performance of any act or contract." (Italics added.) Subdivision (b) authorizes recovery of "all compensation paid to the unlicensed contractor for performance of any act or contract," whereas subdivision (a) more expansively prohibits recovery by a contractor absent proof he or she was duly licensed "at all times during the performance" of the contract. The reference in subdivision (a) to the requirement that a contractor, to obtain compensation, must remain licensed "at all times during the performance of that act or contract," is missing from subdivision (b). Instead, the right to reimbursement is granted to the extent of "all compensation paid to the unlicensed contractor." (Italics added.)
In light of the use of quite divergent language by the Legislature in subdivision (b), and under the distinctive facts presented here, we have some question about right of reimbursement of payments willingly made to a contractor who was properly licensed when the contract commenced, and remained so while work was performed and payments were made, until his license became invalid by operation of law without his knowledge. Nevertheless, we accept defendant's concession as a resolution of the issue. (See Roby v. McKesson Corp. (2009) 47 Cal.4th 686, 705 [101 Cal.Rptr.3d 773, 219 P.3d 749]; In re James F. (2008) 42 Cal.4th 901, 911 [70 Cal.Rptr.3d 358, 174 P.3d 180]; People v. Chatman (2006) 38 Cal.4th 344, 373 [42 Cal.Rptr.3d 621, 133 P.3d 534].) We therefore conclude that the trial court erred by apportioning the reimbursement granted to plaintiffs.
" ' "When the Legislature uses materially different language in statutory provisions addressing the same subject or related subjects, the normal inference is that the Legislature intended a difference in meaning." [Citations.]' [Citation.]" (Singh v. Superior Court (2006) 140 Cal.App.4th 387, 399 .)
DISPOSITION
Accordingly, the judgment is modified to award plaintiffs reimbursement from defendant in the amount of $889,972, and as so modified the judgment is affirmed. The parties are to bear their own costs on appeal.
Dondero, J. We concur: Marchiano, P. J. Banke, J.