California Contractor Laws: The Main Things New Contractors Need To Know
If you’re a new California contractor or you’re simply looking to become a construction contractor in the state, it may seem like a daunting task to stay compliant and within the bounds of the legal requirements put forth by the State and the various authorities in charge of maintaining safety and construction standards.
California is notorious for its regulatory eagerness, with the state legislature constantly enacting new bills that force contractors to make constant changes in order to avoid running afoul of California law – and facing the serious consequences that accompany such action.
When it comes to contracting, you simply must follow the law – and that means laws that you’re not even aware of. With that in mind, here are the main things new contractors have to look out for when they’re beginning their journey.
1. Licensing Requirements
- California Contractors State License Board (CSLB) Licensing: Engaging in construction work on projects valued at $500 or more necessitates a valid contractor’s license issued by the CSLB. Here are the CSLB requirements in brief:
- Qualifications: you must be 18 years of age, have 4 years of journeyman experience
- Trade and Law Examinations: Every aspiring contractor must pass examinations pertinent to their trade alongside a Law and Business exam.
- Bonding and Insurance: As we’ll touch on in a moment, contractors are required to provide proof of bonding and insurance as part of the licensing process to safeguard the interests of consumers and employees.
- Fees: As always, there’s a number of fees associated with getting your CSLB license. The application for a contractor’s license includes a fee of $330. Retaking the exam, applying for multiple licenses, and other specific situations can add additional fees. Visit the CSLB’s fee article for more.
2. Insurance and Bonding
- Contractors’ Bonds: Any prospective contractor is required to file a contractor’s bond to receive their license, no matter their specialty. The CSLB just recently raised this number to $25,000 as of January 1, 2023. This bond exists as a failsafe for clients – it gives them immediate financial recourse in the case of a contractor failing to deliver on what they promised.
- Insurance: Insurance is less about the client and more about the contractor, subcontractor, and any employees on a job site. Currently, the CSLB requires all contractors to hold Workers’ Compensation insurance, as of 2023. This protects workers (and the contractor) from damages incurred on a job site. The worker has money to pay for the issue, and the contractor is protected from financial repercussions as their insurance takes care of payouts.
3. Building and Safety Regulations:
- Cal/OSHA Compliance: You knew it was coming – Cal/OSHA compliance is necessary to stay within legal guidelines for contractors. Contractors are obliged to adhere to Cal/OSHA regulations encapsulated in the California Code of Regulations, Title 8, Chapter 4. These regulations encompass Construction Safety Orders, Electrical Safety Orders, and General Industry Safety Orders, which are pivotal in ensuring workplace safety and compliance with state and federal safety standards.
- Cal/OSHA’s regulations are always changing. Visit Cal/OSHA’s website for the most up-to-date information on OSHA rules in California.
4. Local Codes and Regulations
- Just as there are statewide regulations that control what a contractor can and cannot do, there are also local and municipal regulations that determine what types of jobs can be performed, the types of materials that can be used, the physical limitations of buildings such as height and size, and so on. These codes are as important – if not more important – than CSLB licensing, as the penalties are often more immediate and severe.
- A good jumping-off point to find local codes and regulations is by going to the state’s own codes and regulatory database.
5. Contractual Laws
Permit and Payment Regulations: Compliance with state laws concerning permits and payments is crucial. Regulations stipulate that contractors should not accept deposits exceeding $1,000 or payments disproportionate to the work completed. Ensuring that all requisite permits are obtained before commencing work is also a legal obligation.
Written Contracts: The CSLB requires contractors to have a written contract for any job exceeding $500 in cost. Anything less than $500 doesn’t require a contract – it doesn’t even require a CSLB license!
6. Tax Compliance:
- Tax Obligations: Contractor tax obligations are dictated by the California Business Professional Code, Subsection 7000, which outlines tax obligations and processes for all professions in the state. What these obligations are will vary according to your specific situation, but here are the basic areas of tax most contractors will run into.
- Sales and Use Tax:
- Sales and Use Tax laws in California apply differently to construction contracts based on the type of contract, how contractors purchase materials, fixtures, machinery, and equipment, and how they install these items under contracts to improve real property.
- California law treats construction contractors as consumers of materials they use and retailers of fixtures they install. The sales tax is applicable on the sale of fixtures, while the use tax applies to the purchase of materials used in construction.
- Use Tax:
- Drilling down on the use tax – the use tax is a complement to the sales tax, and it basically seeks to recover tax from sales that occurred outside California. A use tax is due whenever contractors purchase taxable items without payment of California sales tax from an out-of-state vendor for use in California. It also applies to items removed from inventory and used in California when tax wasn’t paid at the time of purchase. The purchase price of these taxable items should be reported under “Purchases Subject to Use Tax” on your sales and use tax return.
- Filing and Payments:
- Contractors are required to adhere to tax return filing deadlines, and the CDTFA offers online services for filing tax returns and making payments. It’s essential to keep business information current by notifying the CDTFA of any business changes.
- Income Tax:
- Independent contractors are required to file their tax returns by April 15th of each year using Form 1040 for federal taxes and Form 540 for California state taxes. There are also specific guidelines for estimated tax payments as detailed in the 2023 Instructions for Form 540-ES.
- Sales and Use Tax:
- The CDTFA – Your Savior
The agency in charge of contractor tax compliance is called the California Department of Tax And Fee Administration. They are kind enough to create clear and specific guides to help contractors understand what they need to pay in their taxes or not! We definitely recommend this to any contractor – getting your tax information straight from the horse’s mouth is invaluable!
- Use their Tax Guide for Construction to become familiar with your tax situation – so you can always be in control of your finances.
7. Recovery of Payments and Penalties:
- Recovery of Payments to Unlicensed Contractors: California law stipulates the process for the recovery of payments made to unlicensed contractors under the Business & Professions Code, § 7031(b), which requires adherence to the protocol and process laid out in this document.
- Warranties: As we’ve covered in our article on contractor warranties, warranties dictate not only the amount of time that a contractor is liable for damages in the case of construction defects, but also stipulate the process and amounts that a contractor must pay back to the client.
8. 2023 Legislative Changes:
- AB1747 – Increased Penalties for Building Law Violations: This bill significantly augments civil penalties for violations of building laws from $8,000 to $30,000 under BPC Section 7110. It also expands the scope of violations to include non-compliance with specific health, safety, water, excavation, pest control, dumping, and insurance laws.
- SB216 – Changes to CA Workers’ Comp Laws: A pivotal change affecting contractors holding specific licenses (Concrete (C-8), Heating, Warm-Air Ventilating, and Air-Conditioning (C-20), Asbestos Abatement (C-22), Tree Service (D-49)). The bill mandates these contractors to obtain workers’ compensation insurance by July 1, 2023, failing which their license classification will be rescinded by the CSLB.
- SB607 – New Limits on Contractor Bonds: Enacted to safeguard the interests of consumers, this bill raises the bond rates from $12,500 and $15,000 to $25,000 effective January 1, 2023. It also introduces changes in fee structures for various business entities and expands the CSLB’s authority concerning fee adjustments.
- SB1237 & SB2105 – Provisions for Active Duty and Veteran Contractors: These bills provide license renewal fee waivers and a 50% fee reduction for initial license or registration to veteran applicants or those on active duty, under specified conditions.
- Minor Changes – Battery Energy Storage Systems, Disciplinary Changes, and C-49 Language Changes: Recent regulations have changed projects, including how and where Battery Energy Storage Systems can be worked on, civil penalties for disciplinary actions, and the legal definition of what jobs require a Class C-49 Tree and Palm Contractors License.
9. When In Doubt, Trust The CSLB:
- 2023 California Contractors License Law & Reference Book: The CSLB really does care about its contractors. They always try to provide as much guidance as possible to the contractors who make up its ranks. It’s no different when it comes to law and regulations – the CSLB’s License Law & Reference Book is going to have everything you need when it comes to understanding the totality of contractor law in California.
Do Your Own Diligence
While these general buckets of information are a great starting point for contractors who want to stay within the law, the world of construction in California is a mind-bending and complex web of state, regional, county, and local laws and regulations that may or may not apply to your unique situation.
Outside of the main requirements like CSLB licensing, bonding and insurance, and business and professional codes, the situation changes for each and every contractor, on each and every job. It’s up to you to not only know these laws but to deeply understand them and remain compliant with the guidelines set out by these laws.
Ignorance of the law is no excuse – in your career as a construction professional, compliance with laws and regulations is a constant battle that requires you to do the work.