Three Ways Licensing Affects Mechanics Lien Rights

Posted on November 25, 2019 by Justin Gitelman in Business Compliance.

This question comes up from time to time, and the truth is that it depends on the state you live in. Simply put: Some states allow you to file a mechanics lien without a construction license, and some states don’t. Before we get into the meat of this article, it’s a good idea to check your state’s lien laws to find out what you need to file a mechanics lien.

No matter what industry you’re in, the laws surrounding contract work can get a little complex. This piece explores the ins-and-outs of state legislation and provides an overview for what you need in order to file a mechanics lien – and get paid for the work you do.

This issue depends entirely on your state

The best practice is to know the local laws surrounding unlicensed contractors before you do any work.

Here are three cases that illustrate the complexity of the licensing issue. In Colorado, for example, you are not required to have a contractors license to file a mechanics lien. On the other hand, in New York, the law says that, if a license is required to do the work, you absolutely need a license to file a lien.

This is where it gets complicated. In states like Florida and Georgia the answer isn’t as clear. These states work more on a case-by-case basis and make decisions based on situational context.

1. If you’re unlicensed, you may not have any recovery options

Now that we’ve covered the basics of state laws, we’ll move on to the main question at hand: Can you file a mechanics lien without a license? 

There’s a greater question at hand here. Since the purpose of a mechanics lien is to recover payment after a nonpayment situation, can an unlicensed contractor recover any payment at all? Once again, the answer to this question depends greatly on your state.

For this example, we’ll use California and Washington: 2 states in which unlicensed contractors have no right to recover payment. On the surface level, this means they can’t file a mechanics lien. But it goes deeper than that. In the event of nonpayment in these two states, unlicensed contractors can’t even file a lawsuit to collect the money they’re owed.

2. Unlicensed contractors are also subject to penalties

Now, there are a few cases in which unlicensed contractors can file a mechanics lien. However, it’s usually not a clean process.

The state governments of Washington and California do their best to limit the amount of unlicensed contractors. To keep it brief, there’s a lot of red tape to incentivize contractors to get licensed. For this reason, unlicensed contractors in these states tend to have more trouble recovering payments than in states like, say, Louisiana.

Louisiana is much more liberal when it comes to unlicensed contractors. In this case, unlicensed contractors do have the ability to file a mechanics lien, but not without a penalty. Usually, the licensing board nullifies the contract and only allows the contractor to recover the “minimum value” of the work.

To summarize, states like Washington and California prevent you from recovering any money at all, while states like Louisiana allow you to file a mechanics lien regardless of whether or not you’re licensed. But, in both cases, you may end up losing money.

3. Unlicensed contractors may have to return what they have been paid

Western states like Washington, Oregon, California, Nevada, Arizona, and New Mexico tend to be stricter about licensing. They generally require contractors to be licensed to do any kind of work. On top of that, the laws in these states are very strict when it comes to licensing and registration.

Just so we can get the full scope of the issue, let’s look at a case from California that drives home the importance of getting your contractors license.

The Twentynine Palms Enterprises Corporation v. Bardos case was settled in 2012, and the ruling was a big hit for an unlicensed contractor who was involved. In the end, the contractor was ordered to return more than $750,000 for work they did on a casino. The issue had nothing to do with the quality of the work that they did. It had everything to do with the fact that the contractor didn’t have a valid license for the majority of the project. Imagine that—over $750,000 worth of work was done for free because the payment had to be returned.

This case also brings up another key point. Along with being denied payment altogether, unlicensed contractors can be forced to return a payment in full. In fact, neglecting to get your license may be one of the worst accounts receivable mistakes you could possibly make.

A quick recap: Western states are strict about licensing. Twentynine Palms v. Bardos is a shining example of why it’s always prudent to get your license no matter what. But even outside the Western states, it’s no cakewalk for unlicensed contractors. They still routinely receive fines, extra penalties, and are even liable for damages.

Bottom line: Get licensed

If you’re doing work that requires a license, you should definitely get that license. Although this may seem like a no-brainer, countless contractors have run into some serious issues because of this oversight. Regardless of whether or not you need a license to collect payment in your state, getting caught up in a nonpayment issue without a license opens you up to all kinds of hassle and headache.
So, if you want to keep your practice safe and ensure you have lien rights as a contractor, always, always, always make sure you’re licensed for the work you’re doing.

Justin Gitelman is the Content Coordinator at Levelset, where over 500,000 contractors and suppliers connect on a cloud-based platform to make payment processes stress-free. Levelset helps contractors and suppliers get payment under control, and sees a world where no one loses a night’s sleep over payment.

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