United States: Construction Law Client Alert The 9-1-1 For California Contractors On Personnel Of Record With The CSLB

(January 10, 2020) - California's Contractors' State License Law, Cal. Bus. & Prof. Code §§ 7000 et seq., requires licensees to provide various pieces of information to the Contractors State License Board (CSLB) both in the application for an original contractors license and "within 90 days" of a triggering event. This includes, among other things, information about the licensee's qualifier, or qualifiers if the licensee has more than one license classification, and certain personnel of record who must be associated with the license and who are authorized to act on behalf of the licensee with respect to CLSB-related matters.

Failure to provide the CSLB with the requisite information and, moreover, to keep personnel information current could be costly, including interfering with the licensee's ability to timely act to comply with the Contractors' State License Law and avoid the automatic suspension of its license and, possibly, the revocation of its license for one to five years. Acting as a contractor in California without an active or valid license could be catastrophic, including subjecting the licensee to disciplinary action by the CSLB and other civil dispute-related consequences.

Licensees could find themselves facing significant delays if its personnel of record identified on the CSLB's or California Secretary of State's (SOS) records for the licensee is stale. This could include preventing them from being able to timely file, with the requisite signature, for example, a Renewal Application, Application for Replacing the Qualifying Individual or a request for additional time to file an Application for Replacing the Qualifying Individual, Application to Add a New Limited Partner to an Existing Partnership License, or Application to Add New Personnel to Existing Corporate or Limited Liability Company License, or delaying the CSLB's processing of their application until the stale information is corrected both with the SOS and CSLB.

Licensees are sometimes surprised by delays when they file an application for an original contractor's license or make changes to their personnel of record resulting from the fingerprinting requirement for the qualifier and personnel of record. As part of the application process and as required by law, the qualifier and personnel of record must be fingerprinted if they have not been fingerprinted by the CSLB before or if their previous fingerprint record was purged by the CSLB due to a voided application, disassociated, revoked, or cancelled license or registration, or for some other reason. Live Scan fingerprinting services are available at most local police and sheriff departments, and any public Live Scan site. However, for individuals who do not live in California or plan to come to California or have access to a Live Scan site, the time to process a hard copy fingerprint card by a law enforcement agency reportedly can take three to six months or longer. Fingerprints are then compared to the records of the California Department of Justice and the Federal Bureau of Investigation, and then the criminal record information is reported to CSLB. Under some circumstances, licensure may be denied because of an individual's criminal record.

Licensees should also be aware that the CSLB's processing of some applications will be delayed if changes to the CSLB's records for the licensee are inconsistent with the SOS's records for the business entity, e.g., the officers, members, and managers in the SOS's records are not current or are different that what is included on the application submitted to the CSLB. Licensees should beware that changes to the SOS's records can take days or even weeks.

Triggers to be aware of include:

Personnel of Record

California requires that certain persons be listed on the contractor's license application. This includes the "qualifier" for each license classification, e.g.,

  • Responsible Managing Employee (RME)
  • Qualifying Partner (QPT)
  • Responsible Managing Officer (RMO)
  • Responsible Managing Manager (RMG)
  • Responsible Managing Member (RMM)

An RME must be a bona fide employee and may be the qualifier for only one active license at a time. A "bona fide employee" is regularly employed by the licensee and actively involved in the operation of the business at least 32 hours per week or 80% of the total business operating hours per week, whichever is less. This includes any one or a combination of the following activities: (1) supervising construction, (2) managing construction activities by making technical and administrative decisions, (3) checking jobs for proper workmanship, or (4) direct supervision on construction job sites.

A QPT or RMO may serve as the qualifier for more than one license at a time, provided one of the following conditions exists: (1) there is a common ownership of at least 20% of each licensee; (2) the additional licensee is a subsidiary of, or a participant in a joint venture with the first licensee; or (3) the majority of partners or officers is the same. If the 20% common ownership no longer exists, the qualifying individual must disassociate from each license for which the exemption status no longer applies. This qualifier may qualify for no more than three licensees in any one-year period.

In addition, depending upon the type of entity, California requires that other personnel of record be associated with the license.

Foreign corporations are only required to provide the name of the president of the licensee on the license application. The name of the president must be consistent with the corporation's record with the SOS.

California corporations are required to include on the application the names of the president, secretary, and treasurer of the licensee. The corporation's officers must be consistent with the corporation's record with the SOS.

LLCs are treated quite differently. Every person and/or company that is an officer, responsible manager, member, or director of an LLC must be listed as personnel of record on LLC applications. LLC managers and members must be listed on the LLC's record with the SOS.

The CSLB will confirm that information provided to it is consistent with the information provided to the SOS. In addition, all personnel of record are subject to fingerprinting and the related background check, even personnel who are located outside of the state of California.

Licensees should beware that collecting the requisite fingerprints for its qualifier and personnel of record can take some coordination and will require cooperation by those who are required to be fingerprinted. Unanticipated delays can result if everyone does not timely cooperate.

Changes to Personnel

When personnel associated with the contractor's license change, including title changes, California requires the licensee to provide the CSLB with notice of such changes.

Replacing the Qualifier

The CSLB's "Application for Replacing the Qualifying Individual" is used to replace the qualifying individual on an existing license for all business entity types.

  • The qualifier for a sole ownership license can be replaced by a qualified owner or RME.
  • The qualifier for a partnership can be replaced by a qualified existing QPT or RME.
  • The qualifier for a corporation can be replaced by a qualified RME or RMO.
  • The qualifier for an LLC can be replaced by a qualified RME, RMO, RMG, or RMM.

Replacement of the qualifier must be made within 90 days of her/his disassociation to avoid a suspension of the license. If the license has more than one classification and the qualifier for the other class or classes remains on the license, the licensee may continue to operate in the remaining class or classes.

Notification of the qualifier's disassociation can be made by the owner, partner, officer, member, manager, or the qualifier who is leaving by a "Disassociation Request" or an Application for Replacing the Qualifying Individual and payment of the appropriate fees. Failure to replace the disassociated qualifying individual within 90 days from the date of disassociation, unless an extension is granted, will result in the automatic suspension of a license that is on active status.

If a licensee will be unable to replace an exiting qualifier within the requisite 90-day period, a 90-day extension may be requested. An extension request will only be considered under certain circumstances, including that an Application for Replacing the Qualifying Individual has been filed and only if the extension is timely sought.

An RME may be the qualifier for only one active license at a time. In contrast, a QPT or RMO may serve as the qualifier for up to three licenses at one time.

Replacing the qualifier will also require the Qualifier's Bond to be updated. 

Changes to Other Personnel of Record

The CSLB provides forms to change the personnel of record for a licensee:

  • Application to Add a New Limited Partner to an Existing Partnership License
  • Application to Add New Personnel to Existing Corporate or Limited Liability Company License
  • Application to Report Change of Title for Current Officer or Personnel of Existing Corporate or Limited Liability Company License

A General Partnership license is issued to a specific partnership structure and, therefore, an additional general partner may not be added to an existing partnership license. Instead, the partnership will be required to apply for a new contractor's license. In contrast, a Limited Partnership consists of one or more general partners and one or more limited partners. A limited partner may be added or removed from a Limited Partnership license without requiring the partnership to obtain a new license, provided that all general partners remain the same and at least one limited partner is listed.

Changes to the personnel of record may also require changes to an LLC licensee's liability insurance.

Licensees should beware that, in most cases, changing the qualifier or personnel of record will trigger the fingerprinting requirement. Coordination and cooperation by those who must be fingerprinted will be required to avoid prolonged delays.
 

Changes to the Business Entity

Beware that a "change in business entity" may require a new contractor's license. If a general partner or qualifying partner leaves the partnership, the partnership license must be canceled and, likewise, if a corporation dissolves, merges, or surrenders the right to do business in California through the SOS, the contractor license must be canceled.

Most notably, if the licensee's registration number assigned by the SOS to a business entity changes, a new contractor license number will be required by the CLSB for this new business entity.

The CSLB provides forms to cancel a license and to continue and reassign a license, if permitted:

  • License Cancellation Request
  • License Continuance Request (Available Only to a Sole Ownership Licensee, Partnership Licensee, or Joint Venture Licensee)
  • Request for License Reissuance

California permits an existing sole ownership license number to be reissued to a new corporation or LLC if (1) the existing sole ownership license is in good standing, (2) the corporation or LLC was formed by the same individual, and (3) the licensee maintains ownership directly or indirectly of shares or membership interests evidencing more than 50% of the voting power of the new corporation or LLC.

California also permits an existing corporate license number to be reissued to a new LLC if (1) the existing corporate license is in good standing immediately before its cancellation in connection with the application for an LLC, (2) the LLC was formed by a corporation to continue the business of the corporation subsequent to the cancellation of the corporate entity's license, and (3) the personnel listed for each entity are the same.

Special rules apply to LLC licensees, including requiring an LLC employee/worker bond and $1 million or more in liability insurance. The requisite personnel of record is also significantly broader than for any other licensees.

California is not the only state that requires licensees to report events like those identified above. Licensees should be aware of these common triggers to reporting obligations and take care when their business operations are undergoing change, including, but not limited to, changes in key personnel, or nearing renewal.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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