Navigating Disgorgement Actions: What California Contractors Need to Know

judge gavel on building blueprint plans with a safety helmet

Disgorgement actions can pose serious financial risks for contractors in California. Under Business and Professions Code Section 7031, unlicensed contractors may be required to return all compensation received for work performed. This may be true even if the project was completed successfully. Understanding how disgorgement claims work and how to protect your business is essential for contractors operating in the state.

At Plumtree & Brunner, LLP, our California construction attorneys can help you handle concerns related to disgorgement actions. We can also help you meet California’s legal requirements to avoid these problems from occurring in the future. Get in touch today to learn more. 

What Is Disgorgement in California Construction Law?

Disgorgement is a legal remedy that allows property owners to recover payments made to an unlicensed contractor. This means that if a contractor was not properly licensed at any point during a project, they may be forced to return all compensation received for the work.

Even if the contractor performed high-quality work, California law does not allow them to keep payments if they were unlicensed during any phase of the project. This strict rule is designed to protect consumers and ensure compliance with state licensing requirements.

Who Can File a Disgorgement Claim?

Property owners who hired an unlicensed contractor can file a disgorgement claim to recover payments made for the work performed. These claims apply to:

  • General contractors
  • Subcontractors
  • Specialty contractors

Disgorgement actions can be devastating for contractors, as they may be required to return all compensation, even if they have already paid subcontractors, suppliers, or employees.

Key Legal Considerations for Contractors

1. Licensing Requirements

California law requires contractors to be properly licensed by the Contractors State License Board (CSLB) before performing work valued at $500 or more. Contractors must maintain their license throughout the entire project to avoid legal risks.

2. Statute of Limitations

Recent court rulings have clarified that disgorgement claims must be filed within one year of the contractor’s last work on the project. This means that property owners cannot bring a claim indefinitely, but contractors should still be vigilant about compliance.

3. Substantial Compliance Defense

In some cases, contractors may argue substantial compliance as a defense against disgorgement claims. This defense applies if:

  • The contractor held a valid license before and after the project.
  • The contractor acted in good faith and was duly qualified to perform the work.
  • The licensing lapse was minor and unintentional.

However, courts strictly interpret licensing laws, and this defense is not always successful.

How Contractors Can Protect Themselves from Disgorgement in California

To avoid disgorgement claims, California contractors should take proactive steps to ensure compliance:

1. Maintain Proper Licensing

  • Verify that your CSLB license is active and covers the scope of work.
  • Renew licenses before expiration to prevent lapses.
  • Ensure that qualifying agents meet supervision requirements.
wooden judge gavel and yellow construction gloves

2. Document Compliance

  • Keep detailed records of licensing status throughout the project.
  • Maintain contracts, permits, and payment records to demonstrate compliance.
  • Obtain written confirmation of licensing requirements from project owners.

3. Work With Legal Counsel

  • Consult an experienced California construction attorney to review contracts and licensing requirements.
  • Address potential disputes early to prevent legal action.
  • Understand your rights and defenses in case of a disgorgement claim.

Speak with a California Disgorgement Attorney for Help

Disgorgement actions can have severe financial consequences for California contractors. By maintaining proper licensing, documenting compliance, and seeking legal guidance, contractors can protect themselves from costly claims.  Be proactive to avoid a disgorgement claim.

Our team at Plumtree & Bruner, LLP can assist you with any issues relating to disgorgement in California. Contact us today for a consultation.