Nearly all jurisdictions have their own contractor licensing requirements, and contractors are well aware of the possible consequences of non-compliance, including potentially hefty fines, suspension, and ineligibility for public contract awards.  While a contractor’s own compliance with licensing laws is important for performance and potential claim recovery reasons, there can be additional pitfalls of subcontractor non-compliance that can lead to devastating results.

Courts and legislatures have recently attempted to define some of the grey areas in contractor licensing by broadening the scope of licensing requirements to expand their coverage to certain entities such as construction managers and labor brokers.  In a recent case, White-Spunner Construction, Inc. v. Construction Completion Company, 2012 WL 2362637 (Ala. June 22, 2012), the Alabama Supreme Court held that an entity providing only labor to a construction project, but no other supervisory or management services, was nonetheless considered a contractor under the Alabama licensing laws.  As explained below, the labor broker’s licensing deficiency had far reaching consequences for the other contracting parties on the project.

White-Spunner Construction, Inc. v. Construction Completion Company

In May 2008, White-Spunner entered into two contracts with Auburn University to construct eight four-story dormitory buildings.  As required by the relevant Alabama statute, White-Spunner obtained a payment bond from Hartford Fire Insurance Company (“Hartford”).  White-Spunner subcontracted with Construction Completion Company (“CCC”) to provide labor, materials, and services for the framing scope of work for the buildings.  Pursuant to the subcontract between CCC and White-Spunner, CCC agreed to provide laborers to the project in exchange for a set fee for each man-hour of work performed.  Unbeknownst to White-Spunner, CCC subcontracted with Buena Vista Construction, LLC (“Buena Vista”) for the provision of the workers necessary for CCC to satisfy its obligation to White-Spunner.  The workers provided by Buena Vista donned CCC uniforms on the project site, and were at all times under the direct control of CCC project managers.  Buena Vista, however, was not licensed as a contractor in Alabama during the performance of its agreement with CCC.

In October 2008, a dispute arose between White-Spunner and CCC concerning the propriety of certain amounts invoiced by CCC.  White-Spunner paid the undisputed portions of CCC’s invoices, leaving outstanding only the disputed amount.  In February 2009, CCC filed suit in Alabama state court against White-Spunner and Hartford to recover the amount of the disputed invoices.  Initially, CCC also named Buena Vista as a defendant, principally seeking a declaratory judgment setting forth the amount CCC owed to Buena Vista.  White-Spunner filed a counterclaim against CCC for breach of contract related to CCC’s unsatisfactory performance.  Buena Vista also asserted a counterclaim against CCC for non-payment.  In August 2010, CCC moved for summary judgment against Buena Vista, arguing that Buena Vista’s contract with CCC was void because Buena Vista was not a licensed contractor at the time it performed work for CCC on the Auburn project.  Buena Vista opposed the motion arguing that the work performed for CCC did not require Buena Vista to be licensed under Alabama law.  Specifically, Buena Vista asserted that it did not act as a “contractor” because (i) it only provided laborers to CCC; (ii) it never engaged in construction activities; and (iii) it never acted in a supervisory capacity over the laborers provided to the project.

CCC and Buena Vista eventually reached a settlement and agreed to a dismissal of their respective claims against each other.  In May 2011, the trial court awarded CCC damages against White-Spunner and Hartford for their failure to pay CCC the value of the disputed invoices.  White-Spunner and Hartford appealed to the Supreme Court of Alabama.

On appeal, and in an ironic case of déjà vu, White-Spunner and Hartford raised the same argument previously asserted by CCC against Buena Vista in the trial court.  They argued that because Buena Vista was an unlicensed contractor, CCC’s contract with Buena Vista was illegal, and therefore, the amounts claimed by CCC against White-Spunner and Hartford for work performed by Buena Vista were not recoverable.  In considering the appeal, the Supreme Court of Alabama addressed two specific issues: (i) whether White-Spunner and Hartford, not parties to the CCC-Buena Vista agreement, had standing to challenge the validity of that agreement; and (ii) whether Buena Vista, which acted only as a “labor broker” was required to maintain a contractor’s license under Alabama law.

As to the issue of standing, the Court decisively held that White-Spunner and Hartford had standing to challenge the validity of the CCC-Buena Vista agreement because, if that contract were deemed void, CCC could not establish its entitlement and damages to the amounts claimed against White-Spunner and Hartford.

Then, the Court held that even though Buena Vista was essentially a labor broker, it nevertheless fit the broad definition of a “contractor” under the Alabama licensing statute.  In reaching its decision, the Court analyzed the applicable statute, Ala. Code § 34-8-1 et seq., and found that the statute did not contain a “labor broker” exception such that Buena Vista would be exempt from the licensing requirements.  The ultimate inquiry, the Court said, was whether Buena Vista’s agreement with CCC required Buena Vista to engage in activities that required a contractor’s license, namely “construction, alteration, maintenance, repair, rehabilitation, remediation, reclamation, or demolition.”   The Court found that Buena Vista employees were directed by CCC to frame buildings and to supervise other Buena Vista employees.  Moreover, it was undisputed that Buena Vista employees performed work beyond menial labor, including framing, which was specifically recognized by the Alabama Licensing Board as a construction activity.

Finally, the Court relied on Personnel Temporary Services v. West Virginia Division of Labor Contracting Board, 475 S.E.2d 149 (W. Va. 1996), in which the Supreme Court of West Virginia addressed whether the West Virginia Licensing Act applied to labor brokers.  The court in Personnel Temporary Servicesheld that an employment agency that referred laborers to a properly licensed contractor for employment, while retaining all payroll functions for the laborers, was a “contractor” as defined under the West Virginia Contractor Licensing Act.  The White-Spunner Court found Personnel Temporary Servicesinstructive because the language of the West Virginia licensing statute was similar in scope to the Alabama statute.

For those reasons, the Alabama Supreme Court held that Buena Vista—acting as a labor broker—violated the Alabama licensing statute, and accordingly, the Buena Vista and CCC contract was void.  Reversing the trial court’s decision, the Alabama Supreme Court concluded that the unenforceable contract between Buena Vista and CCC could not form the basis of CCC’s non-payment claim against White-Spunner and Hartford.

Implications Of White-Spunner

The White-Spunner and Personnel Temporary Services cases demonstrate the wide reach of contractor licensing laws and highlight the importance of confirming compliance not only for contractors themselves, but also for those performing work on their behalf.  Under White-Spunner, a contractor or subcontractor may jeopardize the ability to collect otherwise properly incurred costs from a general contractor or owner due to the failure of a lower tier subcontractor to maintain the appropriate licenses.  Thus, to avoid such unintended consequences, it is essential for contractors to verify that all entities performing work on their behalf are properly licensed.

The White-Spunner and Personnel Temporary Services cases further illustrate that contractor licensing laws appear to be dispensing with the traditional notion of a “general contractor” as contracting entities are becoming increasingly specialized or discrete in the services they offer.  An entity that simply supplies laborers, without supervisory or management services, may no longer be insulated from contractor licensing requirements.  Likewise, many states, including Alabama and West Virginia, require construction managers to be licensed in the same manner as a contractor even if they are not providing labor to the project.  Accordingly, it is important that any entity performing work on a construction project check their state and local licensing laws to confirm that they are not running afoul of such requirements.

Conclusion

White-Spunner illustrates the increasing complexity present as courts interpret the traditional licensing laws in an evolving industry.  In particular, the case highlights the importance of verifying compliance with state and local licensing requirements for contractors of all tiers.  Many states have also clarified the licensing requirements for construction managers.  If your business offers construction management services, but you are unsure as to the scope of your state’s licensing laws, Watt, Tieder, Hoffar & Fitzgerald, L.L.P., publishes a state-by-state guide of licensing requirements for construction managers that may help your business in navigating these requirements.