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State says lax rules might let builders use questionable licenses

By 
Les Mahler
SF Public Press
 — Mar 26 2012 - 8:13am

The agency overseeing companies that build houses and office buildings across California has for years trumpeted its ability to sniff out phony contractors, often publishing photos of dramatic undercover police stings of unlicensed builders at work on half-finished suburban cul-de-sacs.

But now the agency, the Contractors State License Board, is looking into a problem of the state’s own making — a program that allows contractors to essentially lease out their licenses.

The board has allowed some licensed contractors to earn extra income by supervising as many as three projects across the state. In some cases, licensees would have to travel hundreds of miles to oversee work performed by others, which experts in the field say could pose liability problems.

The agency said it has no way to search records that might reveal whether convicted felons are using the program as a loophole to work as contractors legally. Alerted by a reporter to one case in which this could be happening, investigators say they are looking into possible improprieties.

The idea of the “responsible managing officer” program was to provide a bridge to licensure for those just starting their businesses. But stories of improper use of licenses worry industry representatives. One of the state’s largest companies that trains licensed contractors is asking the board to monitor its own graduates.

The market for leased licenses is “an industry we don’t regulate,” said Venus Stromberg, a spokeswoman for the state licensing board. “It’s a complicated and convoluted issue, and that’s what we’re struggling with. Does it rise to the level of consumer harm and is it worth addressing? That’s what we’re going to determine.”

Stromberg said in early February that the agency would hire programmers to restructure its databases to allow investigators to look for inappropriately licensed contractors.

“The board is taking a look at this to make sure people are legitimate, and are legitimately acting in the capacity they say they are,” said contracting industry expert David Kalb, president of Capitol Services, a licensing consulting firm in Sacramento.

The responsible managing officer program allows builders to start without having to go through the state’s exam or qualify based on journeyman’s experience. Under the state licensing board rules, responsible managing officers can oversee three businesses or corporations, and they do not have to be clustered geographically.

That’s part of the problem, said David Fogt, chief of enforcement with the licensing board. He said his office investigates cases to determine if the licensed officers, or “qualifiers,” are actually participating in a job. “If we find the qualifier is not actively involved, we allege there’s a violation.”

Industry trainers worry that abuse of state licenses could make it harder for the state to claim the license actually means something. And it could also deprive them of business if more contractors use the backdoor method that does not require a test.

“With three licenses, who’s going to be responsible if there’s failure on the field?” said Gary Fiehmann, the founder of Industry Schools, which says its staff have trained more than 100,000 would-be California contractors over more than three decades. “Somebody has to be the liable person.”

Ultimately, he said, the rules are in place to protect consumers: If things go wrong with contractors, the state board has a system in place to clear up any problems between homeowners and contractors.

Fiehmann sees problems if a sublicensed company goes bankrupt and workers aren’t paid.

Another problem, he said, is on-site safety monitoring. While the responsible managing officer is on location at one job, who is responsible for work at another location at the other end of the state? “That’s dangerous,” he said.

Wide geography

Now the state is investigating whether the responsible managing officer program has been used irresponsibly to sanction work on jobs that are so spread out that they are hard for one person to monitor regularly.

In 2007, Paul Herman Hayhurst II was the qualifier for two businesses in Southern California: Oceans Builders Seven Inc. in Studio City, and ABS Construction Group in Los Angeles.

While he was the responsible managing officer for ABS Construction, he was fired for being an absentee license holder, said the company’s president, Amos Ben Shmuel.

“He was here from February 2007 until November 2007,” Shmuel said. A responsible managing officer “is supposed to help, but he was never around.”

Hayhurst is now the qualifier for three businesses in California: Roofing USA in Los Angeles, Oceans Builders Seven Inc., and World Exteriors Inc., in Livermore, according to state records.

Stromberg, the licensing board spokeswoman, said she thought that being a responsible managing officer for a business in Southern California and Northern California would present a problem.

“Perhaps if the two businesses were in Los Angeles, if they weren’t far apart, that would be feasible,” she said. “But if he was in Livermore — where is he physically?”

Hayhurst is not listed on the company’s phone directory. He did not return a request for comment over email.

The accusation of absentee licensing by ABS Construction sparked the licensing board’s interest in Hayhurst.

World Exteriors founder John Arbuckle was convicted in court in 2011 for lying about his roofing experience. The company’s president, George A. Coelho, pleaded guilty last year to embezzling $150,000 from his previous employer,  Pinnacle Roofing Company in Tracy, where Arbuckle had also worked.

Arbuckle was removed from his position with World Exteriors at an administrative hearing in Sacramento in June 2011. After his embezzlement plea in Manteca Superior Court in San Joaquin County, Coelho removed himself as president and CEO in June 2011, Stromberg said.

Now, both men are permitted to be only employees at the company they used to run. Their sons have taken over the business. Coelho is serving a year in home detention.

The state decided to investigate when a reporter asked questions about Coelho’s licensing status in the wake of the  conviction.

Although Coelho is not listed as president of World Exteriors on state documents, he is still listed as such on the company’s local business license, according to staff at the city of Livermore’s business department. Coelho also lists himself as the contact person for World Exteriors, according to the city’s economic development department.

“He’s the only officer we have listed for the Livermore business,” said Siobhan Tyler, a staff member at the city’s business department. The department was updating its list of businesses officers in February, she said. “There’s a possibility it’s in the mail. There’s a possibility it’s not.”

Coelho and Arbuckle did not respond to emails or to messages left for them on company voice mail at their listed phone numbers.

Listing a recent felon as the president of a licensed company is a violation of the licensing board’s rules that bars Coelho from holding a contractor’s license for seven years after a conviction.

“That’s part of our investigation,” Stromberg said. “Taken into context altogether, we’ll see if there’s cause to discipline the licensee or him for running the business without a license.”

Finding felons

Fiehmann said it’s not uncommon for ex-convicts who are having a difficult time getting a job sometimes to find a way into the construction industry on someone else’s license.

Fingerprinting of licensees has “been on the books since 2005,” Stromberg said. “Before that, we didn’t do background checks.” That presents the possibility that someone with a felony conviction could qualify “if they could show journeymen experience, had the $2,500 operating capital and pass the exam.”

The far bigger problem of felons in the industry is unlicensed contractors, Stromberg said.

Consumers who might think they are saving money could be employing a felon.

Strombert said that, on average, in one of every third or fourth operation they do, one of the suspects is a sex offender.

“Every operation nets at least half-dozen suspects; you’re looking at one in 18 to 36 suspects, and it’s an average. You don’t know who’s showing up if they don’t have a license," she said.

Just how many state-registered sex offenders are working in the construction trade is unknown, she added. The board has no authority over sex offenders. Enforcement is up to the local police, the sheriff and the Department of Justice.

“We are charged with enforcing the business and profession’s code,” Stromberg said. “We can’t cite someone because they hired a sex offender.”

The monitoring of the licensing database will take a while to get going because the agency is still developing a protocol.

The hang-up right now is building computer programs that can find repeated licenses and records in other databases that flag felons — “the technical stuff.”

“We don’t know how complicated the program will be,” she said. “So it could be six months from now.”

Comments

Dear Editor:

To clear up misinformation about the Contractors State License Board (CSLB) that your readers may have received from SF Public Press’s March 26, 2012 article, titled “State says lax rules might let builders use questionable licenses,” I offer a few of the most important points that need clarification.

CSLB regulates the state’s construction contractors and provides information and education to consumers so they can make informed choices related to home improvement and other construction projects.

There is no state program that enables or “allows” a licensee to lease out a contractor license. In fact, California law prohibits the fraudulent use of a contractor license and it would be possible cause for CSLB to revoke the license and for a prosecutor to file felony charges against the person who fraudulently used the license. What’s more, the licensee is financially liable for any damages caused by the non-licensed person.

It’s important that your readers have some context about Responsible Managing Officers (RMO). Laws outlining the requirements to serve as a qualifier on a contractor license have been part of California’s Business and Professions Code since 1959. An amendment more than 20 years ago added a limit to the number of partnerships or corporations on which an individual could serve as an RMO to three licenses in any one-year period. (This year, limited liability companies (LLC) were added to the code and CSLB now licenses LLCs, as well.)

The code also states that the RMO “shall be responsible for exercising that direct supervision and control of his or her employer’s or principal’s construction operations as is necessary to secure full compliance with this chapter and the rules and regulations of the board relating to the construction operations.” Your article implies that RMOs are required to physically monitor job sites regularly and cannot do so if the job sites are spread out geographically. No part of the law states that the RMO has to physically be onsite or supervising the daily activities of any active job site. If physically monitoring job sites were a legal requirement, it is possible that hundreds, if not thousands, of California contractors with only one license would be unable to conduct business in different parts of the state at the same time.

With that in mind, it’s important to remember that the RMO is ultimately responsible for everything that happens on a job site. If laws are broken and CSLB takes an action against a license, all licenses associated with that RMO would be negatively affected. In addition, RMOs are required to have at least 20 percent interest in the corporation.

Some private companies may to try circumvent current RMO laws by putting licensees in a position of serving as a qualifier without direct involvement in the supervision and control of a company. If that occurs, there are severe consequences. Penalties for violating state contracting laws (both administrative and punitive) have been in place for years, and CSLB aggressively pursues anyone who tries to skirt these laws.

Your article also states that one can obtain a license without passing the state exam or having the required journey-level experience because of RMOs. With rare exceptions, each RMO has passed the law and business and the separate trade exam for the license classification he or she is seeking, and has provided proof of the required four years’ journey-level work experience. Without successful completion of the exams and experience an individual would not qualify for a license.

We are hopeful that your readers have not misinterpreted your article to mean that state law or CSLB allows individuals to operate without having successfully met all contracting licensure requirements, and that this explanation confirms that not only do state law and regulations exist, but that they actively are upheld and violators legally and financially are held accountable.

Before hiring any contractor to work in or around their home or business, CSLB encourages your readers to check the status of a contractor’s license and find other important information, including personnel on the license by visiting the CSLB website at www.cslb.ca.gov or www.CheckTheLicenseFirst.com. They can also follow us on Twitter and Facebook to learn more about and engage in ongoing discussions regarding the board’s role in protecting the state’s consumers, licensing contractors, and enforcing state contractor license laws.