By Harold Safer

Starting Jan. 1, 2027, SB 342 lets contractors on public works, commercial, institutional and certain larger multifamily projects collect for work done while licensed, even if the license lapsed mid-job. Single-family homes and smaller residential jobs keep the all-or-nothing rule. On either kind of job, a lapse still costs money and can weaken lien rights.

On Jan. 1, 2027, California eases the penalty for contractors whose license lapses mid-job, but only on certain kinds of projects. Senate Bill 342, signed Sept. 30, 2026, as Chapter 967, rewrites Business and Professions Code Section 7031. To see what changes, start with how the rule works today.

The current rule: one gap bars the whole claim

Section 7031(a) sets a binary condition. A contractor may sue to collect pay for licensed work only if it was "a duly licensed contractor at all times during the performance of that act or contract." The merits of the claim don't matter.

The California Supreme Court read that language strictly in MW Erectors, Inc. v. Niederhauser Ornamental & Metal Works Co. (2005) 36 Cal.4th 412. A contractor unlicensed at any point during performance cannot recover, even for the work it did while licensed.

Section 7031(b) adds a second effect. A customer who used an unlicensed contractor may sue to recover "all compensation paid." That is disgorgement. You can lose the unpaid balance and be forced to return what you already collected.

One narrow exception exists. Under Section 7031(e), a court may find "substantial compliance" if the contractor was licensed before the work began, acted reasonably and in good faith to stay licensed, and moved promptly to fix the problem once it learned of it. That takes an evidentiary hearing: a lawsuit, not a plan.

What SB 342 changes

SB 342 carves out five kinds of contracts:

Public works of improvement.
Commercial construction projects.
Institutional construction projects.
Common interest developments, as defined in Civil Code Section 4100, if no tenant or resident is a party to the contract.
Multifamily residential projects of four or more units, if no tenant or resident is a party to the contract.

On those jobs, "at all times" gives way to two specific windows. A contractor may sue for pay if it was licensed "at the time the contract was executed and during the portion of the performance of the contract for which compensation is sought." Disgorgement narrows the same way. The customer may recover only "the portion of compensation paid to the unlicensed contractor for work performed during the time in which the contractor was unlicensed."

The penalty now scales with the lapse, not the whole job.

The first window matters. Under MW Erectors, being unlicensed on signing day was not fatal if you were licensed throughout the work. The new carve-out asks expressly whether you were licensed when the contract was executed. Sign only while your license is active.

Two provisions do not change: the substantial-compliance rule in Section 7031(e), and Section 7031(c), which makes a security interest unenforceable unless the contractor was licensed "at all times."

Where the old rule still applies

Single-family homes, remodels and residential projects under four units fall outside the carve-out. So do condo and apartment jobs where a tenant or resident signs the contract. On that work, a one-week lapse can still cost the entire contract price, and the owner can still demand back every dollar paid.

The bill does not say whether it reaches contracts signed before Jan. 1, 2027. If a dispute straddles that date, ask a construction lawyer.

Running the numbers: a hypothetical

Take a made-up drywall subcontractor. In March 2027, it signs a $240,000 subcontract on a three-story office building. Its license is active.

On May 1, its workers' compensation policy lapses over a missed payment. Under Section 7125.2, that suspends the license automatically, effective the day coverage lapses. Coverage is restored May 22. The crew never stops working. At job's end, the general contractor withholds the final $60,000 and argues the sub forfeited everything.

Under the old rule, the sub likely could not sue for any of the $60,000. The general contractor could try to recover the $180,000 already paid. The exposure is the full contract.

Under SB 342, the sub can pursue pay for work performed while licensed. Any clawback is limited to pay for work done between May 1 and May 21. Exposure shrinks from the whole contract to three weeks of work. Those weeks still cost money, and the case turns on which work happened when.

Move the same facts to a $240,000 custom home, and the old rule applies.

How a lapse reaches your lien rights

A mechanics lien is only as strong as your right to enforce it. California courts have long held that Section 7031's bar applies to a contractor seeking to foreclose a mechanics lien; Slatkin v. White (2002) collects the cases. If you can't sue, the lien is just paper.

On covered projects, SB 342 opens a path to pursue pay for licensed-period work. Courts have not yet applied the new text, so treat that path as narrow.

Lapses also compound with notice errors. Civil Code Section 8204 requires a preliminary notice within 20 days after you first furnish work. Send it late, and your lien, stop payment notice and payment bond claims reach back only 20 days before the notice was served. A late prelim plus a license gap can leave very little to claim.

A practical checklist

Check the CSLB. Look up your license at cslb.ca.gov before you sign each contract and again with each pay application. Check your subs, too.
Renew early. Section 7141.5 grants retroactive renewal if an otherwise eligible licensee files a completed application and pays the fees within 90 days of expiration. That is a net, not a schedule.
Watch workers' comp. If required coverage lapses, the license is suspended by operation of law. If you hold an exemption and hire your first employee, suspension can start the day coverage was required.
Keep your bond on file. Section 7071.6 makes a $25,000 contractor's bond a condition of keeping a license.
Date everything. Keep daily logs, delivery tickets and invoices by period. Under SB 342, the timeline is the evidence.
Send the prelim within 20 days of first furnishing work.
Fix lapses fast. Cure any lapse immediately and document each step. Section 7031(e) rewards prompt, good-faith action.

How FieldLatch fits in

FieldLatch can't renew your license. It can keep your payment paperwork on schedule. A Preliminary Notice costs $85, including postage, for two recipients, plus $10 for each additional recipient. A Notice of Intent to Lien is $95. A Notice of Lawsuit is $90. Filing a mechanics lien is $340, including the county recording fee.

Keep the license current. Send the notices on time. Then the work you did can turn into the pay you earned.

This article is general information, not legal advice. Consult a California construction attorney about your situation.

California's License-Lapse Trap Gets a Partial Fix in 2027