In certain trades which require a license involving demonstration of a level of skill and knowledge, the issue arises as to whether owners of the business must have that license or whether they can retain the services of a licensed person to allow the entity to engage in business.
In the construction trades, this is a relatively common phenomenon with the investors or out of State entities seeking to engage in the construction trade by hiring an officer or employee to hold the license.
The State has an interest in making sure that such a person is engaged in the oversight and control of the entity sufficient to provide the protections to the public that the entire licensing regime is created to maintain. Thus, States routinely provide a series of requirements imposed upon the use of such employees who are normally termed the RESPONSIBLE MANAGING OFFICER or “RMOs”.
This article briefly discusses the California requirements, rules and regulations concerning the Responsible Managing Officer position for companies. California has, by far, one of the most complex and rigorous rules and regulations imposed upon companies and, indeed, not all states require a Responsible Managing Officer, but for those that do, each has different rules with regard to the procedure for replacing the individual.
This is meant as a general overview of the law for RMOs in California and it is vital to obtain legal advice before commencing such an operation.
1. DESCRIPTION OF POSITION AND POWERS OF THE RESPONSIBLE MANAGING OFFICER IN CALIFORNIA
A Responsible Managing Officer (“RMO”) under California law is an individual who is a bona fide employee of the applicant for a contractor’s license, and is actively engaged in the classification of work for which that responsible managing employee is the qualifying person on behalf of the applicant. California Business & Professions Code (“Code”) §7068(c).
For purposes of Code §7068, a “bona fide employee” (or Responsible Managing Employee, or “RME”) of the applicant means an employee who is permanently employed by the applicant and is actively engaged in the operation of the applicant’s contracting business for at least 32 hours or 80 percent of the total hours per week such business is in operation, whichever is less.
The RMO must be engaged in “direct supervision and control” of the work. For purposes of §7068.1 of the Code, “direct supervision and control” includes any one or any combination of the following activities: supervising construction, managing construction activities by making technical and administrative decisions, checking jobs for proper workmanship, or direct supervision on construction job sites. Contractor State License Board, Rules & Regulations, Chapter 13, Article 2, §§823(a) and (b).
Under §7068.1, the RMO must not act in the capacity as an RMO for an additional individual or firm unless one of the following conditions exists:
- there is a common ownership of at least 20 percent of the equity of each individual or firm for which the person acts in a qualifying capacity.
- The additional firm is a subsidiary of or a joint venture with the first. Subsidiary as used in this subdivision, means any firm at least 20 percent of the equity of which is owned by the other firm.
- With a respect to a firm under corporation as described in §7068(b)(3), the majority of the partners or officers are the same.
Notwithstanding provisions a through c above, a qualifying individual may act as the qualifier for no more than three firms in any one year period (refers to firms located in California). “Firm” as used in this section includes a corporation under §7068.
The duties of the RMO and/or RME (Responsible Managing Employee) must meet certain criteria which are codified in §§7068 and 7068.1 of the Code.
Those duties include:
- Being 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 the provisions of this chapter and the rules and regulations of the board relating to the construction operations. Code §7068.1.
- Ensuring that the building, safety, health and lien laws of the state are complied with, as well as the administrative principles of the contracting business as set forth by the contractor’s board for the safety and protection of the public. Code §7068.
Therefore, in California, an RMO’s and/or RME’s duties include, at a minimum:
a. supervising construction,
b. checking jobs for proper workmanship, and
c. managing construction activities by making technical and administrative decisions.
The duties and the responsibilities of the qualifying individual also depends on the applicant or licensees for a contractors license because the RMO’s duties and responsibilities for supervision and control of the applicant’s construction operations are to be set forth in detail by the applicant and submitted to the contractor’s board.
Furthermore §7068.1(d) of the Code requires that the every applicant or licensee qualifying by the appearance of a qualifying individual to submit detailed information on the qualifying individual’s duties and responsibilities for supervision and control of the applicant’s construction operations.
Ownership of the company engaged in the business alters some of the requirements imposed:
An RMO can merely be an officer of the entity with no ownership but may have to post an additional bond for his/her license. If the RMO has at least ten percent interest in the entity, a license bond is not needed. Further, if the RMO has less than twenty percent ownership, that RMO is restricted to being the RMO to this one corporation. This law may be changing and should be checked for its current status. Note that in California, if one has fifty one percent of the equity of a corporation, one effectively controls the entity.
2. EFFECT OF DISASSOCIATION OF RMO & AMOUNT OF TIME BEFORE A NEW RMO MAY BE APPOINTED
If the RMO or RME disassociates from the licensed entity, the licensee or qualifier shall notify the registrar in writing and the licensee shall replace the qualifier within 90 days from the date of disassociation. Code §7068.2. To replace a RMO or RME the licensee shall file an application as prescribed by the registrar, accompanied by the fee, designating an individual to qualify as required by the law. If the licensee fails to replace the qualifier within 90 days of the disassociation, the license shall be automatically suspended or the classification removed at the end of the 90 days.
Upon failure of the licensee or the qualifier to notify the registrar of the disassociation within 90 days from the date of disassociation, the license shall be automatically suspended or the classification removed and the qualifier removed from the license effective the date the written
notification is received at the board.
a. The Date of Disassociation. The registrar may review and accept the petition of a licensee who disputes the date of disassociation or who has failed to notify and replace the qualifier within the prescribed time, upon a showing of good cause by the contractor. This petition shall be received within 90 days from the date of the board's notice that the license will be suspended if the qualifier is not replaced. The registrar may grant only one 90-day extension to replace the qualifier.
The person qualifying on behalf of an individual or firm under subdivision (a), (b), or (c) of §7068 shall be responsible for the licensee's construction operations until the Board receives the written notification of disassociation. Thus the “disassociated” license holder…remains on the line.
Failure of the licensee or the qualifier to notify the registrar of the qualifier's disassociation within 90 days of the disassociation is grounds for disciplinary action. California Business & Professions Code, Section 7068.2.
3. PROCEDURE TO REPLACE RMO
To replace a RMO, the licensee shall file an application as prescribed by the registrar, accompanied by the fee. Code §7068.2. Notification may be by letter or by using the Notice of Disassociation. Replacement of the qualifier may be made by submitting the Application for Replacing the Qualifying Individual, and appropriate fees. As discussed above, if the RMO is not replaced within 90 days the license is automatically suspended.
A corporation may qualify by examination for a contractor's license upon the appearance of a qualifying individual appearing either as a responsible managing officer or a responsible managing employee. No examination shall be required of a qualifying individual if, within the five-year period immediately preceding the application for licensure, the qualifying individual has either personally passed the written examination for the same classification being applied for, or has served as the qualifying individual for a licensee whose license was in good standing at any time during the five-year period immediately preceding the application for licensure and in the same classification being applied for. Cal. Bus & Prof Code 7065.
4. TIME REQUIRED TO GET OBTAIN A NEW LICENSE
WHERE EXAMINATION REQUIRED UNDER CODE §3065
The Board shall inform an applicant in writing within 60 days of receipt whether the application is complete and has and has been referred for examination or is deficient and what specific information is required. An application is “complete” when an acceptable application and fee have been filed by the applicant. Article 12, §827(a)(1)
According to Article 12, §827(a)(6)(A) the minimum, median and maximum times for an application requiring examination for licensure as a contract, for an additional classification, or for replacement of the qualifying person from the time of receipt of the application until the Board decided to issue the license, grant the additional classification or replacement of the qualifying person, based on the License Board’s past two years performance were:
For Original License
Minimum 11 days
Medium 253 days
Maximum 726 days
To Replace RMO
Minimum 20 days
Medium 78 days
Maximum 428 days
WHERE NO EXAMINATION REQUIRED UNDER §3065
As for the expected times for an applicant who does not require an examination under §7065, the Board shall inform the applicant within 50 days after receipt whether the application is complete and has and has been referred for examination or is deficient and what specific information is required.
The minimum, median and maximum times for an application requiring examination for licensure as a contract, for an additional classification, or for replacement of the qualifying person from the time of receipt of the application until the Board decided to issue the license, grant the additional classification or replacement of the qualifying person, based on the Board’s past two years performance were:
For Original License
Minimum 1 day
Medium 48 days
Maximum 349 days
To Replace RMO
Minimum 1 day
Medium 29 days
Maximum 253 days
These periods include not only the Board’s processing time, but also the time for which the applicant is responsible: e.g., the return of a rejected application, failure of and/or failure to appear at examinations, filing of the required bond(s) and fee. §827(a)(6)(C) and §827(b)(5)(C).
Website for more information:
Contractor’s State License Board
http://www.cslb.ca.gov/
CONCLUSION:
A wise old contractor who regularly sold his services as a RMO once commented that if it was his license on the line, as well as his reputation, that he wanted and needed effective control and intended to keep it. This often led to heated disputes with absentee owners from another State, but given the legal requirements, he usually won those disputes.
Thus it must be noted that power within any entity using such a method is inherently divided unless the RMO is an owner or committed to a long term relationship with the entity.
Alternatively, if the entity is seeking a onetime entry into a market in another State or simply testing the waters and will get its own license after further study, this approach makes sense.
But a business model of only using a non owner RMO is inherently unstable and this should be seen as a method for transitioning to a position in which the entity, itself, holds the critical license.