The construction industry is one that can be unpredictable. One of the main reasons for this is because every market is different. While one market may be doing well, another may be suffering. One component of the industry that can cause major issues for construction companies is something called disgorgement. If you want to avoid this in California, then you need to take the appropriate actions.
What is Disgorgement?
Disgorgement is a law or regulation that can require a business to give something up as demanded or through legal compulsion. In the construction industry, it means that the construction company may have to give back their profits from a project they have completed or are in process of completing. For example, if a contractor enters into a contract with a client to build a property, performs the work, receives payment, and then has to return the payment due to legal reasons, that is disgorgement in action.
Actions to Take to Avoid Disgorgement
Just as lenders, real estate agents, and investors stay up to date on different laws and regulations affecting their sides of the industry, contractors benefit greatly from understanding laws and regulations that could potentially affect their work. Obviously, disgorgement is not something that any contractor wants to happen to them. In order to avoid this, there are some key things you need to do and stay on top of so you can avoid it in your business.
- Have a valid license. You and all of your employees should have a valid license. This means that you need to have your license during the time that you are performing the contractual work. You do not want to start a project without an active license. Not only would you open yourself to the possibility of disgorgement but you could also face some civil and criminal penalties such as jail time, fines, and more.
- Have workers’ compensation insurance. You want to make sure that you have the proper insurance at all times during a project. Beyond that, you want to make sure that the insurance does not lapse at any time. Even though it is an extra expense, it is not one that you want to let lapse so you can save a few dollars. You could end up losing all of your money from the project as a result. You also do not want to list employees as independent contractors to save money on this insurance if they are not. Doing so could invalidate your contractor license immediately and you may not even be notified of this change. You could then be operating as usual and not even know you have lost your license.
- Only collect payment for work completed. You do not want to take money for any work that has not been done or for materials that have not been delivered yet. It is against the law in California to do this and you must limit a down payment to $1,000 or 10% of the purchase price. Since this is law in California, it is important to follow it at all times, even if you are strapped for cash. If the working relationship between you and your client were to go bad, then they could use that against you in court and it could result in disgorgement.
As you can see, disgorgement is something that can be avoided. As long as you comply with the laws and regulations, you should not be in danger of disgorgement for your construction business.