Court Case May Force Union Pay on Developers

The California Prevailing Wage Law, Labor Code 1720, requires contractors and subcontractors engaged in "public works" to pay their workers union-scale prevailing wages and benefits. The California Department of Industrial Relations, which enforces the law, interprets "public works" to include almost all private construction projects that receive public financial assistance.
        Under the department's expansive view of the law, acceptance of public money to pave a parking lot or grade a construction site can have serious unintended consequences, including sharply higher labor costs, civil fines and even criminal prosecution. To avoid such traps, developers as well as local governments seeking to attract development projects to their communities, need certainty as to whether, and if so when, public financial assistance turns private development into public works subject to the law.
        City of Long Beach v. Department of Industrial Relations offered the California Supreme Court the opportunity to provide that certainty by holding the law inapplicable to almost all private construction projects. Unfortunately, the court passed up its chance and based its decision on a statutory definition that, due to a subsequent amendment, bears almost no relevance to future applications of the law. What should have been an important decision that placed appropriate and clear limits on the law turns out to be a disappointment that leaves the scope of the statute menacingly uncertain.
        
        Historical Precedents
        Long Beach arose out of a 1998 agreement between the Society for the Prevention of Cruelty to Animals of Los Angeles and the city of Long Beach under which SPCA agreed to build a $10 million animal shelter on a site leased from the city. SPCA in turn leased back part of the building to house the city's animal-control department. The city made a $1.5 million grant to SPCA for development of the shelter. City funds went into a separate account to be used only for site investigation, "permit, application, filing and other fees and charges," and "design and related preconstruction costs." The city estimated that about $1 million of the grant funds had been or would be used to pay for architectural and design work, project management, legal fees, surveying and insurance premiums.
        At the time SPCA and the city entered into the agreement, Labor Code 1720(a) defined "public works" as "[c]onstruction, alteration, demolition, or repair work done under contract and paid for in whole or in part out of public funds." At the request of a labor organization, the department investigated the shelter project and determined that it was a public work. The department reasoned that the activities the city paid for were "construction" work, done under a contract between SPCA and its contractor and paid for out of the city's grant money. The city sued to overturn the determination. The case reached the Supreme Court.
        The court held that the shelter was not a public work under the 1998 version of 1720(a) because city funds paid only for "preconstruction" activities, not construction. The court reasoned that construction referred to onsite physical work, not work such as architectural design and site inspection.
        Although the court's narrow reading of "construction" helps developers whose projects are subject to former 1720(a), in 2000 the Legislature amended the statute to provide that "'construction' includes work performed during the design and preconstruction phases of construction including, but not limited to, inspection and land surveying work." This amendment, which remains part of the current statute, makes the Long Beach holding largely irrelevant to future applications of the law.
        The law recognizes that public works may arise from two types of construction contracts: those awarded to private contractors by public entities (awarded contracts) and construction contracts between private parties. The law defines the prevailing wage that must be paid on a public work solely in terms of an awarded contract.
        In Bishop v. City of San Jose, the court applied 1771 and 1724 in holding the law inapplicable to work performed by municipal employees.
        As its language shows, 1720.2 defines as "public works" only certain build-to-suit leases for government anchor tenants. Section 1720.2 was necessary because government entities were saving money by leasing privately constructed buildings, which were not "done under" an awarded contract instead of awarding what would have been public-works contracts for construction of government-owned buildings. Statements that privately constructed buildings were not within the scope of the law recur in the legislative history of 1720.2. With the sole exception of the build-to-suit leases covered by 1720.2, the law does not define any privately owned construction projects as public works.
        The Long Beach court could have applied its reasoning in Bishop and held that the SPCA shelter was not "done under contract" because it was not constructed under a government-awarded contract and did not satisfy the conditions of 1720.2. To do so, it would not have had to break new ground. In failing to do so, the court seems to have lost sight of the practical economic consequences of failing to limit the scope of the law.
        Other aspects of the opinion are troubling as well. The court stated that the law should be "liberally construed" in favor of coverage.
        Labor Code 1776 requires public-works contractors and subcontractors to maintain payroll records, certified under penalty of perjury, showing that they have complied with the wage and hour requirements of the law. Failure to comply with a request for such records within 10 days results in automatic penalties and possible criminal prosecution under 1776(g) and 1777.
        These penalties are imposed without prior judicial review of whether the document request is lawful, which violates due process and the Fourth Amendment. By not taking the small step of holding that private construction is not "done under contract" the court may have set the stage for a far more profound collision between the law and the U.S. Constitution.
        
        Michael F. Wright is an attorney with Case, Knowlson, Jordan & Wright in Los Angeles.