New laws change landscape for public projects

Two pieces of legislation signed into law in 2014 will have a significant effect on contractors and developers in public works projects. Senate Bill 854 establishes a new system for the Department of Industrial Relations to monitor the payment of prevailing wages on all public works projects. Assembly Bill 1939 puts the onus on developers who receive public funding to inform their contractors of the prevailing wage requirements.

It is well established in California that public works projects generally require all contractors and subcontractors to pay their workers' the prevailing rate of wages, established by the DIR director. In determining the prevailing rate, the director must consider the collectively bargained rates in the area. The prevailing rate therefore does not necessarily reflect the wages paid to most workers - which may be lower - but rather the rates established for union workers through the collective bargaining process.

The Prevailing Wage Law, at least in theory, puts union contractors on equal footing with nonunion contractors to obtain public works contracts, which generally must be awarded to the lowest qualified bidder. Of course, by raising the labor costs, the costs of public work also rise. This system may provide contractors willing to risk paying lower wages with an opportunity to undercut other bidders.

With SB 854, the DIR is attempting to create a system that will substantially increase the risk of not paying prevailing wages. The new system works in three steps: (1) all contractors and subcontractors must register with the DIR prior to bidding on or working on any public projects; (2) public agencies must notify the DIR of all public projects and which contractors were awarded the project and (3) contractors and all subcontractors must submit certified payrolls directly to the DIR on a weekly basis.

Registration must be done online and will require payment of an annual fee, currently set at $300. The fee is a one-time payment each year that will qualify each entity, regardless of the number of licenses held by the entity. The most notable aspect about this requirement is that contractors and subcontractors must be registered before submitting a bid or being included in a bid for public work. Except for some limited exceptions, contractors will not be able to wait and see if they are awarded a contract before registering.

The registration requirement is not limited to projects put out to bid. The definition of a "public project" under the Prevailing Wage Law is broader than most public bidding statutes and applies to projects of $1,000 or more, which is a lower threshold than most public bidding statutes. Additionally, the registration requirement applies to all subcontractors as well as contractors, regardless of tier. Even contractors who perform more menial construction or repair jobs will likely be required to register.

While the initial registration fee is relatively low, failing to register before bidding or performing work can have serious consequences. The initial consequence - provided it is the only violation within the previous 12 months - is a "penalty" registration fee of $2,000 in addition to the standard $300 fee. Multiple violations could result in disqualification from registration, preventing the contractor from lawfully working on any public project for 12 months.

AB 1939, on the other hand, provides a more traditional approach to enforcing a legislative policy: a private right of action. Specifically, the new law creates a private right of action for a contractor to recover from the "hiring party" the added labor costs, penalties and legal fees resulting from the failure to pay prevailing wages. No cause of action arises if the hiring party or the owner or developer advised the contractor that the project was subject to the Prevailing Wage Law.

A "hiring party" is defined as the party with whom the contractor has a direct contract on a private works project where any portion of the project is subject to prevailing wage. In determining whether a project is subject to prevailing wage, the key is to follow the money. If the project is paid for in whole or in part out of public funds, it is subject to prevailing wage.

AB 1939 is the legislative response to the case of Hensel Phelps Construction Co. v. San Diego Unified Port District, 197 Cal. App. 4th 1020 (2011), wherein a contractor was ultimately required to pay more than $8 million in back wages and penalties. The port, a public agency, had leased land to a private entity to develop as a hotel. The private entity then hired a developer who, in turn, hired a contractor to perform the construction. Due to a rent credit in the port's original lease, the Court of Appeal found that the project was paid for in part out of public funds.

Since 2003, Labor Code Section 1781 has allowed a contractor to bring a private right of action, but only where a public agency directly contracts with the contractor. AB 1939 essentially closes a loophole. Similar to SB 854, AB 1939 addresses a situation where a party could gain an unfair advantage by misusing the Prevailing Wage Law. Because a developer or other private party could not be held liable, there was a disincentive to inform contractors of the need to pay prevailing wages - especially where the contractor was unaware of the source of funding for the project.

These new enforcement mechanisms come in the wake of recent expansions - both subtle and not-so-subtle - of the Prevailing Wage Law. For example, AB 26, also from the 2014 session, includes post-construction activities within the definition of public work, while AB 1598, adopted in 2012, includes the assembly and disassembly of modular office systems. SB 136, from the 2011 session, expanded the law to include renewable energy and energy efficiency projects that supply power to public agencies.

In the most far-reaching expansion, SB 7, from the 2013 session, withholds state grant funds from any charter cities that do not pay prevailing wages on municipal projects. The law was adopted in response to State Building & Construction Trades Council v. City of Vista, 54 Cal. 4th 547 (2012), which held charter cities exempt under the state Constitution from paying prevailing wages on projects paid for out of municipal funds. A coalition of charter cities is challenging the law; but until the litigation is resolved, most charter cities are requiring payment of prevailing wages.

The expansion of the law coupled with these new enforcement mechanisms shows a continued legislative policy to close any loops that may have enabled construction to proceed without the payment of prevailing wages. The upshot is that contractors should expect SB 854 to lead to more enforcement actions. Contractors and subcontractors who might do public work or publicly funded private work should immediately register with the DIR. All contractors and subcontractors must be registered before submitting any public bids due on or after March 1, or entering any public contracts awarded on or after April 1.

Michael Maurer is an associate with Best Best & Krieger LLP.