PREVAILING WAGES UPDATE

California Supreme Court Preserves Status Quo Uncertainty Regarding Charter City Exemption from Prevailing Wages

Contractors on public work projects have long complained of the headaches resulting from the strain of complying with prevailing wage law in connection with public work projects. Recently, the California Supreme Court had the opportunity to provide some relief. Unfortunately, the Court avoided clarifying an unsettled and confusing aspect of the law.

Under California’s Prevailing Wage Law, contractors performing work on a “public work” must pay their workers special wage rates fixed by the state, known as “prevailing wages.” There are significant penalties for failing to do so.

Contractors can inadvertently run afoul of the Prevailing Wage Law because it is not always readily apparent when a project is a “public work.” Some government projects are covered by the law, others are not. Moreover, some projects that do not appear to be government related may in fact be public work projects due to public funds contributions. Worse yet, a project may be deemed to be public work after the fact by a state agency or court. A contractor may then be responsible for paying back wages and penalties.

In San Diego, a much relied-upon exception is that charter cities, such as the City of San Diego, are exempt from prevailing wage requirements. Under California’s state constitution, a charter city enjoys autonomy over its “municipal affairs.” In a 1981 case, Vial v. City of San Diego, our Fourth District Court of Appeal ruled that “municipal affairs” include a charter city’s public work projects. That is, the Prevailing Wage Law does not apply to charter city construction projects undertaken as part of the municipal affairs of the city.

The City of San Diego is a charter city. The City has implemented a policy that prevailing wages need not be paid for work on city construction projects, unless the project cost exceeds $10 million. Other charter cities in the county include Chula Vista, Del Mar, and San Marcos.

There has been lingering anxiety in the construction community over whether the charter city exemption to Prevailing Wage Law will remain valid law. The nervousness lies in the fact that as a general rule, state laws addressing a “statewide concern” can trump the right of charter cities to control their municipal affairs. For example, a charter city could not enact codes that conflict with the state’s Vehicle Code because traffic laws are a statewide concern. The lingering question is whether prevailing wages count as one of these statewide concerns. If the answer is “yes,” then even charter city projects are subject to prevailing wage law. Neither the California Supreme Court, nor the legislature, has decided this question.

The question recently went before the California Supreme Court in 2004 when the Court accepted for review a case entitled City of Long Beach v. Department of Industrial Relations. The Court finally issued its decision in late December 2004. Unfortunately, the Court avoided answering the question.

The City of Long Beach case involved a private animal shelter project. The City entered into an agreement with the SPCA to contribute funds toward the development and preconstruction phase of an animal shelter and administrative offices. Workers on the project were not paid prevailing wages for two primary reasons. First, the City of Long Beach is a chartered city, and the City’s involvement in the project was seen as a municipal affair of the City. Therefore it was exempt from the Prevailing Wage Law. Second, the City’s contribution to the project was not viewed as a “public work.” At the time of the City’s contract in 1998, “public work” was defined as “construction, alteration, demolition, or repair work done under contract and paid for in whole or in part out of public funds.” Here, the City paid for development and preconstruction costs, not actual construction. Therefore, the Prevailing Wage Law did not apply because it was not a public work. (Note that after 2000, the law changed and even public funds paid for preconstruction matters can render a project a public work.)

Prompted by a local labor organization, the California Department of Industrial Relations conducted an investigation. The DIR concluded that the project was a public work, and the workers were therefore owed prevailing wages.

The Second District Court of Appeal agreed with the DIR. The court specifically ruled that the Prevailing Wage Law trumped the charter city municipal affairs exception, because, in the court’s view, prevailing wages are a statewide concern.

In December 2004, the California Supreme Court reversed the appellate court decision, but in the process it managed to dodge the municipal affairs question. The Court did so by endorsing the City’s second conclusion, i.e. that the Prevailing Wage Law did not apply under pre-2000 law because the City’s funds were not used for actual construction. Because this conclusion disposed of the case, the Court decided not to answer the municipal affairs question.

In short, the Long Beach decision creates a state of limbo that leaves the construction community as anxious as ever. Absent legislative intervention, the Supreme Court eventually will answer the question it dodged in the Long Beach decision. If the Court decides that charter cities are not exempt, and if the decision has retroactive application, contractors could face a flood of claims for back pay and Labor Code penalties.

Workers will undoubtedly sue their employers, the contractors, rather than the city. Although in such situations contractors may attempt to seek recourse from the city, it will be impossible to avoid entanglement in litigation. The statute of limitations will thwart old claims, but there will be plenty left to sue over. The Department of Industrial Relations must file a claim within 180 days of project completion, but creative lawyers may be able to bring claims as old as four years on behalf of individual workers.

The current limbo is detrimental to the construction community. On the whole, a definitive decision either way would benefit the construction industry because it would provide certainty and help reduce the risk of liability for noncompliance with the law. If the California Supreme Court or state legislature were to determine that prevailing wages must be paid on charter city projects, then the resulting higher wages could be built into future construction bids. Ultimately, the cities, not contractors, would foot the bill. On the downside, this added labor cost might force our budget-constrained cities to reduce the size or number of projects. Therefore, the ideal outcome for the construction industry would be a Supreme Court decision or amended legislation declaring that charter cities are exempt from prevailing wage law.

Absent intervention by the state legislature, there is no immediate relief in sight. The wheels of justice turn slowly, and it could take years before the issue comes back to the California Supreme Court.

In the meantime, there are at least two protective measures contractors can take. First, every contractor involved in a charter city project should obtain from the city confirmation in writing (in the call for bids or elsewhere) that the project is not a public work subject to the Prevailing Wage Law. The Labor Code provides that if the city does so and is later found to be wrong, the contractor could sue the city for reimbursement of any wages, penalties, costs, and attorney fees incurred during a labor claim. Second, prime contractors should attempt to negotiate with the city for the inclusion of an indemnity clause in the contract providing that the city will hold the contractor harmless in the event that the project is later determined to be subject to the Prevailing Wage Law.

Christopher W. Olmsted, Esq., is an attorney practicing with Barker Law Group APLC. He can be reached at cwo@barkerlawgroup.com or (619) 682-4820. The information in this column is intended to be informational only and does not constitute legal advice.