I. What is Prevailing Wage? A. Defining Prevailing Wage The purpose of the Labor Code prevailing wage requirements is to protect all workers on

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1 I. What is Prevailing Wage? A. Defining Prevailing Wage The purpose of the Labor Code prevailing wage requirements is to protect all workers on public works projects. 1. Section 1770 et seq. of the Labor Code sets forth the requirements for payment of prevailing wages on public works projects. 2. All workers on public works projects exceeding one thousand dollars ($1,000) must be paid not less than the general prevailing rate of per diem wages for work of a similar character in the locality in which the public work is performed. (Labor Code 1771) 3. Public works includes, construction, alteration, demolition, or repair work done under contract and paid for in whole or in part out of public funds. (Labor Code 1720) 4 An exemption to the requirement of payment of prevailing wages on public works projects over $1,000 are labor compliance programs. 5. The Director of the DIR determines the general prevailing rate of per diem wages for the various categories of work. B. Who Must Pay Prevailing Wages 1. The contractor is responsible for paying prevailing wages. (Labor Code 1774) 2. The school district is required to obtain the general prevailing rate of per diem wages from the Director of the DIR (Labor Code 1773) which can be obtained: (a). By mail from the DIR/Division of Labor Statistics and Research; or (b). On the internet website and clicking on Statistics and Research C. Contractors Must Pay Prevailing Wages to Workers 1. Labor Code Section 1772 provides that workers employed by contractors or subcontractors in the execution of any contract for public work are deemed to be employed upon public work. 2. There is nothing in the prevailing wage laws that requires a school district to determine the applicable craft, classification or type of worker. II. How is Prevailing Wage Enforced? A. Procedure for Enforcement As of July 1, 2001, significant statutory changes were made in the way prevailing wage claims are handled, including the appeal time period and remedies available to the contractor for challenging an assessment by the Labor Commissioner. 1. Previous Process. Before July 1, 2001, the process for withholding and appeals was as follows: (a) Upon receipt of a written request to withhold funds from the California Director of Industrial Relations ( DIR ) due to a failure to pay the prevailing wages to an employee, the awarding body was required to withhold funds from the prime contractor in an amount equal to the wages due to the employee and any fines assessed for failure to comply with the statute. (Labor Code 1727, 1775.) (b) When penalties or wages could not be satisfied from payments owed to the contractor by the awarding body, the DLSE, with the assistance of the awarding body, was authorized to bring a court action to recover the amounts due. (Labor Code 1775.) (c) If the awarding body withheld wages and penalties for failure to pay prevailing wage, the contractor could file an action against the awarding body to recover penalties and forfeitures withheld from the contractor. (Labor Code )

2 (d) The contractor s exclusive remedy was an action against the awarding body for breach of contract. (Labor Code ; Purdy & Fitzpatrick v. State of California (1969) 71 Cal.2d 566.) 2. Current Process. Since July 1, 2001, the process is as follows: (a) If the Labor Commissioner, after an investigation, determines that there has been a violation of the prevailing wage statutes, the Commissioner issues a civil wage and penalty assessment to the contractor or subcontractor and serves a copy of the assessment on the awarding body. (Labor Code 1727) (b) Upon receipt of the assessment, the awarding body is required to withhold and retain sufficient funds to satisfy the assessment from any amounts due to the contractor. (Labor Code 1727) (c) If the awarding body did not retain sufficient amounts to satisfy the assessment, the contractor is required to withhold funds due to the subcontractor to satisfy the assessment and transfer the funds to the awarding body. (Labor Code 1727) (d) After sixty days following the service of a civil wage and penalty assessment, the contractor, subcontractor and surety are liable for liquidated damages in an amount equal to the wages that remain unpaid. (Labor Code 1742(a)) 3. The Hearing Procedure: A contractor is entitled to a hearing and there are specific statutory guidelines regarding this process. (Labor Code 1742) (a) A contractor may obtain a review of the assessment by transmitting a request for a hearing to the Labor Commissioner, which shall be held before an impartial hearing officer appointed by the DIR. (b) If a request is not filed within the sixty-day period, the assessment becomes final. (c) After the hearing, the Director issues a decision. If the contractor is dissatisfied with the decision, the contractor can obtain judicial review of the decision by filing a petition for writ of mandate with the Superior Court. If the contractor fails to file a petition for writ of mandate within forty-five days, the decision becomes final. (d) Upon receipt of a certified copy of a final order that is no longer subject to judicial review, an awarding body that has withheld funds in response to a civil wage and penalty assessment shall remit the funds to the Labor Commissioner. 4. Obligations of Awarding Body s Not Operating a Labor Compliance Program (a) An awarding body who has not been granted the right to operate its own labor compliance programs is still required to take cognizance of violations of the California prevailing wage laws, and report any such violations to the Labor Commissioner. (Labor Code 1726.) There is no definition of what cognizance means in this context. (b) An awarding body, as a result of its own investigation, may determine that there has been a violation of the prevailing wage law and withhold contract payments. (Labor Code 1726). This is not often done and will likely result in inserting the District into a labor code compliance dispute with its contractor. (c) If an awarding body enforces the prevailing wage law pursuant to Sections 1726, it must provide notice of the withholding of contract payments to the contractor. (Labor Code ). (d) The awarding body shall serve notice by first-class and certified mail to the contractor, subcontractor and any surety issuing a bond that secures the payment of wages. (Labor Code )

3 (e) The notice advises the contractor and subcontractor of the procedure for obtaining review of the withholding of contract payments. (f) The withholding of contract payments in accordance with Section 1726 is reviewable in the same manner as if the notice of the withholding were a civil penalty order of the Division of Labor Standards Enforcement (DLSE). If review is requested, the Labor Commissioner may intervene to represent the awarding body. 5. Joint Labor Management Committees (a) In addition to the civil wage and penalty assessment by the Labor Commissioner, a joint labor management committee established pursuant to the federal Labor Management Cooperation Act of 1978 (29 USC 175a) may file an action against any employer who fails to pay prevailing wages as required by state law. (Labor Code ) (b) Pursuant to such action, the court may award restitution to an employee for unpaid wages and may award the joint labor management committee attorneys fees incurred in maintaining the action. (Labor Code 1776(e).) B. Types of Construction Delivery and How They Affect Prevailing Wage 1. Traditional 2. Developer-Built Schools 3. Charter Schools III. What is a Labor Compliance Program (LCP)? An arrangement wherein a public agency takes over the role of labor code/prevailing wage auditor of all contractors on virtually all district projects. Although this requires the district to, in essence, take on the role of the DLSE and Department of Industrial Relation, some monetary benefits are available to school districts that decide to operate its own LCP. If A.B passes, every school district that uses state bond money will be required to have an LCP. This is discussed below. A. Statutory Guidelines 1. District Request. Currently, an awarding body may seek approval from the Department of Industrial Relations (DIR) to operate an LCP. 2. Initial Approval. The DIR will review the awarding body s request pursuant to the guidelines in Cal. Code Regs., tit. 8, Initial Operation. If approved, the district begins operating its LCP. The district must provide notice it is operating an LCP in its bids and purchase orders, and must post it at all job sites. 4. Final Approval. After 11 months, the district can then request final approval from the DIR. (Cal. Code Regs., tit. 8, ) 5. Components of LCP (Labor Code (b); Cal. Code Regs., tit. 8, ) (a) Prejob Conference with the contractor and subcontractor to discuss federal and state labor law requirements applicable to the contract. (b) Certified Payroll Records: Maintenance and submission by contractor and subcontractors, review by district. (c) Withhold contract payments equal to the amount of underpayment and applicable penalties when, after investigation, it establishes that underpayment has occurred. (d) Withhold contract payments when payroll records are delinquent or inadequate. (e) Annual Reports. (Cal. Code Regs., tit. 8, )

4 (f) Audits by district of weekly payroll records. (Cal. Code Regs., tit. 8, ) 6. Applicability. Raises the minimum project amount before prevailing wages need to be paid from $1,000 (Labor Code 1771) to $25,000 on construction projects and $15,000 for alteration, demolition, repair, or maintenance. (Labor Code and Cal. Code Regs., tit. 8, ) 7. Keeping Penalties. The district may keep these amounts after the Labor Commissioner has determined these amounts to be Forfeitures, the amounts of unpaid penalty assessed by the district for the contractor s violations of the prevailing wage laws. (Cal. Code Regs., tit. 8, 16438(a).) 8. Distributing Wages and Benefits. Forfeitures that are wages and benefits which belong to an employee and are withheld or collected from a contractor or sub-contractor... and which have not been paid to the employee or irrevocably committed on the employee s behalf to a benefit fund, shall be deposited with the Labor Commissioner. (Cal. Code Regs., tit. 8, 16438(d).) B. Design-Build Contracts 1. In 2001, the Design-Build Act For School Districts (K-12) was enacted, adding Education Code sections through and repealing Chapter 2.5 (commencing with ) of Part 10.5 of the Education Code (Act). 2. The Act provides an alternate project delivery method for school district projects by authorizing school districts to enter into design-build contracts for school projects where the total design and construction costs exceed $10 million. 3. Section (d) states that a school district entering into a design-build contract must: (a) Establish and enforce an LCP containing the requirements outlined in section of the Labor Code, or (b) Contract with a third party to operate an LCP containing the requirements outlined in section This requirement does not apply to projects where the school district or design-build entity has entered into a collective bargaining agreement that binds all the contractors performing work on the project. C. What Will AB 1506 Require? 1. If enacted, will add section to the Labor Code which will require any school district using new state bond money (the Kindergarten-University Public Education Facilities Bond Act of 2002 / 2004 ) to initiate and enforce, or contract with a third party to initiate and enforce, a labor compliance program. 2. Unclear if this would have to be an LCP approved by the Department of Industrial Relations (DIR). 3. If the DIR does not approve a district s new LCP, does the state appropriate bond funds to that district? D. Considerations for Selecting an LCP Provider 1. Experience running a successful California LCP. (Likely very difficult to find anyone with this experience.) 2. Experience communicating with unions. 3. Experience evaluating certified payroll records. 4. Experience overseeing work crews.

5 5. Cost. 6. Potential bias. 7. Indemnity for wrongful withholding. IV. How Does a Project Labor Agreement Differ from an LCP? A. Definitions A project labor agreement (PLA) is not part of a labor compliance program they are separate programs that deal with different issues. 1. Union contractors contend that PLAs are agreements entered into by awarding bodys and union contractors, usually organized through local trade councils, for the limited purpose of preserving labor peace and providing competent workers. 2. Non-union contractors contend that PLAs are agreements entered into by awarding bodys and union contractors, usually organized through local trade councils, for the limited purpose of requiring that workers for designated projects are union workers. 3. PLAs become part of the bid specifications for purposes of determining the lowest responsible bidder. B. Legality 1. Associated Builders. PLAs have been upheld for certain public contracts in California. (Associated Builders and Contractors, Inc. v. San Francisco Airports Commission (1999) 21 Cal. 4 th 352.) 2. In Associated Builders, however, the City and County of San Francisco, the public entity that adopted the PLA, is a charter city, which has autonomous rule over municipal affairs pursuant to Article XI, section 5 of the California Constitution. (Associated Builders, 21 Cal. 4th at 363). 3. There is no specific legal authority that clearly allows or forbids California school districts to enter into a PLA. C. Controversial. PLAs are very controversial and, like many labor and employment issues, generate very strong feelings from both sides of the issue. 1. Proponents of PLAs argue, among other issues, that PLAs: (a) Promote labor peace, (b) Reduce costs, (c) Increase the use of local labor, (d) Provide an adequate supply of skilled local workers, (e) Create a higher quality of construction, (f) Provide safer job sites, (g) Provide greater opportunities for women and minorities, and (h) Create efficient construction management. 2. Opponents of PLAs argue, among other issues, that PLAs (a) Delay project completion, (b) Increase construction, wage, and benefits costs, (c) Preclude the use of non-union workers,

6 (d) Reduce the number of bidders, and (e) Reduce the quality of construction. D. PLA Features. Some problematic features that have been found in proposed PLAs include: 1. The projects controlled by a PLA can be as broad as any contracts done with school bond finance money. This could include a district s current local bond money or potential state bond money. 2. A PLA can apply to any improvement of current and to-be-acquired real property and may, therefore, apply indefinitely. 3. Often contain dispute resolution procedures that could be triggered in disputes regarding scope of work, pricing, change orders, and the like. (a) These types of disputes are controlled by section 20104, et seq. of the Public Contract Code, and PLAs can, therefore, run afoul of section (b) Most PLAs designate specific individual(s) as arbitrators that must be used in any dispute. 4. After a cumulative sum of seven days of work on a project all contractor s and subcontractors employees are required to become and maintain membership in the appropriate union. 5. The trades council will generally agree to use its utmost efforts to recruit a sufficient number of skilled craftpersons to fulfill a district s requirements, but there is no guarantee. V. What is a Local Labor Preference? Local labor preferences and/or goals either require, give a preference to, or require a contractor to demonstrate good faith efforts to hire local workers on district projects. A. Local Labor Preference Requirements Violates the U.S. Constitution. 1. The U.S. Supreme Court has held that the privileges and immunities clause of Article IV of the United States Constitution generally prohibits a resident or local craft labor preference on public construction contracts. The sole exception is if there is substantial justification for the resident preference such that out-of-state residents are the cause of the problem addressed by the resident preference. (United Building & Construction Trades Council of Camden County and Vicinity v. Mayor of Camden (1984) 465 U.S. 208) (a) Sufficient substantial justification might include high unemployment, a decline in population, businesses, and/or property values. The resident preference would then have to be shown to remedy those problems. In other words, a school district would have to determine a valid reason for the discrimination and show not only the existence of the problem, but that the out-of-state residents are the cause of the problem, and that the discrimination by the district bears a close relationship to appropriately addressing the problem. (b) Even if a school district believes that there is adequate justification for the preference, contractors and unions typically oppose such resident preference requirements. CASH SEMINAR-MBD BOWIE GIBBS.vers.2.DOC