California Labor Code sections 1720 et seq. (the Prevailing Wage Law) ("PWL") require employers (including developers and contractors) engaged in public works projects to pay the prevailing wage to their employees if the project is "paid for in whole or in part out of public funds." The Second Appellate District Court of Appeal recently ruled that private developers must pay prevailing wages for the construction of all public improvements in connection with a development project if public funds are used to finance any part of the public improvements, even if the remaining public improvements are paid for with private funds. The California Supreme Court declined to hear the developer's appeal. Therefore, developers and contractors could face increased project costs as a result of this case.
Background & Summary
In Azusa Land Partners v. Department of
Industrial Relations, 191 Cal.App.4th 1 (2010), the
developer proposed a master planned 500+ acre development that
included up to 1,200 homes, 50,000 square feet of commercial, and
public infrastructure and improvements. To obtain the City of
Azusa's approval, the developer agreed to public infrastructure
and improvement work, including construction of a public school and
park, freight under-crossings, sanitation district facilities, and
street, bridge, storm drain, sewer, water, utilities, park and
landscaping improvements. The public improvements were to be funded
by Mello-Roos bonds which were approved for indebtedness of up to
$120 million to be incurred by the Community Facilities District
("CFD"). The developer was required to construct the
public improvements even if the actual costs exceeded the amount of
bond funds sold by the CFD for the improvements. The total cost of
the public improvements was approximately $146 million but the CFD
only sold $71 million in bonds, leaving the developer on the hook
for the remaining $75 million.
A third party requested an inquiry into whether the entire project
was a "public work" subject to the PWL. "Public
works" is broadly defined by the PWL and includes work
"paid for in whole or in part out of public funds." The
Department of Industrial Relations (the "Department"),
which was charged with the review, determined that even though the
project was only partly funded with public funds, the entire
project was nevertheless a public work and subject to the PWL.
However, the Department also found prevailing wage did not have to
be paid on the entire project because the project met an exemption
in the PWL (Labor Code section 1720(c)(2)) that required prevailing
wage only for those public infrastructure improvements in the
project required as a condition of regulatory approval.
Accordingly, the developer had to pay prevailing wage for all those
public improvements even though some were in fact privately funded
due to the shortfall in CFD funding. The developer appealed, but
the Department upheld its initial determination, meaning prevailing
wage had to be paid for all of the public improvements.
The developer filed a petition for writ of mandate in superior
court and the trial court denied the petition. On appeal, the
developer argued it should only be required to pay prevailing wage
for the public improvements actually financed with the Mello-Roos
bond proceeds and not for privately funded infrastructure
improvements for which no bond proceeds were received –
the developer was seeking a more narrow interpretation under
section 1720(c)(2) of the PWL.
The Court of Appeal disagreed with the developer. First, the court
held that under the PWL, the entire project was a "public
work" because the project was funded in part through public
funds. Second, the court held that under the PWL, the Mello-Roos
bond proceeds constituted public funds. Finally, the court rejected
the developer's argument that even if the project was subject
to the PWL, it should only be required to pay prevailing wage for
the public improvements that were built with Mello-Roos bonds, and
not any public improvements constructed at private expense.
Instead, the Court of Appeal agreed with the Department and the
trial court, interpreting the PWL to apply to all public
improvements, regardless of whether or not they were paid for with
Mello-Roos bonds.
On March 2, 2011, the California Supreme Court declined to hear the
developer's appeal. As a result, the developer will be required
to pay prevailing wage on the entire $146 million cost for the
project's public improvements, including the $75 million in
public improvements which it privately financed.
Comment
Going forward, developers and contractors may be required to pay prevailing wage on the entire build-out of public improvements, even if the development is mostly privately financed and privately owned. This means each party should carefully determine in their development and construction contracts whether prevailing wage rules apply and which party will pay the increased costs.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.