United States: California´s Roll-Back of Prevailing Wage Requirements

Decades ago, the California Legislature passed prevailing wage laws, requiring projects that are public works or that are publicly funded to pay workers at a "generally prevailing rate of wage for work of a similar character in the locality." Successive rulings by the Department of Industrial Relations ("DIR") over the years expanded the definition of public works projects and publicly funded projects, causing developers of projects with only a tangential relation to public funds to consider themselves obligated to comply with the prevailing wage requirements. These requirements add significantly to the costs and administrative burden involved with a range of real estate development projects, particularly affordable housing projects involving tax credits and other governmental incentives.

However, a recent DIR determination may indicate that the trend toward expanding the scope of the prevailing wage laws has come to a close. The determination -- Public Works Case No. 2004-0016, made precedential on March 1, 2005 -- has raised hopes among developers that the prevailing wage laws may no longer be applied to projects with only indirect public funding.

Under the California Labor Code, developers employing workers on a public works project must pay not less than the prevailing wage for their respective craft. The definition of a "public works project" is unclear. Proponents of prevailing wage laws contend that a project that receives governmental subsidies - in the form of tax credits and tax-exempt bonds, for example - is a public works project, which requires the payment of prevailing wages. Developers insist that such a project is privately-owned and that public financing does not transmute an otherwise private project into a public works project.

The difference between paying prevailing wages and non-prevailing wages can be significant. Prevailing wage rates - which are set by the DIR - are, generally, equivalent to union scale wages (because wage surveys are answered predominantly by union workers). In addition to the higher rates, the Labor Code imposes other requirements with respect to public works projects, including the payment of overtime wages and the obligation to maintain payroll records and make them available for inspection to ensure Labor Code compliance. A 2003 study conducted by U.C. Berkeley researchers and funded by the U.S. Department of Housing and Urban Development concluded that compliance with prevailing wage requirements increases construction costs for affordable housing projects by between 9% and 32%.

The new DIR determination - which constitutes the most important development in the California affordable housing industry in many years - arose in relation to Rancho Santa Fe Village Apartments, a residential rental project near San Diego which required rental to low-income tenants at affordable rents. (Pillsbury represents the property owner.) The project was partially financed with tax-exempt bonds and Federal Low Income Housing Tax Credits. Developers and investors believed that the Labor Code required developers to let prevailing wage contracts if Federal Tax Credits are taken by the project owners. However, when asked for a formal determination interpreting the relevant Labor Code provisions, the DIR concluded that neither Federal Tax Credits nor tax-exempt bonds trigger prevailing wage requirements.

The DIR's determination concluded that Rancho Santa Fe Apartments is not a public work and therefore is not subject to prevailing wage requirements. Regarding tax credits, the DIR, quoting case law, found that a tax credit "involves no expenditure of public moneys received or held…but merely reduces the taxpayer's liability for total tax due." Regarding tax-exempt conduit bonds, the DIR reasoned that such bonds do not constitute debt of the public agency issuing the bonds and cannot be considered a loan by the public agency since the funds are actually supplied by private bondholders and advanced by the bond trustee to the developer. Consequently, "[s]ince none of the money flows into or out of public coffers, the conduit bond financing is not 'the payment of money or the equivalent of money by the state or political subdivision’ within the meaning of the [Labor Code]." The DIR also rejected the State Building and Construction Trades Council of California, AFL-CIO ("SBCTC") position that a loan of tax-exempt bond proceeds constitutes a below-market rate loan under the Labor Code because "[t]here are separate markets for tax-exempt and taxable bonds."

The DIR's determination is a significant setback to a larger campaign by SBCTC to apply prevailing wage requirements to all residential construction, including home building, and SBCTC is expected to fight the determination. In fact, on March 28, 2005, attorneys for SBCTC submitted an appeal with the DIR on the Rancho Santa Fe Apartments determination. In addition, insiders to the DIR process believe that SBCTC and other labor groups may also lobby the California Legislature to amend the current prevailing wage laws to require the payment of prevailing wages to projects such as the Rancho Santa Fe Apartments project. A legislative solution, however, must go through Governor Schwarzenegger's office, and he appears to oppose these efforts by labor. He will likely excercise his veto right over any proposed future legislation relating to prevailing wage unless embedded in proposed law that the Governor supports.

Many in the California housing industry have decided to rely on the DIR determination and proceed with projects involving tax credits and other indirect public subsidies without taking steps to comply with the prevailing wage laws. While the outcome of appeals and possible Labor Code amendments is uncertain - and the facts of any given project must be weighed carefully - this reaction to the DIR determination appears reasonable. The determination, which highlights the ambiguity of the Labor Code and the lack of clarity of many of its provisions, reflects what appears to be a new direction for the application of prevailing wage requirements in residential construction. The resulting cost savings and reduction in administrative obligations may very well produce a marked increase in affordable housing construction - which would be a victory for both developers and communities around California.

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