In recent years, the Department of Industrial Relations (“DIR”), the Legislature and the California courts have expanded the application of the prevailing wage law to projects through the broad definition of a “public works,” beyond what most contractors, owners and even counsel would expect.  While most involved in construction anticipate that any work directly for, or direct payment of funds by, a public entity would trigger the prevailing wage laws, several decisions, determinations and recent legislation have significantly expanded the prevailing wage reach over the last several years.

Very recently, the DIR determined that both the shell construction of a Volkswagen auto dealership, and the separate tenant improvements in that shell, were public projects subject to prevailing wage law due to the land transfer by the City to the developer “because the Land is a transfer of an asset of value for less than fair market price”.

Similarly, in May 2012, the DIR determined that a contractor involved in the $95 million privately funded development and construction of a new agricultural facility was subject to prevailing wage law, but for the application of the de minimis doctrine, when the contractor accepted the City’s “in lieu of fees” for the City required infrastructure improvements.  The DIR determined that “[i]t does not matter that Company is performing infrastructure improvements itself or that Company could have elected to simply pay the fee and let the City perform the infrastructure improvement work. Company plans to accept the fee waiver. Therefore, it has received or will receive public funds within the meaning of subdivision (b)(4)”.  For additional applications and coverage determinations, see also the DIR’s most recent determination.  Previously in January 2012, the Legislature eliminated the applicability of the DIR’s 2010 determinations that solar photovoltaic power purchase agreements that include installation of leased equipment on public property were not public works through the passage of Labor Code section 1720.6.  This statute specifically defines a public project in part to be the “construction or maintenance of renewable energy generating capacity or energy efficiency improvements,” if certain elements are triggered.  See the DIR determinations from April 21, 2010, PW Case 2008-038 and 2009-005, for the prior analysis:  (See also Lab. Code, §§ 1720-1720.6.)

By decision in Oxbow Carbon & Minerals, LLC v. Department of Indus. Relations (2011) 194 Cal.App.4th 538, 547, the court concluded that the phrase “construction…done under contract and paid for in whole or in part out of public funds” was not precisely defined, and therefore two separate contracts, one publicly funded and one privately funded, were to be considered together.  As a result, the entire project was subject to the prevailing wage law.

The trend gained momentum in 2010, when the court in Azusa Land Partners v. Department of Indus. Relations (2010) 191 Cal.App.4th 1 made developers cringe by taking a very expansive view of what constitute “public works” under Labor Code section 1720, subdivision (a)(1). The court determined that an entire private master development was a “public works” subject to payment of prevailing wages when any “public funds” are paid toward any construction done under contract within the overall development.   In Azusa, the trigger was the local public entities Mello-Roos funds for infrastructure that were “public funds,” causing the application of the prevailing wage determination to the entire project.

Given the trend, owners, developers and contractors must be very diligent in obtaining clarification as to the application of the prevailing wage laws.  If there is any doubt, a careful evaluation, or even a request for a determination from the DIR in advance, may well be warranted in order to avoid later violations of the law.  Parties in their contracts should likewise specify who will bear the expense of a determination, both in the analysis of applicability and in the event of an unfavorable ruling.  For instance, if no advance DIR determination is requested on a questionable project, the parties should include terms that address the risk of the cost increase, and perhaps where the funds for such an increase may be found.  This is particularly important if the contractor is not the party contracting with or obtaining the benefit from the public entity and is unaware of development deals by the owner or developer.  Although public entities are statutorily required to identify public works contracts when they contract directly, or else be subject to the additional cost of complying with prevailing wage requirements and fines or penalties assessed, there are limitations to the statutory application that also may preclude recovery by the contractor even if the statutes are otherwise applicable. (Lab. Code, §§ 1726, 1781.)