Prevailing Wages: Beware of Fee Waivers Even When They are Not Waived


In a surprising determination by the Department of Industrial Relations ("DIR"), a development was found to be a "public work" under Labor Code Section 1771 when a developer, in compliance with a fee ordinance, constructed improvements in lieu of paying a development fee. Blue Diamond Agricultural Processing Facility; City of Turlock (Public Works Case 2011-033)

Labor Code Section Defined

Labor Code Section 1771 requires the payment of prevailing wages to workers in connection with "public works", defined as

"construction, alteration, demolition, installation, or repair work done under contract and paid for in whole or in part out of public funds."

Labor Code Section 1771(b) enumerates several instances whereby projects are deemed to be "paid for in whole or in part out of public funds", including … (4) fees, costs, rents, insurance or bond premiums, loans, interest rates, or other obligations that would normally be required in the execution of the contract, that are paid, reduced, charged at less than fair market value, waived, or forgiven by the state or political subdivision".

"Waived" Fee Makes Project Public Work

In this case, the City of Turlock ("City") had a development fee ordinance which authorized a credit to developers for constructing improvements in an amount equal to the lesser of the City's estimated construction costs and the developer's actual construction costs. The developer completed certain off-site infrastructure work and received a credit against the fee.

In a Notice of Determination, the DIR reasoned that even though the developer may have satisfied the financial equivalent of paying the fee, the fee was in fact "waived" thereby causing the project to be a public work.

Notwithstanding the determination as to the project being a public work, the DIR exempted the project from the payment of prevailing wages based on a "de minimis" exception under Labor Code Section 1771(c)(3).

Developers Should Proceed with Caution

Developers are advised to proceed with extreme caution when seeking to vary, to any degree, city or county fee requirements. The Blue Diamond Agricultural Processing Facility case noted above adds further peril by labeling any project a "public works" project in which the developer performs work in satisfaction of a fee requirement.

If a developer has concerns, it may obtain a determination from the DIR before undertaking the obligation.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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