General contractors and their sureties on public works construction projects in California have faced an onslaught of claims, assessments, and lawsuits based on the failure of subcontractors, regardless of tier, to pay their workers proper prevailing wages. Such claims come in the form of Department of Industrial Relations (“DIR”) and its Division of Labor Standards Enforcement (“DLSE”) wage and penalty assessments, a public entity’s own internal labor compliance division assessments, or civil lawsuits filed by one or more workers. A worker’s claim may arise as a result of a simple misunderstanding of his or her proper DIR classification, an innocent math error, or the subcontractor’s mistaken belief that certain job duties did not require payment at the prevailing wage rate. Of course, underpayment can also occur from an unscrupulous subcontractor purposefully paying less than what the law requires.
No matter the forum, whether DLSE administrative action or civil suit, or the reason for underpayment, defending prevailing wage claims is often extremely expensive. Further, given the potential liability for statutory liquidated damages, penalties, and large attorney’s fee awards (in the case of civil suits), unsuccessfully challenging such claims can have disastrous financial consequences. It is often the case that the offending subcontractor becomes insolvent, leaving the general contractor’s payment bond surety facing exposure. Of course, this leaves the general contractor with ultimate liability because of its indemnity obligation to its surety.
This article addresses what a general contractor can do to protect itself or limit the impact of what seems like a draconian process and set of laws.
1. A general contractor can require its subcontractors to obtain payment and performance bonds. It can also include a clear indemnity provision in its subcontracts requiring subcontractors and their sureties to indemnify the general contractor and its surety for losses, claims, and expenses resulting from the subcontractors’ failure to comply with prevailing wage laws.
2. A general contractor can obtain subcontractor default insurance coupled with a clear subcontract indemnity provision as described above.
3. When soliciting subcontractor bids, a general contractor can analyze and investigate the subcontractor’s history and economic viability. This may include identifying how long the subcontractor has been in business, whether it has performed scopes of work and for dollar amounts similar to what it is bidding on, and confirming (in writing, if possible) that the subcontractor knows and understands the various DIR classifications and other prevailing wage requirements for the work to be performed by both itself and any tiers of subcontractors working under it.
4. In the bidding process, a general contractor can identify all trades that may require “drive time” to and from the project site and ensure that the subcontractors for those trades know that prevailing wages are required for drive time spent in connection with the execution of a public works construction contract.
5. During the course of the project, a general contractor should review subcontractor certified payroll reports as soon as possible and reconcile the worker classification and wage rates reflected in the reports against the DIR classification sheets for the applicable trade.
6. A general contractor should keep detailed project records (e.g., daily reports, daily sign-in sheets) identifying which subcontractors or suppliers performed work on the project, the names of workers, and the hours worked. Although it may be difficult as a practical matter to capture all of this information, efforts to increase the detail and specificity of project records will likely buttress a contractor’s ability to defend prevailing wage claims.
Strategy Considerations in Responding to a Prevailing Wage Claim
1. Investigate the assessment or lawsuit as quickly and efficiently as possible to determine whether it has merit. This investigation includes identifying the basis for the assessment or claim, the proper DIR classification, the classification’s proper prevailing wage, and whether the subcontractor’s certified payroll reports reconcile with the foregoing information.
2. Contact the subcontractor directly to determine its position and obtain all pertinent records.
3. Analyze all pertinent project records regarding the workers at issue, including what work was performed and what hours were worked. Sometimes, particularly in the context of DIR/DLSE assessments, hurried or sloppy work by the state’s investigator may result in an excessive assessment. A thorough review of the pertinent project records assists in identifying assessment errors.
4. Determine whether the DLSE or the plaintiff (in the case of a civil suit) is over-reaching or exaggerating the claim.
5. Analyze whether there are any defenses to the assessment or lawsuit. One example is the statute of limitations governing DIR/DLSE assessments and civil actions.
Ultimately, if the claim investigation confirms that the assessment or lawsuit has merit and there are no defenses, the general contractor should develop either a settlement strategy or a defense plan that seeks to resolve or limit the imposition of statutory liquidated damages, penalties, and attorney’s fees.