California Labor Code sections 1720 et seq. (the Prevailing Wage Law) ("PWL") require employers 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 decision, if it stands, subjects developers to increased project costs not previously anticipated.

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.