Lusardi Construction Co. v. Aubry

PANELLI, J., Concurring and Dissenting.

I dissent from the majority’s holding that the obligation of a contractor on a public works project to pay the prevailing wages arises from a statutory duty independent of any contractual agreement or notice to the contractor. (Maj. opn., ante, at pp. 986-988.) The majority bases its conclusion on the language of one of the public works law’s provisions that the prevailing wage “ ‘shall be paid to all workers employed on public works.’ ” (Id. at p. 987, italics omitted, quoting Lab. Code, § 1771.) 1 The majority also asserts that requiring contractors to comply with the public works laws only when their contracts require it would defeat the legislative objective of ensuring that workers on public works be paid the prevailing wages. (Maj. opn., ante, at p. 987.) I disagree with the majority’s interpretation of the prevailing wage laws. In my view, the statutory scheme as a whole does not disclose a legislative intent to hold contractors liable for paying the prevailing wages when the contract does not require those wages to be paid; rather, it reflects a view that the Legislature intended contractors to be aware of their obligations under the prevailing *1000 wage laws before entering into a contract for public works. As a consequence, the result that the majority in this case reaches is patently unfair and, in my view, unconstitutional as a violation of due process; there is no evidence that the Legislature intended such a result.

In interpreting the prevailing wage laws, we must look at the statutory scheme as a whole in order to harmonize the various elements. (Mattice Investments, Inc. v. Division of Labor Standards Enforcement (1987) 190 Cal.App.3d 918, 923 [ 235 Cal.Rptr. 502 ]; Bowland v. Municipal Court (1976) 18 Cal.3d 479, 489 [ 134 Cal.Rptr. 630 , 556 P.2d 1081 ].) While it is true, as the majority states, that section 1771 provides that the prevailing wage “shall be paid to all workers employed on public works,” it is also evident that the statutory scheme establishes detailed procedures designed to ensure that contractors are aware of their responsibilities under the public works laws before entering into a public works contract. (See §§ 1773.2, 1775, 1776, subd. (g), 1777.5.) In particular, the public body awarding the contract is required either to specify the prevailing wage in the call for bids, the bid specifications, and the contract itself, or to include a statement in those documents that copies of the prevailing rate of wages are on file and available for inspection. (§ 1773.2.) In addition, the awarding public body is required to have the contract include a stipulation that the contractor will comply with the forfeiture and penalty provisions if any workers employed by the contractor or any subcontractor are underpaid. (§ 1775.)

These provisions for precontract notice indicate that the Legislature intended contractors to be fully aware of their responsibility to pay the prevailing wages and of the consequences of failure to pay those wages before entering into a contract for the construction of public works. The Legislature also intended contractors to agree to those obligations in the contract. The statutory scheme can most reasonably be read to allow the prevailing wage laws to be enforced against the contractor only when the contract specifies that the project is a public work. The stipulated facts in this case indicate that Lusardi Construction Company’s (Lusardi’s) contract did not state that the prevailing wage laws were applicable; in fact, Lusardi’s representative made clear that the company would not enter the contract if it was for a public works project. I do not believe that the Legislature intended contractors to be held liable for the prevailing wages under these factual circumstances.

This interpretation is consistent with that of the Courts of Appeal that have considered the question of when a contractor can be required to pay prevailing wages on a public works project. As will be discussed, those courts have held without exception, that the contractor could be held liable because, in *1001 each case, the contractor had agreed in the contract to be subject to the prevailing wage laws.

In Division of Lab. Stds. Enforcement v. Ericsson Information Systems, Inc. (1990) 221 Cal.App.3d 114 [ 270 Cal.Rptr. 75 ], the Court of Appeal held that a contractor could be required to pay the prevailing wage to workers who fell into a job classification for which the public entity awarding the contract had not specified the prevailing wage. The court reasoned that this deficiency did not relieve the contractor of its obligation to pay all its workers prevailing wages, because the contractor had expressly agreed in the contract to pay prevailing wages. (Id. at pp. 125-126 & fn. 21.)

Two cases in which payments were withheld from contractors after the contractors failed to ensure that prevailing wages were paid also conclude that the duty to pay prevailing wages arises from the contract. In O. G. Sansone Co. v. Department of Transportation (1976) 55 Cal.App.3d 434 [ 127 Cal.Rptr. 799 ] the court held that contractor could be required to pay penalties and the difference between actual wages and the prevailing wage rate when a subcontractor failed to pay the prevailing wages. The court reasoned that the public works provisions of the Labor Code did not place an involuntary burden on the contractor, since “[the contractors’] execution of the contract with knowledge of the penalties to be imposed if they or their subcontractors failed to pay the prevailing wages required under the contract was voluntary, and constituted consent to the [prevailing wage provisions]. [Citation.]” (Id. at p. 455.) Therefore the court held that “[w]hen the contractor submits his bid based on the prevailing wage determination and freely enters into a contract for the public work involved, in which contract he stipulates to be subject to the penalty provisions of the prevailing wage law, he cannot be heard to say that he was denied due process of law with respect to the enforcement of the penalty provisions.” (Ibid., italics added.)

The court in Waters v. Division of Labor Standards Enforcement (1987) 192 Cal.App.3d 635 [ 237 Cal.Rptr. 546 ] (Waters), applied a similar analysis. There, the contracting public entity withheld payments from a contractor to cover penalties and extra wages when a subcontractor failed to pay the prevailing rate. The city contracting for the project had not specified what the prevailing rates were, nor that those rates were on file in the city’s office. However, the contract between the city and Waters, the contractor, did provide that the prevailing wage rates were to be paid to the workers. The court held that Waters could be required to pay the difference between the prevailing rates and the wages actually paid, because “[t]he contract documents . . . did alert Waters, as he so testified, that the wages must not be less *1002 than the prevailing general rate” (Id. at p. 640, italics added.) 2 The court stated, “[w]hen a contractor freely enters into an agreement for a public work in which he stipulates to pay the prevailing wage rate . . . , he will be required to comply with the terms of his contract.” (Id. at p. 639.)

Thus, the courts that have considered the applicability of the requirement to pay prevailing wages in circumstances in which the public entity did not fully comply with its obligations agree that “the duty to pay the prevailing wage [is] triggered once the contractor so agree[s] in the contract.” (Division of Lab. Stds. Enforcement v. Ericsson Information Systems, Inc., supra, 221 Cal.App.3d at p. 126, fn. 21 , italics added.) Under this analysis, a contractor is not liable for paying prevailing wages or for any penalties for underpayment unless the contractor was on notice of the requirements at the time that the contractor entered into the contract for the public work and agreed to pay the prevailing wages in the contract. I believe that this conclusion is correct.

Under the majority’s interpretation, a contractor may be held liable for extra wages although the contractor had no notice that the prevailing wage requirements would be applicable and, like Lusardi, the contractor would not have entered into the contract if the contractor had had that notice. In that case, if a contractor enters into a contract in a good faith belief that it is for a private work, as the stipulated facts state that Lusardi did, and the project is later determined to be a public work, the contractor would effectively have been forced against its will into accepting a public works contract. To say that the contractor will only be liable for the extra wages and not for any penalties does not mitigate the fundamental unfairness of this outcome. I see no reason to conclude that the Legislature intended such an unfair result. (See County of Madera v. Gendron (1963) 59 Cal.2d 798, 803 [ 31 Cal.Rptr. 302 , 382 P.2d 342 , 6 A.L.R.3d 555 ] [court reluctant to construe statute in a way that would cause “harsh and unjust result” in the absence of “clear indication” of legislative intent]; see also Johnson v. Workers’ Comp. Appeals Bd. (1984) 37 Cal.3d 235, 242 [ 207 Cal.Rptr. 857 , 689 P.2d 1127 ].)

The majority attempts to soften the harshness of its holding by saying that Lusardi may be entitled to indemnity from the Tri-City Hospital District (the District). In my view, the fundamental unfairness remains. The majority’s conclusion would place on Lusardi the primary responsibility for paying the excess wages, as well as the additional burden of showing that it was entitled to indemnity. This is a considerable burden to place on a contractor that, as the stipulated facts state, relied in good faith on the District’s assurances that the expansion project was a private work.

*1003 I am also troubled by the due process implications of the majority’s conclusion imposing liability on Lusardi. In this case, the Director of the Department of Industrial Relations (the Director), after the contract was entered into, made a determination that the project was a public work and directed the District to withhold payments due Lusardi. The majority concludes that this action did not result in a deprivation of property without due process of law, since there was no money due from the District to Lusardi, but rather, all money due Lusardi was owed by Imperial Municipal Services Group, Inc. (Imperial). Accordingly, under the majority’s view, the Director would have had to institute a court action, giving Lusardi notice and an opportunity to be heard before any deprivation of its property occurred. (Maj. opn., ante, at pp. 990-993; see § 1775.)

This reasoning, in my view, is unsound. The contract between the District and Imperial stated that “[Imperial] hereby appoints and constitutes [the District] as its agent and attorney-in-fact for all purposes respecting construction of the [expansion project], including, without limitation, the engagement of contractors . . . and the management and supervision of the construction of the [expansion project] .... [The District], as agent, shall . . . supervise and provide for, or cause to be supervised and provided for, as agent for [Imperial], the complete acquisition and construction of the [expansion project].” Thus, the District had complete responsibility for managing the construction of the project. Moreover, the majority concludes that as the agent of Imperial, the District is the “awarding body.”

If the District is the “awarding body,” it elevates form over substance to say that there was no money owing from the District to the contractor. If the District did owe money to Lusardi, then the Director would not have ordered an “impossible act” when he ordered the District to withhold funds from Lusardi. (See maj. opn., ante, at p. 991.) This withholding of funds would clearly violate Lusardi’s due process rights, since the contractor would have been deprived of its property without notice or an opportunity to be heard. (See O. G. Sansone Co. v. Department of Transportation, supra, 55 Cal.App.3d at p. 455 .)

The majority has expressed concern that if contractors cannot be bound by the public works laws in the absence of agreement in the contract, the policy of ensuring that workers are paid the prevailing wage will be defeated. However, I do not see any state policy that can only be served by holding contractors liable in these circumstances. The Legislature has seen fit to place on the contracting public entities the obligation to require public works contractors to pay the prevailing wages. “By the express terms of the statutes, the Legislature has imposed upon the awarding body ... the responsibility for providing advance notice to the contractor that wages must *1004 be paid in accordance with the general prevailing rate .... [Citation.]” (Waters, supra, 192 Cal.App.3d at p. 640 .) The statutory objective of guaranteeing that workers on public works are paid prevailing wages can be served by requiring public entities to carry out their obligations under the public works law.

Enforcing the public works laws against awarding bodies only and not against the contractors in these circumstances would be both reasonable and fair. The public works law imposes a duty on the public agency to put bidders on notice of the potential liability that a successful bidder will incur. Nowhere does the public works law suggest that bidders not notified of the implications of a successful bid will nonetheless be subject to an obligation imposed upon them after the fact, resulting from the failure of a public agency to follow the dictates of the law. Nor would it be unreasonable to place upon the public agency itself the financial burden of its failure to comply with the public works law. By not adhering to its obligation under the law, the public agency is, presumptively, the beneficiary of a less costly project; had the public agency advised bidders of their obligations under the public works law to pay prevailing wages the project would have been more costly to the public agency. Hence it would not be unfair to require the public agency to bear any obligation to pay the extra wages.

The majority has also raised the possibility that, if contractors are not held liable in these circumstances, public entities and contractors might collude to evade the prevailing wage laws. However, the statutory scheme provides criminal sanctions that will serve to discourage collusion. Section 1777 makes it a misdemeanor for any officer, agent, or representative of the state or any political subdivision to wilfully violate any provision of the prevailing wage law statutory scheme. I presume that collusion with a contractor to evade the laws would fall under this section.

Therefore, I dissent from the majority’s conclusion that contractors’ obligation to pay the prevailing wages arises purely from the statutory scheme. In my view, Lusardi cannot be required to pay the difference between the prevailing wages and the wages actually paid because it did not have notice that the prevailing wage laws applied before entering into the contract to construct the expansion project and did not agree in the contract to pay those wages. Like the majority, I also conclude that Lusardi cannot be required to pay the statutory penalties.

Baxter, J., concurred.

All further statutory references are to the Labor Code unless otherwise noted.

It also held that, under the doctrine of equitable estoppel, Waters could not be required to pay the statutory penalties because he had made a reasonable attempt to find out what the prevailing wages were. ( Waters, supra, 192 Cal.App.3d at pp. 640-641.)