BILL ANALYSIS Ó SENATE COMMITTEE ON LABOR AND INDUSTRIAL RELATIONS Senator Tony Mendoza, Chair 2015 - 2016 Regular Bill No: AB 251 Hearing Date: June 10, 2015 ----------------------------------------------------------------- |Author: |Levine | |-----------+-----------------------------------------------------| |Version: |May 28, 2015 | ----------------------------------------------------------------- ----------------------------------------------------------------- |Urgency: |No |Fiscal: |Yes | ----------------------------------------------------------------- ----------------------------------------------------------------- |Consultant:|Deanna Ping | | | | ----------------------------------------------------------------- Subject: Public works: public subsidies. KEY ISSUE Should the Legislature approve a statutory definition for a "de minimus" public subsidy under prevailing wage law? ANALYSIS Existing law defines "public works" to include, among other jobs, construction, alteration, demolition, installation, or repair work done under contract and paid for in whole or in part out of public funds. (Labor Code §1720) Under existing law , "paid for in whole or in part out of public funds" means, among other things, the following: 1. The payment of money or the equivalent of money by the state or political subdivision directly to or on behalf of the public works contractor, subcontractor, or developer. 2. The performance of construction work by the state or political subdivision in execution of the project. 3. Fees, costs, rents, insurance or bond premiums, loans, interest rates, or other obligations that would normally be AB 251 (Levine) Page 2 of ? 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. 4. Money loaned by the state or political subdivision that is to be repaid on a contingent basis. (Labor Code §1720) Existing law defines "awarding body" or "body awarding the contract" as the department, board, authority, officer or agent awarding a contract for public work. (Labor Code §1722) Existing law requires all employees who work on public works projects costing $1,000 or more to be paid the general prevailing rate of per diem wages and the general prevailing rate for holiday and overtime work for the specific location where the public work is to be performed. (Labor Code §1771) Existing law states that if the state or a political subdivision reimburses a private developer for costs that would normally be borne by the public, or provides directly or indirectly a public subsidy to a private development project that is de minimus in the context of the project, an otherwise private development project shall not be subject to prevailing wage requirements. (Labor Code §1720) This bill provides a statutory definition for a "de minimus" public subsidy that does not trigger the requirements of prevailing wage law. Specifically, this bill defines "de minimus" to mean a public subsidy that is both less than $75,000 and less than 1 percent of the total project cost and will not apply to a project that was advertised for bid, or a contract that was awarded, before January 1, 2016. COMMENTS 1. A Brief History of State and Federal Prevailing Wage Law State prevailing wage laws vary from state to state, but do share a common history that predates federal prevailing wage law. Many of these state laws were enacted as part of Progressive Era reform efforts to improve working conditions AB 251 (Levine) Page 3 of ? at the end of the 19th and the beginning of the 20th centuries. Between 1891 and 1923, seven states adopted prevailing wage laws that required payment of specified hourly wages on government construction projects, the state of Kansas being the first in 1891. Eighteen additional states (including California in 1931) and the federal government adopted prevailing wage laws during the Great Depression of the 1930s amidst concern that acceptance of the low bid, a common requirement of government contracting for public projects, would reduce local wages and disrupt the local economies. This was particularly in the depths of the Great Depression, where, for some local economies, the government had become the primary purchaser of construction products and a significant employer. In general, the proponents of prevailing wage legislation wanted to prevent the government from using its purchasing power to undermine the wages of its citizens. It was believed that the government should set an example, by paying the wages prevailing in a locality for each occupation hired by government contractors to build public projects. Even today, prevailing wage laws are generally meant to ensure that wages commonly paid to construction workers in a particular region will determine the minimum wage paid to the same type of workers employed on publicly funded construction projects. 2. General Background on "Public Works" Under California Law In general, "public works" is defined to include construction, alteration, demolition, installation or repair work done under contract and "paid for in whole or in part out of public funds." Over a decade ago, there was much administrative and legislative action over what constituted the term "paid for in whole or in part out of public funds." This action culminated in the enactment of SB 975 (Alarcón), Chapter 938, Statutes of 2001, which codified a definition of "paid for in whole or in part out of public funds" that included certain payments, transfers, credits, reductions, waivers and performances of work. At the time, supporters of SB 975 stated that it established a definition that conformed to several precedential coverage decisions made by the Department of Industrial Relations (DIR). According to the sponsors, SB 975 AB 251 (Levine) Page 4 of ? was intended to remove ambiguity regarding the definition of public subsidy of development projects. 3. Need for the bill If a project is determined as a "public work" Labor Code requires (except for projects of $1,000 or less) that the "prevailing wage" to be paid to all workers employed on public works projects. SB 975 provided that if the state or a political subdivision reimburses a private developer for costs that would normally be borne by the public, or provides directly or indirectly a public subsidy to a private development project that is "de minimus" in the context of the project, the project would not be subject to the requirement to pay prevailing wages. Currently there is no specific definition for "de minimus" for the purpose of determining when prevailing wage is applied to project. According to the author, DIR has made various coverage determinations attempting to define the term "de minimus" and has interpreted "de minimus" with vastly different dollar amounts and percentages of project costs which has led to confusion and litigation as to what the term means. The author notes that DIR's determinations of "de minimus" have ranged from $65,710 to $4.5 million or from .5 percent to 2 percent of a project's total cost. According to the author, this bill would restore the original intent of SB 975 that the "de minimus" exception be limited to situations in which the public subsidy is trivial such that it should not have legal significance. AB 251 would provide that a subsidy is de minimus if it is both less than $75,000 and less than 1 percent of the total project cost. 4. Proponent Arguments : According to proponents, Labor Code §1720(c)(3) provides that a project does not become subject to the prevailing wage law if it receives a public subsidy "that is de minimus in the context of the project." Proponents cite the legal definition of "de minimus" as: "trifling, minimal?so insignificant that a court may overlook it." Proponents contend that DIR has strayed from this legal definition of de minimus, and lacking a definition in statute, has loosely interpreted the definition to apply to subsidies ranging from thousands to AB 251 (Levine) Page 5 of ? millions of dollars. Proponents note that with this uncertainty DIR has made determinations of de minimus on projects that have had public subsidies given to developers have that ranged from $65,710 to $1,664,804 or from .5 percent to 1.75 percent of a project's total cost. Proponents argue that a public subsidy of $75,000 is a large amount of taxpayer investment in a project and arguably is not de minimus, making it reasonable to require payment if the developer wants a public subsidy over that amount. 5. Opponent Arguments : Opponents argue that current law on what constitutes "de minimus," a subject extensively debated as part of the discussion surrounding SB 975, should be maintained to ensure there is a true and substantial public investment in the project before other state mandates come into play. Specifically, opponents note that when Labor Code §1720 was amended in 2001 (SB 975) the de minimus exception was discussed, and although never codified, was generally agreed by the parties to be 2% of the project. Opponents contend that subsequent DIR determinations have upheld this agreement by requiring a substantial public subsidy to trigger California's Public Works Law. Opponents argue that this was a level stakeholders generally agreed was reasonable to ensure there is a true and substantial public investment in the project before other state mandates come into play. 6. Prior Legislation : AB 302 (Chau) would have defined "de minimus" to mean a public subsidy that is both less than $10,000 and less than 1 percent of the total project cost and will not apply to a project that was advertised for bid, or a contract that was awarded, before January 1, 2014. The bill was vetoed by the Governor. SB 972 (Costa), Chapter 1048, Statutes of 2002, was intended to clarify the application of SB 975 and provided exemptions from prevailing wage requirements for the construction or rehabilitation of privately-owned residential projects, as specified. SB 975 (Alarcón), Chapter 938, Statutes of 2001, codified a AB 251 (Levine) Page 6 of ? definition of "paid for in whole or in part out of public funds" that included certain payments, transfers, credits, reductions, waivers and performances of work. SUPPORT State Building and Construction Trades Council (Sponsor) California Labor Federation, AFL-CIO California Legislative Conference of the Plumbing, Heating and Piping Industry California State Association of Electrical Workers California State Pipe Trades Council National Electrical Contractors Association Western States Council of Sheet Metal Workers OPPOSITION Air Conditioning Trade Association Associated Builders and Contractors of California Associated Builders and Contractors-San Diego Chapter California Building Industry Association California Concrete Contractors Association Plumbing-Heating-Cooling Contractors Association of California Western Electrical Contractors Association -- END --