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
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          |Author:    |Levine                                               |
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          |Version:   |May 28, 2015                                         |
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          |Urgency:   |No                     |Fiscal:    |Yes              |
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          |Consultant:|Deanna Ping                                          |
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                      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  








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               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  







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            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  







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            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  







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            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  







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            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

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