BILL ANALYSIS Ó AB 326 Page 1 Date of Hearing: January 6, 2016 ASSEMBLY COMMITTEE ON LABOR AND EMPLOYMENT Roger Hernández, Chair AB 326 (Frazier) - As Amended January 4, 2016 SUBJECT: Public works: prevailing wage rates: wage and penalty assessments SUMMARY: Amends existing law related to civil wage and penalty assessments for prevailing wage violations. Specifically, this bill: 1)Provides that certain funds held in escrow by the Department of Industrial Relations (DIR) in specified prevailing wage proceedings shall be released "within 30 days" at the conclusion of all administrative and judicial review. 2)Makes other technical changes. EXISTING LAW: 1)Provides that after 60 days following the service of a civil wage and penalty assessment for prevailing wage violations, the affected contractor or subcontractor shall be liable for liquidated damages in an amount equal to the wages, or portion thereof, that still remain unpaid. AB 326 Page 2 2)Provides that if the contractor or subcontractor demonstrates to the satisfaction of the director of DIR that he or she had substantial grounds for appealing the assessment or notice with respect to a portion of the unpaid wages covered by the assessment or notice, the director may exercise his or her discretion to waive payment of the liquidated damages with respect to that portion of the unpaid wages. 3)Provides that there shall be no liability for liquidated damages if the full amount of the assessment or notice, including penalties, has been deposited with DIR within 60 days following service of the assessment or notice, for DIR to hold in escrow pending administrative and judicial review. 4)Requires DIR to release such funds, plus any interest earned, at the conclusion of all administrative and judicial review to the persons and entities who are found to be entitled to such funds. FISCAL EFFECT: None. This bill is keyed non-fiscal by the Legislative Counsel. COMMENTS: Under current law, if a wage and penalty assessment for prevailing wage law violations remains unpaid for a period of 60 days, the affected contractor or subcontractor is liable for liquidated damages in an amount equal to the wages that remain unpaid. The general purpose of this provision is to encourage prompt payment of wages following an assessment for violation of the law. However, current law provides that there shall be no liability for liquidated damages if the contractor or subcontractor has deposited the full amount of the assessment (in cash) with DIR pending administrative and judicial review of the assessment. AB 326 Page 3 Existing law requires DIR to release the funds, plus any interest earned, at the conclusion of all administrative and judicial review to the persons and entities found to be entitled to those funds. ARGUMENTS IN SUPPORT According to the author, although the statute stipulates that the cash funds deposited by the contractor in order to avoid liquidated damages shall be released at the conclusion of all administrative and judicial review, there is nothing in the statute that states such funds shall be released in an expedited manner. As a result, releasing such funds can take months before the contractor is reimbursed. The author states that in one case, the cash deposit was $93,608.01, and in another it was $284,873.21. In both cases, these amounts were in addition to at least the equivalent amount already being withheld by the awarding bodies from the general contractor's contract balance. In both cases, the claims against the contractor were dropped according to counsel. However, according to the author the task of getting the money back from DIR can take a long period of time. This bill is sponsored by the Associated General Contractors who state: "It is not unusual to have contractors post significant cash deposits. An example, in one documented case the contractor's civil wage and penalty assessment was solely based on the misconduct of the subcontractor, yet the general contractor had to post $250,489 in order to avoid liquidated damages. The cash deposit was held from February to August (six months), where it was dismissed, and then it took another AB 326 Page 4 three months to have the funds returned. This bill simply states that once the case has been decided that the funds should be returned within 30 days." PREVIOUS LEGISLATION AB 1741 (Frazier) from 2014 proposed to amend this same section of the law to allow the contractor or subcontractor to post the full amount of the assessment in the form of a bond (in lieu of cash) in order to avoid liability for liquidated damages. Supporters of that bill argued that currently contractors are faced with having to post substantial amounts of cash at a time when cash flow is important. Unnecessarily tying up cash can place innocent contractors in jeopardy of losing their business or creating financial hardship. The committee analysis of AB 1741 noted the following relevant legislative and administrative history: "Legislation enacted in 2001 (AB 1646) established automatic liquidated damages for wage and penalty assessments that remain unpaid for a period of 60 days. This was enacted as part of a broader measure to replace the prior system of de novo court review of prevailing wage disputes with a formal administrative procedure, followed by limited judicial review. However, following the enactment of the automatic liquidated damages provision, some contractors raised concerns that this provision placed them in a difficult situation regarding assessments for which they were filing appeals with DIR. For example, they argued that contractors and subcontractors who wish to contest a citation with DIR were faced with two choices - they pay the disputed wages in order to avoid possible liquidated damage assessments and try to collect the AB 326 Page 5 wages from workers if the contractor or subcontractor prevail at DIR, or, refuse to pay the disputed wages and risk a liquidated damages assessment if DIR rules against them. They argued that neither choice affords the contractor or subcontractor reasonable due process because they are effectively penalized prior to a determination of guilt. These concerns led to the enactment of SB 1352 (Wyland) from 2008 which established the provisions of current law that allow a contractor to avoid liability for liquidated damages if they post the full amount of the assessment with DIR in an escrow account while an administrative appeal is pending. Earlier versions of SB 1352 would have allowed a contractor to post any of the following with DIR to avoid liability for liquidated damages: "cash, a letter of credit, a payment bond, or negotiable securities" in the amount of wages covered by the assessment. However, that language was subsequently amended out of the bill and the enacted version of the bill contained only the current language requiring the full amount of the assessment to be posted. Despite the aforementioned legislative history, on March 30, 2009, the Chief Deputy Director of DIR issued a memorandum in which he stated that, in lieu of a cash deposit, a contractor may post a payment bond with DIR as long as the bond satisfied specified criteria. There is some question regarding whether DIR had the legal authority to do so in light of the fact that the enabling legislation (SB 1352) had specifically considered, but then deleted, the ability to submit payment to DIR in the form of a bond. In 2013, when DIR revised its' Public Works Manual, it deleted the prior references to payment to DIR in the form of a bond." AB 326 Page 6 AB 1741 was held on suspense in the Assembly Appropriations Committee. There are some indications that the administration may have had some policy concerns about the proposal to allow the posting of a bond in lieu of cash. This bill would not provide for a bond, but would instead merely require DIR to release such funds within 30 days of a final adjudication. REGISTERED SUPPORT / OPPOSITION: Support Associated General Contractors (sponsor) California Professional Association of Specialty Contractors Construction Employers' Association Opposition None on file. Analysis Prepared by:Ben Ebbink / L. & E. / (916) 319-2091 AB 326 Page 7