BILL ANALYSIS Ó
AB 1233
Page 1
Date of Hearing: January 6, 2016
ASSEMBLY COMMITTEE ON LABOR AND EMPLOYMENT
Roger Hernández, Chair
AB 1233
(Levine) - As Amended January 4, 2016
SUBJECT: Public works: public subsidies
SUMMARY: Provides a statutory definition for a "de minimis"
public subsidy that does not trigger the requirements of
prevailing wage law. Specifically, this bill:
1)Defines "de minimis" to mean a public subsidy that is both
less than $250,000 and less that 2 percent of the total
project cost.
2)Specifies that this bill does not apply to a contract that was
advertised for bid, or a contract that was awarded, before
January 1, 2017.
EXISTING LAW:
1) Requires the prevailing wage rate to be paid to all workers
on "public works" projects over $1,000.
2) Defines "public work" to include, among other things,
construction, alteration, demolition, installation or repair
work done under contract and paid for in whole or in part out
of public funds.
AB 1233
Page 2
3) Establishes a definition for "paid for in whole or in part
out of public funds," as specified.
4) Provides 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
minimis" in the context of the project, an otherwise private
development project shall not thereby become subject to the
requirement to pay prevailing wages.
FISCAL EFFECT: Unknown
COMMENTS: According to the author, this bill will clearly
define when a public subsidy is "de minimis" for the purpose of
determining when prevailing wage law applies to certain
projects.
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 actually predates federal prevailing
wage law. Many of these state laws were enacted as part of
general reform efforts to improve working conditions 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 enacted the first
prevailing wage law in 1891.
Eighteen additional states and the federal government adopted
AB 1233
Page 3
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 when
government had become the major purchaser of construction, would
operate to reduce the wages paid to workers on those projects to
a level that would disrupt the local economy.
California's prevailing was law was enacted in 1931.
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. Thus, 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.
Most public construction projects contracted for or by the
federal government or the District of Columbia are covered by
the federal prevailing wage law, the Davis-Bacon Act (Act),
while 33 states have prevailing wage laws, often referred to as
"little Davis-Bacon Acts," that encompass projects financed by
states and their political subdivisions.
The federal Davis-Bacon Act was enacted by Congress in 1931.
The Act requires workers employed under public construction
contracts of the federal government in excess of $2,000 to be
paid a minimum wage that the United States Department of Labor
determines to be prevailing for corresponding classes of
workers. In addition, sixty separate federal laws currently
specify the payment of Davis- Bacon wages for work prescribed.
AB 1233
Page 4
The federal government also has two additional prevailing wage
laws - the Walsh-Healy Public Contracts Act of 1935 (which
covers federal contractors in manufacturing and supply
industries), and the O'Hara-McNamara Services Act of 1965 (which
covers service contracts).
The United States Supreme Court has stated the public policy
underlying the Davis-Bacon Act as one of:
"protecting local wage standards by preventing contractors
from basing their bids on wages lower than those prevailing
in the area . . . [and] giving local labor and the local
contractor a fair opportunity to participate in this
building program." Universities Research Ass'n. v. Coutu
(1981) 450 U.S. 754, 773-774).
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).
AB 1233
Page 5
These coverage decisions defined payment by land, reimbursement
plans, installation, grants, waiver of fees, and other types of
public subsidy as public funds for purposes of prevailing wage
law. According to the sponsors, SB 975 was intended to remove
ambiguity regarding the definition of public subsidy of
development projects.
SB 975 also exempted certain affordable housing, residential and
private development projects that met certain criteria.
Follow-up legislation, SB 972 (Costa), Chapter # 1048, Statutes
of 2002, was intended to clarify the application of SB 975 and
was the result of extensive discussions between the State
Building and Construction Trades Council (sponsor of SB 975),
affordable housing advocates, and the Davis Administration.
Supporters of SB 972 contended that the original legislation had
unintended consequences for self-help housing and housing
rehabilitation projects. As a result of that compromise, SB 972
exempted from public works requirements the construction or
rehabilitation of privately-owned residential projects that met
certain criteria.
Why It Matters: "Prevailing Wage"
The determination of whether a project is deemed to constitute a
"public work" is important because the 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.
"De Minimis" Public Subsidies
AB 1233
Page 6
SB 975 also 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 minimis" in the context of the project, an otherwise
private development project shall not thereby become subject to
the requirement to pay prevailing wages. However, SB 975 did
not provide a definition for the term "de minimis."
Therefore, since the enactment of SB 975, DIR has issued several
coverage determinations attempting to define the term "de
minimis."
In 2005, DIR first articulated a standard for "de minimis" in
Public Works Case No. 2004-024 (New Mitsubishi Auto
Dealership)(March 18, 2005). In that case, DIR noted that
nothing in the prevailing wage law or the applicable legislative
history of SB 975 provided guidance as to the appropriate
measure of what should be considered "de minimis." Therefore,
DIR looked to other statutory or regulatory schemes for other
state agencies (including Franchise Tax Board and the California
Coastal Commission) and articulated a standard for "de minimis"
to mean "the public funding was proportionally small enough, in
relation to the overall cost of the Project, that the
availability of those funds did not significantly affect the
economic viability of the Project" (emphasis provided). In that
specific case, DIR found that public reimbursement of $65,710 to
a project with a total cost of $4,010,010 represented only 1.64
percent of the total project cost, and therefore could
reasonably be considered "de minimis."
AB 1233
Page 7
Since that time, DIR has applied this test to find a "de
minimis" public subsidy in the following situations: a
$317,330.80 public subsidy on a $22 million project (or 1.4
percent of the total project cost), PW Case No. 2007-012 (May
15, 2008); a $123,300.67 public subsidy on a $29 million project
(or 0.4 percent of the total project cost), PW Case No. 2008-010
(August 4, 2008); a public subsidy of $202,337 on a $18 million
project (or 1.1 percent of the total project cost), PW Case No.
2008-037 (January 2, 2009); a $23,475 public subsidy on a $2.4
million project (or 0.99 percent of the total project costs), PW
Case No. 2008-038 (April 21, 2010); a $96,553.20 public subsidy
on a $8 million project (or 1.2 percent of the total project
cost), PW Case No. 2009-005 (April 21, 2010), a $500,000 public
subsidy on a $25.5 million project (or 1.23 percent of the total
project cost), PW Case No. 2008-025 (August 16, 2009); a
$1,664,804 public subsidy on a $95 million project (or 1.75
percent of the total project cost), PW Case No. 2011-033 (May 9,
2012); and a $4.5 million public subsidy on a $315 million
project (or 1.42 percent of the total project cost, PW Case No.
2013-023 (September 11, 2014).
ARGUMENTS IN SUPPORT
This bill is sponsored by the State Building and Construction
Trades Council of California.
They argue that the legal definition of de minimis is "trifling,
minimal...so insignificant that a court may overlook it."
Unfortunately, in recent years, DIR has strayed from this legal
definition of "de minimis", and lacking a definition in statute,
has loosely interpreted the definition to apply to subsidies
ranging from thousands to millions of dollars. They contend
that this bill would create a clear statutory definition by
providing that a subsidy is "de minimis" if it is both less than
$250,000 and less than two percent of the total project cost.
AB 1233
Page 8
The sponsor notes that the exception was created in SB 975 in
2001. However, by not specifically defining "de minimis" for
the purpose of determining when prevailing wage is applied to
projects and given no other guidance as to the appropriate
measure of what should be considered de minimis in the
legislative history, several projects have moved forward that
should have been covered by the prevailing wage law but were
not.
As a result, the sponsor argues that there has been uncertainty
over the definition of "de minimis" over the last decade. DIR
has made determinations of "de minimis" on projects that have
had public subsidies given to developers that have ranged from
$65,710 to $4.5 million.
The sponsor concludes that a public subsidy as much or more than
the definition used in this bill is a notable amount of taxpayer
investment in a project and arguably is not "de minimis", so it
is reasonable to require payment of prevailing wages if the
developer wants a public subsidy over that amount.
ARGUMENTS IN OPPOSITION
Opponents to previous versions of this bill argued that when SB
975 was enacted in 2001, there was extensive debate regarding
the "de minimis" exception. Although never codified, opponents
contend that there was general agreement among the stakeholders
that the trigger for the exception was 2 percent of the total
project cost. This was a level the stakeholders generally
agreed was reasonable to ensure that there is a true and
substantial public investment in the project before other state
mandates come into play.
Opponents contend that this bill further caps that contribution
at specific dollar amount, which may be inappropriate on large
AB 1233
Page 9
multi-million dollar projects.
Finally, opponents note that Governor Brown vetoed similar
legislation in 2013 and 2015 (as discussed below).
PRIOR LEGISLATION:
This bill is identical to AB 251 (Levine) from 2015. That
measure was vetoed by Governor Brown, who stated the following
in his veto message:
"This measure seeks to codify a definition of the term 'de
minimis' to determine what level of public subsidy triggers
prevailing wage requirements on an otherwise private project.
Longstanding practice has been to view the subsidy in context
of the project and use 2% as a general threshold for
determinations. There has been no showing that the current
practice is unreasonable.
While I remain a staunch supporter of prevailing wages I am
concerned that this measure is too restrictive and may have
unintended consequences. Two years ago, I cited the same
concerns when I returned a similar bill without my signature.
This measure does not adequately address those concerns."
This bill is similar to AB 302 (Chau) from 2013. That measure
was vetoed by Governor Brown, who stated the following in his
veto message:
"This measure seeks to codify a definition of the term 'de
minimus' for purposes of what level of public subsidy
triggers prevailing wage requirements on an otherwise
AB 1233
Page 10
private project.
Longstanding practice has been to view the subsidy in
context of the project and use 2% as a general threshold
for determinations. By codifying a standard that
establishes 'de minimus' as less than 1% and less than
$25,000 few, if any, projects receiving public subsidies
will be found to be exempt from prevailing wage
requirements.
While I remain a staunch supporter of prevailing wages and
the associated quality work and good paying jobs, I am
concerned that this measure is too restrictive. Finally,
there has been no showing that the current practice is
unreasonable."
REGISTERED SUPPORT / OPPOSITION:
Support
State Building and Construction Trades Council of California
(sponsor)
Opposition
None on file.
AB 1233
Page 11
Analysis Prepared by:Ben Ebbink / L. & E. / (916) 319-2091