BILL ANALYSIS �
Senate Committee on Labor and Industrial Relations
Ted W. Lieu, Chair
Date of Hearing: September 1, 2011 20011-2012 Regular
Session
Consultant: Alma Perez Fiscal:Yes
Urgency: No
Bill No: AB 436
Author: Solorio
Version: As amended August 30, 2011
SUBJECT
Public works: labor compliance
KEY ISSUE
Should the Legislature authorize the Department of Industrial
Relations (DIR) to charge and get reimbursed by awarding bodies
for prevailing wage and labor compliance enforcement activities
on public works projects, rather than having them pay a fee up
front?
Should the Legislature provide clarification regarding
legislative intent to authorize that costs of DIR's monitoring
and enforcement activities be paid from state bond proceeds in
order to address concerns raised regarding the legality of using
bond funds to pay the fees required in current law?
Should the prevailing wage and labor compliance enforcement fee
requirements be waived for state bond funded and specified
design-build projects if the awarding body has entered into a
collective bargaining agreement that binds all of the
contractors performing work on the contract and that includes a
mechanism for resolving disputes about the payment of wages?
PURPOSE
To makes changes to existing law related to the prevailing wage
enforcement mechanism within the Department of Industrial
Relations in order to address potential legal questions about
the funding method of that process.
ANALYSIS
Existing law requires that workers employed on public works
projects in California be paid the applicable prevailing wage,
as determined by the Department of Industrial Relations, and
that the body awarding a contract for a public works project
assure compliance with this requirement.
Among other things, existing law regarding "public works"
projects:
Requires that not less than the general prevailing
wage rate be paid to all workers
employed on a "public works" project costing over $1,000
dollars and imposes misdemeanor penalties for a violation
of this requirement.
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.
Defines "paid for in whole or in part out of public
funds" as, among other things, "Fees, costs, rents,
insurance or bond premiums, loans, interest rates, or
other obligations normally required in the execution of a
contract that are paid, reduced, charged at less than
fair market value, waived or forgiven." (Labor Code
�1720)
The State Public Works Enforcement Fund (SPWEF) was created as a
special fund in the State Treasury for the purpose of performing
prevailing wage and labor compliance enforcement activities by
the Department of Industrial Relations (DIR).
Among other things, existing law regarding DIR labor compliance
enforcement:
Authorizes the director of DIR, with the approval of
Hearing Date: September 1, 2011 AB 436
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Senate Committee on Labor and Industrial Relations
the Director of Finance, to determine and assess a fee on
any awarding body using funds derived from any bond issued
by the state to fund public works projects.
The assessed fee cannot exceed one-fourth of 1 percent
(1/4 of 1%) of the bond proceeds and is required to be
deposited in the State Public Works Enforcement Fund only
to be used for enforcement of prevailing wage requirements
on public projects.
The administration and enforcement of prevailing wage
requirements is an administrative expense associated with
public works construction.
For all projects required to pay a fee, DIR shall do
the following:
a) Review payroll records to verify compliance on a
monthly basis;
b) Adopt regulations setting forth the manner in
which the department will ensure compliance with and
enforce prevailing wage requirements;
c) Waive the fee for an awarding body that has
previously been granted approval by the director to
initiate and operate a labor compliance program (LCP) on
the awarding body's projects', and that requests to
continue to operate that LCP in lieu of labor compliance
by the department.
However, the fee cannot be waived for an
awarding body that contracts with a third
party to initiate and enforce an LCP on the awarding
body's projects.
Existing law authorizes the awarding body for a public works
project to not require the payment of the general prevailing
rate of per diem wages on public works projects of specified
sizes and types of work, if the awarding body elects to initiate
and enforce a Labor Compliance Program (LCP) containing
specified requirements for every public works project. (Labor
Code �1771.5 and 1771.55)
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Senate Committee on Labor and Industrial Relations
Existing law gives specified authority for certain school
district governing boards, governing boards of community college
districts and community college facility construction projects,
cities, counties, qualified entities, solid waste management
facilities, or water recycling facilities, transit operators,
and unified school districts to enter into design-build
contracts for specified projects if certain requirements are
met, including the establishment and enforcement of an LCP, or
the contracting with a 3rd party to operate an LCP.
However, existing law provides that after the
effective date of the regulations adopted by DIR for
labor compliance monitoring, these bodies are only
allowed to waive the fee for DIR enforcement if the
entities have previously initiated and operated an
approved "in-house" labor compliance program (not through
a 3rd party).
Design-build" is defined as a procurement process in
which both the design and construction of a project are
procured from a single entity.
Existing law also requires an awarding body that chooses to use
funds derived from either the Kindergarten-University Public
Education Facilities Bond Act of 2002 or the
Kindergarten-University Public Education Facilities Bond Act of
2004, or the body awarding any contract for a public works
project financed in any part with funds made available by the
Water Security, Clean Drinking Water, Coastal and Beach
Protection Act of 2002 or the Safe, Reliable High-Speed
Passenger Train Bond Act for the 21st Century, to pay a fee to
the department sufficient to support the department's costs in
ensuring compliance with and enforcing prevailing wage
requirements on the project and labor compliance enforcement, as
specified.
This Bill would make changes to existing law with regards to the
current mechanism that funds prevailing wage and labor
compliance enforcement activities through the Department of
Industrial Relations.
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Senate Committee on Labor and Industrial Relations
Specifically, this bill would:
1)Provide that the Department of Industrial Relations (DIR)
shall monitor and enforce compliance with applicable
prevailing wage requirements for any public works project paid
for in whole or part out of public funds that are derived from
bonds issued by the state, and shall charge each awarding body
(to be calculated at the percentage currently required in law)
for the reasonable and directly-related costs of monitoring
and enforcing compliance with the prevailing wage requirements
on each such project.
2)State that the reasonable and directly-related costs of
monitoring and enforcing compliance with the prevailing wage
requirements on a public works project incurred by DIR are
payable by the awarding body of such public works project as a
cost of construction.
3)Provide that the awarding body may elect not to receive or
expend amounts from bond proceeds to pay such costs of the
project; however, such election does not relieve the awarding
body from reimbursing DIR for monitoring and enforcing
prevailing wage requirements on the project.
4)State legislative intent that monitoring and enforcing
compliance with the applicable prevailing wage requirements on
a public works project paid for out of public funds that are
derived from state-issued bonds, whether by use of an approved
labor compliance program or other method, is and historically
has been a necessary and prudent oversight activity, and under
existing law, the authority to use bond proceeds for
construction of a public works project inherently includes
authority to pay reasonable costs of such oversight activities
that are directly related to such construction from state bond
proceeds allocated to such construction.
5)Specify that the enforcement fee requirements do not apply to
state bond funded projects and specified design-build projects
if the awarding body has entered into a collective bargaining
agreement that binds all of the contractors performing work on
the contract and that includes a mechanism for resolving
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Senate Committee on Labor and Industrial Relations
disputes about the payment of wages.
a) In lieu of reimbursing DIR for this enforcement, the
awarding body of state bond funded projects and specified
design-build projects may:
i) Elect to continue operating an existing previously
approved LCP to monitor and enforce prevailing wage
requirements on the project as long as it is an
"in-house" LCP (not contracted through a 3rd party); or
ii) Entered into a collective bargaining agreement that
binds all of the contractors performing work on the
contract and that includes a mechanism for resolving
disputes about the payment of wages.
6)Upon order of the Director of Finance, authorize a loan in the
amount of four million three hundred thousand dollars
($4,300,000) to be provided from the Uninsured Employers
Benefit Trust Fund to the State Public Works Enforcement Fund
to meet the startup needs of the Labor Compliance Monitoring
Unit which would be created to provide this enforcement.
7)Make related and conforming changes to existing law.
8)Make other related findings and declarations.
COMMENTS
1. Background on LCP's and DIR's Labor Compliance Monitoring
Unit:
The laws regulating public works projects require, among other
things, that contractors and subcontractors pay their workers
not less than the general prevailing wage rates as determined
under the Labor Code. State prevailing wage requirements are
enforced both by contracting agencies, known as "awarding
bodies," through review of certified payroll records and
taking cognizance of violations, and by the state Labor
Commissioner (also known as the Chief of the Division of Labor
Standards Enforcement), through the investigation of
complaints and issuance of civil wage and penalty assessments.
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Senate Committee on Labor and Industrial Relations
Prior to 2009, existing law required awarding bodies to adopt
and enforce a labor compliance program approved by the
Department of Industrial Relations as a method of meeting
their obligation of assuring compliance with payment of the
prevailing wage on their public works projects. The first
DIR-approved LCPs were established on a voluntary basis to
obtain higher exemptions from prevailing wage requirements
under the law. However, the Legislature later began to
require awarding bodies to use LCPs to monitor and enforce
compliance on specified projects, including school
construction projects funded by the Kindergarten-University
Public Education Facilities Bond Acts of 2002 and 2004,
projects funded by the Water Security, Clean Drinking Water,
Coastal and Beach Protection Act of 2002, and projects built
under a variety of statutes authorizing design-build
procurement.
However, on January 22, 2007 the Legislative Analyst's Office
(LAO) released the report, "Implementing the 2006 Bond
Package: Increasing Effectiveness through Legislative
Oversight," in which the effectiveness of labor compliance
programs (LCP) was questioned.
According to LAO, a review of summary data from annual reports
filed with DIR by LCPs suggested that the amount of wages
recovered for workers by the LCPs was minor given the volume
of public works contracts and the amount spent on
administering LCPs. In its report, LAO stated that if the
Legislature wished to extend LCP requirements to future bonds,
then legislation needed to be passed requiring DIR to
strengthen its oversight of LCPs.
Dissatisfaction with the overall performance of LCPs led to
the adoption of SBX2-9 (Padilla) in 2009. The Legislature
determined that it would be more cost effective to utilize the
expertise of the DIR to monitor and enforce compliance with
the prevailing wage requirements on public works projects than
to use labor compliance programs as the method of assuring
compliance with payment of prevailing wages. Essentially,
SBX2-9 replaced the LCP requirement in a variety of statutes
with a requirement to pay a fee for compliance monitoring and
enforcement by DIR on the same types of projects covered by
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Senate Committee on Labor and Industrial Relations
those statutes. SBX2-9 also expanded the number of projects
that would be covered by this requirement by extending it to
any project funded in whole or in part by a state public works
bond rather than just the four bonds that previously had been
subject to an LCP requirement. The Legislature further
authorized that the cost of the department's monitoring and
enforcement activities on state bond-funded public works
projects be paid from state bond proceeds.
2. Issue in Question: Legality of using bond funds to pay for fee
required for DIR enforcement
SBX2-9 required the Director of DIR to establish the fees with
the approval of the Department of Finance for this service and
to adopt reasonable regulations setting forth the manner in
which DIR would enforce compliance on covered projects. The
legislation further provided that the new fee-based monitoring
and enforcement system would only apply to projects awarded
after the fees and regulations had been adopted. Thereafter,
the Director proposed and adopted regulations that, among
other things, addressed the new system's applicability,
notices, fees, fee waivers, the establishment of a Compliance
Monitoring Unit, payroll record review and other monitoring
and investigative activities. These regulations were approved
on June 29, 2010 and became effective on August 1, 2010,
making the provisions of SBX2-9 effective for projects for
which the contract was awarded on or after that date.
However, subsequent to the adoption of these regulations, bond
counsel for the State Public Works Board indicated that it was
unwilling to write an "unqualified opinion letter" for
specified bond sales due to potential questions about the
legality of using bond funds to pay for fees in the manner
prescribed in SBX2-9 and the regulations.
As a result, DIR sought to amend and delete portions of the
regulations on a temporary emergency basis, for the purpose of
suspending and postponing the commencement of fee-based
compliance monitoring and enforcement by DIR on public works
projects until these legal issues are resolved.
According to DIR, discussions have occurred over the past
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Senate Committee on Labor and Industrial Relations
several months with bond counsel and other interested
stakeholders regarding resolving the potential legal questions
at issue with the funding mechanism. Therefore, according to
DIR this bill would make the necessary statutory changes to
address these potential issues and allow the enforcement
mechanism to move forward.
3. Need for this bill?
Technical changes in the manner in which awarding bodies pay
for DIR enforcement services is required in order to address
the concerns raised by the Attorney General's office that the
current method of reimbursement could be challenged as
inconsistent with constitutional bond law. Without providing
these changes, the State Public Works Board is unable to issue
an unqualified opinion letter for the bond sale. According to
the then Director of DIR, John Duncan, in a letter to
interested person, he stated that "Without the customary
unqualified opinion letter, the bonds will be unmarketable,
leaving the state unable to pay for the projects in question,
resulting in a loss of employment and economic stimulus to the
community at a time of continuing stress to local, state and
national economies.: �Notice of Proposed Emergency Action to
Suspend Effect of SBX2-9 Regulations and Compliance Monitoring
Unit, October 21, 2010]
This bill would change the method by which DIR receives the
funds to cover prevailing wage and labor enforcement
activities from a fee to reimbursement from awarding bodies on
the public works projects. This bill would also state that the
Legislature finds and declares that the reasonable and
directly related costs incurred by the department in
monitoring and enforcing compliance with the prevailing wage
requirements for an awarding body on any public works project
paid for out of public funds that are derived from
state-issued bonds is a necessary and prudent oversight
activity and constitutes an inherent cost of construction of
the authorized public works project, payable from state bond
proceeds allocated to such construction.
4. Proponent Arguments :
Hearing Date: September 1, 2011 AB 436
Consultant: Alma Perez Page 9
Senate Committee on Labor and Industrial Relations
Proponents argue that although current law created the State
Public Works Enforcement Fund in order to allow the director
of DIR to determine and assess a fee on all state bond funds
issued for public works projects for enforcement purposes, the
fund is yet to be enacted as the regulations for it were
suspended due to concerns raised by the Attorney General's
office in the fall of 2010.
According to proponents, there exists an urgent need to
provide enforcement resources which enable DIR to hold
contractors and sub-contractors accountable for prevailing
wage violations. Currently, DIR employs less than two dozen
staff to cover the tens of thousands of public works projects
statewide. Proponents argue that tax payers, law-abiding
contractors and construction workers are the primary victims
when publicly funded projects go unprotected against fraud and
abuse by unscrupulous contractors seeking to profit at the
public's expense. Additionally, proponents argue that
non-compliance is often a sign of other violations such as
failure to carry workers' compensation coverage and
unemployment insurance and participation in the underground
economy.
Proponents argue that the technical and necessary changes in
the bill are required as a result of concerns raised by the
Attorney General's office regarding the reimbursement
methodology in the original statute. This bill would revise
the manner in which awarding bodies pay for the DIR service so
that the Attorney General's office may issue the necessary
"unqualified bond opinion" which allows the State Treasurer to
issue bonds for infrastructure projects. Proponents argue
that enacting these changes will not only save the state money
by discontinuing the use of 3rd party LCPs, but awarding
agencies will see increased productivity, better quality
construction and fewer injuries as a direct result of
compliance with prevailing wage law.
5. Opponent Arguments :
According to opponents of the measure, when the Legislative
Analyst criticized the State's use of Labor Compliance
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Senate Committee on Labor and Industrial Relations
Programs (LCPs) as ineffectual they agreed and supported the
legislation that created the framework for the Compliance
Monitoring Unit in the Department of Industrial Relations -
along with funding for this effort from the public agencies
who undertake the project. Opponents state their
disappointment when opposition from the Attorney General
derailed that effort; however, they are very much opposed to
the inclusion of additional language that would allow some
projects to go unregulated.
Opponents argue that there is no conceivable public benefit to
eliminate the role of the State in enforcing prevailing wage
law. According to opponents, this bill would create three
distinct regulatory schemes:
1. Projects which may continue under LCP supervision
2. Projects that are supervised by the state
3. Projects with absolutely no supervision whatsoever -
only a reliance on a contractual agreement between the
public agency and a handful of non-governmental entities
who agree ahead of time to resolve "disputes about the
payment of wages."
According to opponents, this Legislature has no fewer than
eight separate bills that enhance penalties and levy new
extractions on public works wage and benefit violations, yet,
this bill suggests that the state should have no authority to
enforce the law on specific projects. Opponents are urging
the author to remove these provisions and make the bill apply
to the entire construction industry.
6. Prior Legislation :
SBX2-9 (Padilla) of 2009: Chapter 7, Statutes of
2009-10/Second Extraordinary Session
This bill made general changes to law dealing with the payment
of prevailing wages and its enforcement. Primarily, the bill
changed the enforcement method from one involving Labor
Compliance Programs to a procedure involving a fee that would
be imposed on awarding bodies to directly fund DIR to enforce
prevailing wage laws on those public works projects.
SB 191 (Padilla) of 2007: Vetoed by the Governor
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Senate Committee on Labor and Industrial Relations
This bill, similar concepts as found in SBX2-9, would have
established an alternative mechanism to fund enforcement of
prevailing wage and apprenticeship requirements on specified
public works projects.
SB 18 (Perata) of 2007: Vetoed by the Governor
This bill would have required an awarding body that chooses to
use funds for a public works project using the
Kindergarten-University Public Education Facilities Bond Act
of 2006 to monitor the project with a Department of Industrial
Relations approved labor compliance program.
AB 306 (Eng) of 2007: Held in Senate Appropriations Committee
This bill sought to add specific administrative procedures and
responsibilities to an approved private entity that contracts
to initiate and enforce a Labor Compliance Program.
SUPPORT
State Building and Construction Trades Council, AFL-CIO
The Solis Group
OPPOSITION
Associated Builders and Contractors of California
Plumbing-Heating-Cooling Contractors Association of California
Western Electrical Contractors Association
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Consultant: Alma Perez Page 12
Senate Committee on Labor and Industrial Relations