BILL ANALYSIS �
Senate Committee on Labor and Industrial Relations
Ted W. Lieu, Chair
Date of Hearing: January 11, 2012 20011-2012 Regular
Session
Consultant: Alma Perez Fiscal:Yes
Urgency: No
Bill No: SB 727
Author: Berryhill
As Introduced/Amended: January 4, 2012
SUBJECT
Public works: prevailing wages
KEY ISSUES
Should the Legislature raise the threshold on public works
projects exempt from prevailing wage requirements from $1,000 to
$100,000?
Should the payment of the prevailing wage not be required for
public works projects unless the cumulative investment by the
state or any political subdivision is more than 50 percent of
the total payment under the contract?
Should the Legislature limit the circumstances under which the
payment of prevailing wage is required by establishing that work
performed during the design and preconstruction phases of
construction and the hauling of refuse from a public works site
to an outside disposal location are not included in the
definition of "public works"?
Should the Legislature allow volunteers to continue to perform
certain work on public works projects by deleting the sunset
date of January 1, 2017, on the exemption that allows volunteers
to perform such work and not be paid the prevailing wage, as
otherwise required?
Should the Legislature establish that the requirement to pay
prevailing wages only applies to workers that are "directly at
the sight of the work" and does not apply to fabrication or
prefabrication work that is done at permanent offsite
facilities?
PURPOSE
This bill seeks to make various changes to existing law related
to the payment of prevailing wages on public works projects,
including repealing various provisions of current law.
ANALYSIS
Existing law defines the term "public works" 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, except work done directly by any
public utility company pursuant to an order of the Public
Utilities Commission or other public authority. (Labor Code
�1720)
Under existing law , "public works" also means the hauling of
refuse from a public works site to an outside disposal location,
with respect to contracts involving any state agency, including
the California State University and the University of
California, or any political subdivision of the state. The
"hauling of refuse" includes, but is not limited to, hauling
soil, sand, gravel, rocks, concrete, asphalt, excavation
materials, and construction debris except for recyclable metals,
as specified. (Labor Code �1720.3)
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
required in the execution of the contract, that are paid,
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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.
Existing law requires all employees who work on public works
projects with a budget of $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) This
requirement is applicable to work performed under contract and
is does not apply to work carried out by a public agency with
its own forces. Existing law requires that the Director of the
Department of Industrial Relations (DIR) determine the general
prevailing rate of per diem wages in accordance with specified
standards.
However, existing law provides certain exemptions to the payment
of prevailing wage that includes, among others, the following:
1. Private residential projects built on private property
unless the projects are built pursuant to an agreement with
a state agency, redevelopment agency, or local public
housing authority.
2. An otherwise private development project if the state or
a political subdivision reimburses a private developer for
costs that would normally be borne by the public, as
specified.
3. The construction or rehabilitation of affordable housing
units for low-income or moderate-income persons, as
specified, that are paid for solely with moneys from a Low
and Moderate Income Housing Fund or a combination of
private funds, as specified.
4. Unless otherwise required by a public funding program,
the construction or rehabilitation of privately owned
residential projects is not subject to the prevailing wage
requirements if specified criteria are met.
Existing law exempts any work performed by volunteers, as
defined, from the public works requirements; however, the
exemption allowing volunteers on public works projects is set to
expire on January 1, 2017. (Labor Code �1720.4)
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Lastly, under existing law, every apprentice, as defined,
employed on a public works project is required to be paid the
prevailing rate of per diem wages for apprentices in the trade
to which he or she is registered. However, this requirement
does not apply to contracts of general contractors or to
contracts of specialty contractors not bidding for work through
a general or prime contractor when those contracts involve less
than $30,000 dollars. (Labor Code �1777.5)
This Bill makes various changes to existing law related to the
payment of prevailing wages on public works projects, including
repealing various provisions of current law.
Specifically, this bill:
1)Raises the threshold on public works projects exempt from
prevailing wage requirements from $1,000 to $100,000.
2)Provides that specified public works and prevailing wage
requirements shall not apply to contracts for which the state
or any political subdivision pays a cumulative amount of less
than 50 percent of the total payment under the contract.
However, if the cumulative amount increases to 50 percent or
more at a later date, prevailing wage requirements shall apply
beginning on the date the change occurs.
3)Exempts from prevailing wage requirements any school district
construction, reconstruction or rehabilitation projects except
as required by federal law.
4)Limits the application of prevailing wage law applicable to
specified irrigation, utility, reclamation, improvement
district, street, sewer and other improvement work, by
requiring that such projects be paid for in whole or in part
with public funds in order to be covered (current law does not
have a public funds requirement for these types of projects).
5)Revises various provisions of public works law to apply only
to work done "in the execution of a contract."
6)Revises provisions of existing law related to the
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applicability of the law to private residential projects and
works on private development projects required as part of
regulatory approval of a project, as specified.
7)Revives exemptions for specified residential and low-income
housing projects that (under current law) apply only to
projects before December 31, 2003.
8)Eliminates the requirement in existing law that projects
financed under the California Infrastructure and Economic
Development Bank Act comply with prevailing wage laws.
9)Provides that "public works" does not include work performed
during the design and preconstruction phases of construction,
consequently, eliminating the requirement that this work be
paid the prevailing wage.
10)Deletes provisions of current law that specify that "public
works" includes the hauling of refuse from a public works site
to an outside disposal location.
11)Eliminates the sunset date on an exemption from prevailing
wage requirements for specified volunteers, volunteer
coordinators and conservation corps members.
12)Provides that the requirement to pay prevailing wages does
not apply to fabrication or prefabrication work that is done
at permanent offsite facilities of contractors.
13)Provides that the requirement to pay prevailing wages does
not apply to a public work project of a local agency that
adopts a resolution or ordinance that provides that prevailing
wage requirements shall apply to any public work of that local
agency only if required by a state or federal grant.
14)Provides that workers employed on a hospital seismic
retrofitting project are not required to be paid prevailing
wages.
15)Specifies that workers must be employed "directly at the
sight of the work" to be deemed to be employed upon a public
work.
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16)Extends the contract threshold for certain apprentice
requirements on public works projects from contracts of
$30,000 to contracts of $100,000 or more.
17)Makes other related and conforming changes.
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
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.
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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).
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.
2. Review of Issues Addressed in the Bill:
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 (Alarc�n), 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.
Azusa Land Partners v. Department of Industrial Relations
This bill addresses several aspects of the States current
prevailing wage law. Among them are issues that may stem from
a recent decision of a California appellate court in Azusa
Land Partners v. Department of Industrial Relations. At issue
in that case was a mixed use project comprised of over 1,200
residential homes and 50,000 square feet of commercial space.
The developer entered into an agreement with the City of Azusa
(as a condition of regulatory approval of the project) to
construct certain public improvements, including school, rail,
sanitation, road, bridge and utility construction work. The
City issued bonds to reimburse the developer for a portion of
the cost of the public improvements.
DIR concluded that the entire project constituted a public
work because it was funded "in whole or in part" with public
funds. However, citing an exception under Labor Code
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�1720(c), DIR determined that no more public funds were
contributed than required to pay the cost of the public
infrastructure projects. Therefore, prevailing wages only had
to be paid for the construction of the public improvements.
The Second District Court of Appeal upheld DIR's
interpretation in the case. The first part of the decision
related to whether the overall master-planned development at
issue was a "public work" under Labor Code �1720 because it
was "paid for in whole or in part" out of public funds. The
Court held that the prevailing wage law applied to the
"overall scheme of improvement," thus, the entire project at
issue was a "public work" under �1720. The second main part
of the decision dealt with, despite the fact that the entire
project was a "public work," whether a specified exemption in
1720(c)(2) limited the obligation to pay prevailing wages only
to specified "public improvement work" that was part of the
overall project.
The Azusa decision has generated significant discussion in the
public works arena. Those stakeholders who support the Court's
finding in Azusa contend that the Court rightly interpreted
longstanding interpretation that a project is a public work if
it is "paid for in whole or in part out of public funds."
However, some industry observers strongly disagree with the
Azusa decision and feel that it was an unwarranted expansion
of prevailing wage law into otherwise private projects mostly
objecting to what they call the Court's "development-wide"
approach to determining whether a given project is a "public
work."
In light of this case, it appears that several provisions of
this bill address issues raised in the Azusa decision. First,
this bill recasts various provisions of existing law to focus
on work done "in execution of a contract" instead of the
project itself. Some may argue that this could be seen as an
attempt to overturn the Azusa Court's "development-wide"
approach discussed above. Second, this bill provides that the
requirements do not apply where the public funds amount to
less than 50 percent of the total payment under contract.
Finally, this bill recasts the exemption in Labor Code Section
1720(c) (which was at issue in the Azusa case) to reference
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this new definition of "paid for in whole or in part out of
public funds."
Local Agency Opt-Out
This bill authorizes the governing body of a local agency to
adopt, by an affirmative vote of a majority of its members, a
resolution or ordinance providing that the prevailing wage
requirements shall apply to any public work of the local
agency only if required by a state or federal grant.
Exemption for School Construction Work
Under current law, "public works" are defined as construction,
alteration, demolition, installation or repair work paid for
in whole or in part out of public funds. A significant
portion of public works construction work consists of school
construction and modernization work. This bill provides that
the governing board of a school district is not required to
comply with prevailing wage requirements with regard to the
construction, reconstruction or rehabilitation of school
facilities, except to the extent required by federal law.
Refuse Hauling
Since 1976, the Labor Code has defined "public works" to
include the hauling of refuse to an outside disposal facility
with respect to public works contracts involving any state
agency, including the California State University and the
University of California. In 1999, SB 302 (Floyd) added
contracts involving cities, counties, and other political
subdivisions of the state to this requirement. Last year, AB
514 (R. Hern�ndez) clarified what materials from the worksite
are included in the definition of "hauling of refuse." AB 514
was signed by the Governor and enacted into law. This bill (SB
727) proposes to eliminate this entire provision of law
thereby eliminating the requirement that this work be paid the
prevailing wage.
Offsite Fabrication
The issue of prevailing wage law and the offsite fabrication
of work has been a controversial subject in recent years.
Several stakeholders �labor unions and others] have expressed
concern that some unscrupulous contractors have begun to
perform certain fabrication and prefabrication work away from
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the work site in an effort to evade the requirements of
California's prevailing wage law. The fabricated work would
then be brought to the actual work site and installed, with
workers receiving prevailing wages only for that final stage
in the process.
On March 4, 2003, the DIR issued two precedential public works
coverage determinations addressing whether employees engaged
in certain offsite fabrication in conjunction with
construction projects are deemed to be employed upon public
works. Cuesta College (PW Case #2000-027); City of San
Jose/SJSU Joint Library Project (PW Case #2002-064). In two
lengthy analyses, DIR concluded that California's prevailing
wage law does not limit coverage to the site of the public
works project. Moreover, DIR noted that one of the purposes
of the prevailing wage law is to "protect employees from
substandard wages that might be paid if contractors could
recruit labor from distant cheap-labor areas."
Both of the coverage determinations were administratively
appealed. In addition, various legal actions were filed
challenging the determinations. On April 16, 2003, the Acting
Director of DIR announced that, until the resolution of the
administrative appeals, the implementation of the public works
coverage test enunciated in those determinations regarding
offsite fabrication work would be stayed. A similar 2007 case
is currently pending on appeal in the California First
District Court of Appeal.
This bill provides that the requirement to pay prevailing
wages does not apply to fabrication or prefabrication work
that is done at permanent offsite facilities of contractors.
This bill also specifies that workers must be employed
"directly at the sight of the work" to be deemed to be
employed upon a public work. Similar to this bill, AB 1310
(Dutton) of 2003 and AB 1995 (Cox) of 2004 both attempted to
exempt offsite fabrication work from the requirements of
prevailing wage law. Both measures failed in their first
policy committee.
3. Staff Comment:
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Under current law, prevailing wages are required to be paid to
all workers employed on public works projects. 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" be paid to all workers employed on public works
projects.
This bill proposes to increase this threshold to $100,000.
The author states the need to update this number which has
been unchanged since 1931.
Staff would like to note that according to the U.S. Bureau of
Labor Statistics - CPI Inflation Calculator, $1,000 in 1931
had the same buying power as $14,883.55 in 2011.
4. Proponent Arguments :
According to the author, contractors are required to pay
state-mandated construction wage rates ("prevailing wage") to
workers engaged in various occupations allegedly related to
public works construction, however, the definition of public
works has been expanded to include numerous kinds of
privately-built projects that most reasonable Californians
would not consider to be government projects. The author
believes that as a result, state-mandated construction wage
rates are often inflated as compared to actual market wages in
a locality.
The author and proponents argue that California needs to
encourage economic growth and job creation by eliminating the
government requirement that contractors pay inflated and
inaccurate state-mandated construction wage rates on private
projects that are not truly public works. They argue that this
bill would establish a more reasonable state definition of
"public work," thus limiting the coverage of these mandates to
legitimate government projects.
According to the author, the bill relieves regulatory burdens
for small businesses and governments by increasing the cost
threshold for prevailing wage coverage from $1,000 to
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$100,000. The author states that the bill repeals laws that
expanded state-mandated prevailing wage coverage to
occupations in which workers do not actually build or fix
structures for taxpayers, such as land surveying, inspection
services, refuse hauling, and off-site manufacturing and
fabrication work. Finally, the author argues that this bill
gives local governments the ability to establish their own
prevailing wage policies for public works exclusively funded
by local taxpayers giving them the right to establish rates
that more accurately reflect local market conditions.
Proponents argue that this bill would save money for taxpayers
and given the current financial strain local governments and
small business entities are under due to recession, this
correct and appropriate use of prevailing wage will aid in
creating jobs and economic development to help the high
unemployment in California.
5. Opponent Arguments :
Opponents of the measure argue that this bill is nothing more
than shameful attacks on construction workers during the worst
economic recession in modern history. They argue that this
bill allows unscrupulous contractors to circumvent prevailing
wage requirements, cheat workers from their fair wages, and
put them at risk of greater injury, accident, or death.
According to opponents, for decades, our model prevailing wage
standards have not only guaranteed fair wages for public
construction work, but they have also set a benchmark for
quality to benefit projects' eventual users. Opponents argue
that this bill would exempt a laundry list of current school
construction work from prevailing wage laws. It would cut
prevailing wage from various residential projects and triple a
dollar threshold at which prevailing wage applies. They argue
that this bill reflects ignorance of the fact that prevailing
wage attacks do no save money. According to opponents,
countless studies and reams of evidence confirm that weakened
prevailing wage standards set in motion a chain of events that
ultimately mean inadequate training programs, longer foreman
hours, shoddier work that requires more maintenance and,
inevitably, cost overruns. Thus, opponents argue, these
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overruns more than overwhelm any up-front savings.
Additionally, opponents argue that these exemptions would only
hurt school construction projects because prevailing wage on
school projects means that communities can rest assured their
educational institutions were built by skilled workers under
the highest quality standards and for a fair cost. They argue
that these wage standards force contractors to compete through
efficiency and know-how rather than a brutal race to the
bottom in terms of worker wages, benefits, safety, and
ultimately, construction quality. Lastly, opponents argue that
if passed, this bill would raise the cost of completing
taxpayer funded projects due to low quality work while
increasing insurance costs for all law abiding contractors.
6. Prior Legislation :
AB 987 (Grove) of 2011: Failed Passage in Asm. Committee on
Labor and Employment
AB 987 was identical to this bill. AB 987 was heard and
failed to pass in the Assembly Committee on Labor and
Employment on January 4, 2012.
AB 988 (Grove) of 2011: Failed Passage in Asm. Committee on
Labor and Employment
This bill would eliminate the "modal rate" system for
determining prevailing wage rates, limit the factors that may
be included as a per diem wage, provide a new method for
determining vacation dates, and establishes a new method for
determining prevailing wages.
AB 988 is identical to SB 725 (Berryhill) of 2011, which this
Committee will hear on January 11th. AB 988 was heard and
failed to pass in the Assembly Committee on Labor and
Employment on January 4, 2012.
AB 587 (Gordon) of 2011: Chapter 219, Statutes of 2011
This bill extended the sunset on the exemption of prevailing
wage payment for volunteers on public works project out five
years, from January 1, 2012 to January 1, 2017.
AB 514 (R. Hernandez) of 2011: Chapter 676, Statutes of 2011
This bill specified what materials from the work site are
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included in the definition of hauling of refuse," for purposes
of clarifying if the employee is required to be paid
prevailing wages.
SUPPORT
Associated Builders and Contractors of California (ABC
California) - Sponsor
7 Individuals
OPPOSITION
California Labor Federation
State Building and Construction Trades Council
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