Labor Compliance Programs (AB 1506)

UPDATE:  February 2003

Introduction

This is a follow-up on the information provided in January concerning the implementation of Assembly Bill 1506. In that posting, which follows below, we summarized information concerning pre-existing voluntary Labor Compliance Programs (LCPs) which a local public agency could establish to enforce prevailing wage requirements on all construction projects in exchange for an increase in the minimum threshold for paying prevailing wage. These voluntary LCPs are required to be approved by the Department of Industrial Relations and are subject to existing regulations promulgated by the Department.

We also discussed the requirements of Assembly Bill 1506, which now requires any public entity awarding a public works project to initiate and enforce a mandatory LCP on any projects funded by the 2002 or 2004 State Bond Acts and commenced after April 1, 2003. Initially there was some confusion as to whether the term “commenced” meant that a notice to proceed had been issued on the project, or whether ground actually had to be broken on the project by April 1. Further, it was unclear whether, in addition to the requirement that districts transmit a finding to the State Allocation Board (for community college districts, the finding must be transmitted to the Director of the Department of Industrial Relations), that an LCP has been initiated and enforced, additional approvals from the Department of Industrial Relations would be required. While there are still many uncertainties concerning the new law, these two questions appear to have been answered.

When Does a Project Commence Before April 1, 2003?

At its January 22, 2003 meeting, the State Allocation Board adopted emergency regulations to amend several of its forms to take into account the requirements of AB 1506. SAB will release funds for projects funded under the 2002 State Bond Act (Proposition 47) without an LCP if the Notice to Proceed for the construction phase of the project is issued before April 1, 2003. A draft version of SAB form 50-05, Fund Release Authorization, contains language consistent with the regulations and can be downloaded from the website for the Office of Public School Construction, located at www.opsc.dgs.ca.gov. The form is marked draft because it has not yet been approved by the Office of Administrative Law.

Public entities should be cautious in attempting to avoid the establishment of an LCP by issuing a notice to proceed prior to April 1, 2003. For example, it is possible that a notice to proceed which does not permit the contractor to actually commence construction or enter the site for some time may be subject to challenge.

Is the Department of Industrial Relations’
Approval Required for Funding?

On projects for which a notice to proceed will issue on or after April 1, 2003, it is now clear that the awarding body must demonstrate to the State Allocation Board [Department of Industrial Relations for community college districts] that it has initiated and enforced an LCP approved by the Department of Industrial Relations.

What Is Required for DIR Approval by
The Department of Industrial Relations?

While we have information as to the elements of voluntary LCPs approved by the Department in the past, the minimum criteria actually required by statute for approval of a mandatory LCP have not been clarified. Only a handful of school districts were ever approved for voluntary LCPs under the pre-existing law. There are instances where school attorneys believe that some of the elements of the voluntary LCPs approved for those districts would not be required by applicable statutes and regulations for mandatory LCPs. Nevertheless, those LCPs do provide examples of programs which have received the Department’s blessing and may be useful in facilitating approval. The most recently approved voluntary LCP is for Antioch Unified School District. The approved documents for that district are posted on the website for the Department at www.dir.ca.gov. The Department will also apply its existing LCP regulations to the new mandatory LCPs. Those regulations can be found at Title 8 of the California Code of Regulations, section 16425 and following (also available on the Department’s website).

The Department also recently posted on its website a Guidebook on LCPs which should provide useful information concerning the requirements of an approved program. The Guidebook states that the Department “may take up to 30 days for review prior to determining if the proposal will be initially approved or denied.” Districts may consider proceeding with the bidding process pending approval by the Department of an LCP, delaying award until approval is obtained. However, even if the 30-day time frame is observed, if there are problems with the LCP from the Department’s perspective, there may be additional delays.

As you know, the new law permits a public entity to contract with a third party to operate its LCP. Since one of the factors considered by the Department of Industrial Relations in its approval process is “experience and training of the awarding body’s personnel on public works labor compliance issues,” public entities will want to carefully consider whether current and/or new employees will be able to perform these duties or whether the entity would be better off contracting with a third party. Many construction management firms will make this service available. We hope to have additional information for you in the near future concerning other viable third party options such as consortia.

We will continue to keep you informed of developments in this area. Please don’t hesitate to call in the interim if you have questions. Contract language complying with the requirements of AB 1506 is available upon request.

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January 2003

As discussed in the October 2002 Schools Legal Service workshops, Assembly Bill 1506 requires districts to implement a “labor compliance program” (LCP) for projects funded with monies from the 2002 state facilities bond. The purpose of this memo is to describe existing voluntary LCPs, summarize for you again the mandatory LCP requirements of the bill, and make you aware of some uncertainties created by the new law.

A voluntary LCP has been a feature of the Labor Code for more than a decade, although only a few California districts have taken advantage of it. Under a voluntary LCP, a district elects to in effect stand in the shoes of the Labor Commissioner for purposes of enforcing prevailing wage laws by reviewing, auditing and investigating certified payroll records submitted by contractors on construction projects, withholding payment when records are late or incomplete and in some cases retaining underpayments and penalties from funds due the contractor. LCP requirements must also be published in the bid documents, and a pre-job conference must be held to discuss the requirements of state and federal labor laws. (The Department of Industrial Relations provides a checklist of topics to be covered at a pre-job conference which is set out in its LCP regulations. [8 California Code of Regulations, §16400, and following.])

In exchange for a district’s agreement to do this on all of its construction projects, the district is granted an increase in the threshold for payment of prevailing wage, from the usual $1,000 to $15,000-25,000 depending on the nature of the work. (Contracts for alteration, demolition, repair or maintenance work would be exempt from payment of prevailing wage up to $15,000, and contracts for “construction” would be exempt up to $25,000.)  In addition, the district is entitled to retain some of the penalties it collects from contractors.

The Department of Industrial Relations does not have sufficient staff to comprehensively audit prevailing wage compliance on school district projects, and believes this program is one way to stop what it sees as rampant fraud in this area.

At a recent meeting of the Coalition for Adequate Student Housing, representatives of the principal districts running voluntary LCPs discussed their experiences. These included Los Angeles, San Juan and San Diego Unified School Districts. Their programs required the hiring or contracting of staff to monitor certified payroll, conduct audits where necessary, and even interview contractors’ employees in the field to discover whether the wages reported were actually being paid. While these districts believed the program to be valuable for a number of reasons, the consensus was that the benefits afforded by the voluntary program did not cover its expenses.

The Department of Industrial Relations issued regulations governing voluntary LCPs, found in Title 8 of the California Code of Regulations. The regulations require approval of the Department of Industrial Relations for any LCP. Final approval will not be given until the LCP has been in operation for 11 months after initial approval. Approval criteria include an examination of a district’s experience in administering such a program.

Assembly Bill 1506 added section 1771.7 to the Labor Code. It calls for a public entity awarding a public works project to initiate and enforce (or contract with a third party to do so) a labor compliance program as described in the statute governing voluntary LCPs. This applies to projects commenced after April 1, 2003 funded with monies derived from the 2002 or 2004 State Bond Acts.

It is not yet clear when a project “commences” for purposes of the April 1, 2003 deadline. The State Allocation Board’s Implementation Committee for AB 1506 suggests that a notice to proceed issued before this date will exempt the project from the requirements of the new statute. However, the Department of Industrial Relations, which oversees voluntary LCPs, has stated publicly that the project must actually break ground before that date. Until further clarification in the form of regulations or legislation occurs, districts attempting to avoid the application of this law on a particular project should conservatively assume that ground must actually be broken before that date in order for the project to be exempt from the requirements of AB 1506.

A district is required to make a written finding that it has initiated and enforced an LCP on state bond-funded public works projects, and to transmit a copy of the finding to the State Allocation Board before bond monies can be released.

The law requires the State Allocation Board to increase the per-pupil grant for projects which will now be subject to an LCP to help offset the increased costs of running or contracting for administration of the program. SAB has until July 1, 2004 to make the funding adjustment.

Districts may contract out with third parties for administration of the required LCP. Several construction management firms are planning on offering this service, billing districts for the staff time involved as a reimbursable expense. Some districts and county offices are discussing the possibility of joint operation of an LCP.

There is some controversy as to whether additional approvals for the mandatory LCP will be required from the Department of Industrial Relations.

As discussed above, AB 1506 requires an awarding authority to transmit a written finding to the State Allocation Board in order to trigger release of funding from the 2002 State Bond. The new statute does not make clear whether this is the end of the District’s duty in this regard, or whether the District is subject to all of the regulations governing voluntary LCPs and must seek approval of the Department of Industrial Relations in addition to submitting the written finding to the State Allocation Board. Obviously, an additional layer of approvals from a separate state agency could result in construction delays, especially if this separate approval will be tied to the release of funding. Some school law attorneys and agencies take the position that the Legislature did not intend the Department of Industrial Relations to oversee mandatory LCPs under its voluntary LCP regulations, and that the State Allocation Board is the oversight agency.

The Department of Industrial Relations asserts that it does have jurisdiction over the mandatory LCPs required by AB 1506. Assemblyman Marco Firebaugh sought an opinion of the Legislative Counsel on this issue. The opinion concludes that the mandatory LCPs are subject to the Department’s regulations for voluntary LCPs. A copy of that opinion is available on the CASH website, www.cashnet.org. The Department has also placed information on its website (www.dir.ca.gov/LCP.html) asserting that existing regulations for voluntary LCPs must be followed by mandatory LCPs. Department representatives have stated publicly that a 30-day approval process is possible, with a mechanism for automatic approval for up to one year if the Department does not timely respond to a request, but the process for mandatory LCPs has not been formalized.

It is not clear what the consequences would be if a district obtains automatic approval through the failure of the Department of Industrial Relations to respond, and then many months later the Department revokes the approval. Under the regulations for voluntary LCPs, criteria for approval include an analysis of the public entity’s experience in operating an LCP, experience of its personnel with public works labor compliance issues, the public entity’s record of “taking cognizance of Labor Code violations” and withholding over the past five years. Nearly all districts required to implement a mandatory LCP under AB 1506 will have no experience of this sort. It is possible that the Department would issue new regulations better tailored to the situation of districts implementing mandatory LCPs. Under any scenario, the necessity to seek approval from the Department adds another layer of complexity to the construction process and potentially to the funding process.

The State Allocation Board is in the process of compiling draft emergency regulations to implement its role under AB 1506. We will make you aware by fax or e-mail of relevant developments in this regard.

Enclosed is a chart which attempts to set out some of the requirements of the voluntary and mandatory LCPs with citations to relevant authority.

Please call us if you have any questions or would like to discuss this further. In addition, if you need contract language for projects implementing an LCP, please call.

Enclosure:  “Prevailing Wage Table (1-30-03)”