December 09, 2019

Prevailing Wage Requirements: Going Out of Bounds and After Off-Site Fabrication

Deborah I. Hollander

Prevailing wage requirements are a fixture in public construction, with well-developed industry customs and compliance structures.  However, as more “construction” goes off-site in search of increased efficiency and lower costs through pre-fabrication, statutes and case law are reacting to changes in the industry and expanding prevailing wage requirements beyond the jobsite and over state lines.

Established Law vs. New Construction Techniques

General contractors and subcontractors must pay a minimum “prevailing wage” to laborers, craftsmen, and apprentices employed on public works projects. These wage rates, set under federal and various state laws, usually are based upon the collective bargaining agreements established for a particular trade in the locality in which the public work is performed.  To demonstrate compliance, the contractors and subcontractors provide certifications identifying the employee hours and wage as part of their applications for payment.  Failure to pay the appropriate wages can lead to termination from the project, temporary suspension, or debarment from work on public projects, and in some cases criminal prosecution.  Workers who believe themselves to have been underpaid can bring administrative claims, court actions, and depending upon whether they work for a general contractor or high tier subcontractor, payment bonds claims.  Typically, such lawsuits include claims under other federal and state statutes, including those granting successful plaintiffs attorneys’ fees.

State prevailing wage laws have traditionally applied entirely within the state’s own borders because the laws apply directly to work done physically on the project site and to “labor” at the site, rather than to “materials” delivered to the site.  However, for projects built close to a state’s borders, part of the work day may include travel across state lines.  Furthermore, the line between labor and materials is not hard and fast.  Many “pieces” or features from concrete road culverts to elegant elevator cars for a construction project are specifically designed for that project, then subjected to shop drawings and shop drawing review, and then fabricated for that project in the vendor’s plant or shop.  There are companies which even “prebuild” houses and commercial buildings offsite and then assemble on the ultimate project site.  In Pleasantville, New Jersey, this technique was used to build a public elementary school, with the bid specifications requiring pre-fabrication.

The application of construction labor laws to such “fabrications” has been fluid.  In some trades, such as sheet metal work and precast panels, technology has developed for large portions of what was once on-site labor to be done as offsite large scale fabrication within a shop.  

The federal government and many states have regulations and laws which prevent contractors and subcontractors from avoiding the prevailing wage requirements by moving essential construction work slightly offsite, by, for instance, setting up a mortar mixing operation on land directly next to the official worksite and then delivering it to masons as needed throughout the day.  However, these rules have traditionally been designed to distinguish between true offsite, commercial fabrication shops, and improvised efforts to circumvent prevailing wage rules for a particular project.  For instance, under the Davis-Bacon Act, the federal prevailing wage law, a supplier is not subject to prevailing wage requirements. The test of whether a firm is a “supplier” does not rest on whether the product was custom fabricated.  Instead, a company is a “bona fide material supplier” if it sells supplies to the general public, if the fabrication plant was not established specially for the particular public works contract, and the plant is not to be located at the project site.

However, both recent statutes and case law have shown an increasing probability to allow one state’s prevailing wage law to be applied to construction industry wages outside that state’s boarders. Such extension has unanticipated economic and legal impacts.

Courts and Legislatures Extend Reach of Prevailing Wages

In Solouk v. European Copper Specialties, Inc., the Southern District of New York ruled that New York’s Prevailing Wage rate could apply for the work that a subcontractor’s employees did at a New Jersey shop in the morning before traveling to a Brooklyn construction site.  European Copper Specialties subcontracted with Stalco Construction, Inc., for exterior work on a public work project located in Brooklyn.  Stalco was legally responsible under New York law for its subcontractors’ payment of prevailing wages to workers, and, as is typical, Stalco contractually required European Copper Specialties to properly pay its employees the required wages.  As often occurs in prevailing wage claims, a group of workers alleged that their supervisor instructed them to underreport their hours and later brought suit against both European Copper Specialties and Stalco. 

In this particular case, the workers alleged that early each morning they were required to assemble at European Coppers’ shop in New Jersey, load European Copper’s work vehicle and then travel to the site together.  They further alleged that they did some of the sheet metal preparation in the New Jersey shop and some on site in Brooklyn.  They claimed that they had been directed not to report their work in New Jersey.  Stalco sought dismissal of all claims against it, arguing that it was not the plaintiffs’ employer, and successfully obtained dismissal of all claims for which only a direct employer could be liable.  However, the Court held that New York’s prevailing wage law and pay requirements were applicable to work done in the New Jersey shop: “to the extent the work performed by Plaintiffs at the Shop was (as Plaintiffs claim) integral to their work on the Pier A Project and of the type 'customarily and usually’ performed at the job site, it should be considered work performed about or upon the Project, such that it would fall within the coverage of the Prime Contract’s prevailing wage guarantee.” In reaching this conclusion, the Federal Court opined that New York had a strong public interest in the application of its prevailing wage requirements and New Jersey had no countervailing interests.  No one seems to have considered whether New Jersey’s prevailing wage rates should have been applicable for the work physically done in New Jersey.

While the Solouk case was being briefed, however, New Jersey enacted a statute to even more broadly expand its own prevailing wage statute. New Jersey had previously extended prevailing wages to insulation, duct work, and other mechanical system and plumbing components.  On March 18, 2019, New Jersey further extended the prevailing wage obligation to work on the custom fabrication “either of components or structures pre-fabricated to specifications for a particular project of public work or of other materials finished into components without further modification for use in a project of public work or for use in a type or classification of a project of public work.” 

Read literally, New Jersey’s March 2019 amendment would apply to nearly every feature built for and then delivered to a public project, from highway exit signs to the stage curtains at a high school auditorium.  These items are rarely purchased from stock but are manufactured based upon shop drawings designed to conform to architect’s drawings and bid specifications.  Yet, there is no evidence that anyone previously considered such items as being subject to prevailing wage laws.  In the case of highway signs such as those directing drivers to specific exits, each sign is made for a particular point in a roadway, by specialty manufacturers.  However, those manufacturers do not customarily pay prevailing wages.  In fact many use prison labor, often below minimum wage rates.

Competing Interests

As noted, the Solouk court summarily dismissed the notion that the state where the disputed fabrication or other work was done, or the employers in those states, may have countervailing public policies.  The Solouk decision was in the form of a partial denial of summary judgment, and one of the remaining issues to be tried was whether the sheet metal fabrication done in European Copper’s New Jersey shop should be considered labor subject to the prevailing wage law.  If in the Solouk parties had reviewed the New Jersey prevailing wage law they may have recognized that if New Jersey’s law was applied, then the work clearly would have been covered, although northern New Jersey’s prevailing wage rate may have been less than Brooklyn’s.  Arguably, New Jersey (or any other place of work state) may have a public interest in a lower rate being paid to increase the economic incentive for businesses to locate their shops in such state.

Analogous issues have arisen in the private sector, under the National Labor Relations Act.  Federal labor law recognizes that a collective bargaining agreement may include language to preserve work traditionally performed by a union for a particular employer, by restricting subcontracting to those who observe certain pay scales and conditions of employment.  In Eisenmann Corp. v. Sheet Metal Workers Int'l Ass'n Local No. 24, a federal court found that a prevailing wage agreement in a commercial Project Labor Agreement was enforceable against a non-union fabricator because the purpose was to protect against a temptation to undermine the Project Labor Agreement by outsourcing to offsite non-prevailing wage firms.  However, such clauses are invalid if used to disqualify fabrication firms for being non-union.  While Eisenmann involved a private, industrial contract, rather than public work construction, it suggests that courts may look favorably upon extra-territorial prevailing wage statutes.

Even to the extent that one state’s prevailing wages statutes are enforceable for work physically done in other states, there remain the practical problems of enforcement against an out-of-state company.  The primary target of enforcement is more likely to be the in-state general contractor rather than a remote fabricator.  There is the further question of what region’s union rates apply.  Should union wages in New Jersey or Texas apply to the fabrication of precast glass reinforced panels created in Texas? 

Extra-territorial application of prevailing wage laws also create economic issues.  The employer/subcontractor from state A is unlikely to base its bid for work done in its own state on another state’s wage rates.  In the case of an out of state fabricator, the bidder may not even consider that potential liability.  As a result, its bid may be insufficient to cover the full cost which it may eventually be assessed.  As an experienced general contractor or construction attorney knows, underbid contracts often cause more job problems than the initial price savings justify.  The ultimate impact of requiring out-of-state fabricators to pay prevailing wages is likely to raise the costs of public construction projects, but without directly benefitting the employees of the state paying for the project.

As New Jersey’s bill made its way through its legislature, the Office of Legislative Services tried but was unable to estimate the cost.  Ultimately, it provided an official statement that the change “may result in an indeterminate, likely insignificant, increase in State and local units’ expenditures depending upon the difference, if any, between the costs of contracts that are not subject to prevailing wage requirements and the costs of contracts that are subject to prevailing wage requirements.” As a practical matter, the costs of contracts subject to a prevailing wage requirement are going to be higher, so it is virtually inevitable that the new law will increase the costs of public projects to New Jersey taxpayers.  If the law is extended to fabricators outside of New Jersey, the beneficiaries of the generous policy will be employees (and probably voters) in other states.  If the March 2019 prevailing wage requirement is only applicable to New Jersey fabricators, those fabricators will be placed at a competitive disadvantage with those in other states, again primarily benefiting out of state companies and workers, at the expense of New Jersey taxpayers.  However, the law does protect, at least on a secondary level, the onsite companies and their workers from being at a disadvantage with those who carry out the same functions as shop work.

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