Construction Law Advisory: Mechanical Contractor Scores Victory in Prevailing Wage Dispute

On August 27, 2014, the First District Court of Appeal weighed in on whether prevailing wages are required for public contracts in situations where work is performed in furtherance of the project but at a permanent offsite manufacturing facility that is not exclusively dedicated to the project. In Sheet Metal Workers’ International Association, Local 401 v. John C. Duncan and Russ Will Mechanical, the project at issue was for a community college district where Russ Will was the HVAC subcontractor. The contract documents required contractors to pay prevailing wages but they did not limit where or how Russ Will would fabricate sheet metal required for the job. Russ Will used its existing fabrication facility to form the sheet metal.

An employee of Russ Will filed a complaint with the DIR alleging he should have been paid prevailing wages for work related to the project. The worker fabricated sheet metal for the project but at Russ Will’s Hayward facility, not at the site. The DIR issued a coverage determination in which it concluded that Russ Will was required to pay prevailing wages for the offsite fabrication work associated with the project. The DIR’s determination turned on whether Russ Will was exempt from the prevailing wage law as a material supplier. To qualify for the material supplier exemption, the employer must sell supplies to the general public and its fabrication or manufacturing facility must not be established for the particular public works contract or be located at the site of the public work.

Following the DIR determination, Rush Will filed an administrative appeal. The department reversed its initial coverage determination, concluding that the offsite fabrication performed by Russ Will was not subject to the prevailing wage law.

Although the DIR again concluded that Russ Will was a subcontractor within the meaning of the prevailing wage law and did not qualify for the material supplier exemption, it explained that this conclusion did not necessarily resolve the question of whether the offsite fabrication was subject to prevailing wage requirements.

The DIR noted that California case law did not specifically address the issue posed by the case, i.e., whether fabrication is subject to prevailing wage requirements when performed in an offsite facility of a subcontractor that does not sell supplies to the general public. In the absence of directly applicable California case law, the DIR interpreted the prevailing wage law consistent with federal regulations specifying that prevailing wages do not apply to work performed at a permanent fabrication plant when the location and existence of the plant are determined wholly without regard to any particular public works project. Because the project at issue here had no bearing on the location or existence of Russ Will’s offsite fabrication facility, the DIR concluded that fabrication work performed at the offsite facility was not subject to the prevailing wage law.

By the time of Rush Will’s administrative appeal, the Local 104 had joined the case and had filed a writ with the superior court. The superior court ruled that Rush Will was required to pay prevailing wages and that the DIR had erroneously relied on federal law. Russ Will appealed. In reversing the superior court, the appellate court found that Russ Will would have qualified as an exempt material supplier but for the fact that it did not sell supplies to the general public. The appellate court held that sales of products to the public did not bear upon whether the fabrication performed at a permanent facility was integral to the flow of the construction process: “There is no basis to make this distinction if the critical consideration under California law is whether the offsite operation is integral to the construction process…[w]e conclude that the department did not err in issuing the coverage determination in this case. Offsite fabrication is not covered by the prevailing wage law if it takes place at a permanent, offsite manufacturing facility and the location and existence of that facility is determined wholly without regard to the particular public works project. Because the offsite fabrication at issue here was conducted at Russ Will’s permanent offsite facility, and that facility’s location and continuance in operation were determined wholly without regard to the project, the work was not done ‘in the execution’ of the contract within the meaning of section 1772.”

The appellate court’s ruling likely had a broader application to Russ Will’s ongoing and future wage determinations in projects involving offsite fabrication work. While this case set a bright line rule, in the future, contractors should look for changes in contract language designed to trigger prevailing wages for off-site activities.

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August 28, 2014