March 8, 2011

California Supreme Court Declines to Hear Prevailing Wage Case

On March 2, 2011, the California Supreme Court declined to hear the plaintiff’s appeal of the Second District Court of Appeal’s decision in Azusa Land Partners v. Department of Industrial Relations, which expanded the reach of California’s prevailing wage statutes to public works that are constructed with private funds if the overall project receives public funds – in this case Mello-Roos Community Facilities District (“CFD”) bond proceeds. A full description of the Court of Appeal’s decision can be found in Goodwin Procter’s January 13, 2011 Client Alert.

The Supreme Court’s refusal to hear or depublish the Azusa Land Partners case lets stand the Court of Appeal’s determination that CFD bond proceeds are “public funds” and the receipt of public funds to pay for a portion of public improvements in a project causes the entire project to become a “public work” under California’s prevailing wage laws. The consequences of the entire project becoming a public work are twofold.

First, all public improvements – whether funded with public funds or privately – that are required as a condition of regulatory approval will require the payment of prevailing wages.

Second, all non-public (i.e., private) improvements in the project also constitute a “public work” for California’s prevailing wage purposes. To prevent the non-public improvements from being constructed with prevailing wages, the private improvements must qualify under an exception, such as that found in Section 1720(c)(2) of the California Labor Code. This exception provides that only the public improvements required as a condition of regulatory approval are subject to prevailing wages if (i) the project is an otherwise private development project, (ii) the state or political subdivision contributes no more money, or the equivalent of money, to the overall project than is required to perform the public improvement work, and (iii) the state or political subdivision maintains no proprietary interest in the overall project. There are other exceptions in the Labor Code, but Section 1720(c)(2) was specifically discussed in the Azusa Land Partners case.

Consequently, contractors and developers who have used or are in the process of using Mello-Roos bonds or any other public funds for the construction of infrastructure must carefully examine their contracts, conditions of approval, and public-private relationship to assess the risk of whether prevailing wages must be paid for the construction of all public improvements in their projects, and care must be taken so that contractors and developers do not trigger the requirement to pay prevailing wages on private improvements in a project.

In dealing with such significant financial impacts (both in compliance and in breach), it behooves those involved in public-private developments to review their projects carefully. For example, land purchase and sale contracts between master developers and merchant builders may need to be reviewed, as property values and purchase prices can be materially impacted by prevailing wage requirements. Merchant builders who purchase property from a master developer must determine whether any residual contractual obligations to provide public improvements necessitate the payment of prevailing wages. Master developers who do not use CFD bonds to finance backbone infrastructure will want to obtain sufficient protections against prevailing wage liability for the infrastructure they constructed where downstream merchant builders intend to use CFD bonds or other public funds to pay for public improvements in the future.