DIR $550,000 Fine Reduced to $30,000, Why?

Read the entire DIR Civil Wage Assessment against Brown Construction, Inc. 5/11/17 here.

Is a Contractor Responsible for a Subcontractor Not Paying Overtime?

Brown Construction, Inc. (Brown) and subcontractor Fred Leonard Weber dba Weber Construction (Weber) worked on the New Student Housing (College Creek Apartments) at Humboldt State University (Project) in the County of Humboldt. On July 6, 2011, DLSE issued the Assessment for work performed by Weber, determining that $311,260.33 in unpaid wages was due. The Assessment further determined that $143,500.00 in unpaid statutory penalties was due, $111,800 in Labor Code section 17751 penalties and $31,700.00 in section 1813 penalties.

While Weber's liability for section 1775 penalties is at issue, the only contested issue to be decided is whether a prime contractor is liable for section 1813 penalties for overtime violations committed by its subcontractor.

The Director finds that Weber is liable for the section 1775 penalties and the section 1813 penalties. The Director also finds that as prime contractor, Brown is not jointly or severally liable under section 1813 for overtime violations committed by its subcontractor, Weber.

FACTS

Deputy Labor Commissioner Christopher Kim testified that he issued the original Assessment. The penalties therein were determined by Senior Deputy Labor Commissioner Lola Beavers. Beavers identified the Penalty Review, Exhibit 9. She testified that she considered the statutory factors in determining the section 1775 penalties. While Weber did not have a history of prior violations, she determined the violations in the Assessment to be willful and not based on a good faith mistake. She testified that the overtime violations were the result of Weber's workers working a "four tens" schedule at the beginning of the Project and not being paid overtime for the hours in excess of eight hours per day.

Deputy Labor Commissioner Ying Wu testified that after the case was re-assigned to her, she prepared several revised audits. Exhibit 25 is the final revision. That revision reduced the total section 1775 penalties to $21,850.00 for 437 violations at $50.00 for each violation and section 1813 penalties to $7,425.00. Weber discontinued the "four tens" schedule after the first few weeks.

DISCUSSION

2. Weber Owes Overtime Penalties For Weber Workers Who Were Underpaid For Overtime Hours Worked On The Project.

Section 1813 states in full as follows:

The record establishes that Weber violated section 1815 by paying less than the required prevailing overtime wage rate for 297 violations. Unlike section 1775, section 1813 does not give DLSE any discretion to reduce the amount of the penalty, nor does it give the Director any authority to limit or waive the penalty. Accordingly, the assessment of penalties under section 1813 is affirmed against Weber in the amount of $7,425.00 for 297 violations.

3. Brown Is Neither Jointly Nor Severally Liable For The Penalties Assessed Against Weber Under Section 1813.

Brown argues that it cannot be assessed penalties under section 1813 for Weber's failure to properly pay overtime to its workers employed in the execution of the contract. It argues that the plain meaning of the statute and legislative history relating to its adoption demonstrate a legislative intent to relieve prime contractors of any such penalties assessed against the subcontractor.

DLSE argues that prime contractors are jointly and severally liable for section 1813 penalties incurred by the subcontractor under section 1743, subdivision (a), which provides, in relevant part, that "The contractor and subcontractor shall be jointly and severally liable for all amounts due pursuant to a final order under this chapter or a judgment thereon." DLSE adds that it is the "long-held" position of the Director to hold prime contractors liable under section 1813 for overtime violations by their subcontractors.

It is reasonable to conclude, as Brown does, that the plain meaning of section 1813 is that prime contractors are not liable for overtime penalties assessed against their subcontractors. The Legislature has made a given "contractor or subcontractor" liable for violations ''for each worker employed by the respective contractor and subcontractor .... " (§ 1813, italics added.) Nevertheless, the section is not without ambiguity, and, as DLSE points out, the Department in prior Decisions has found joint and several liability for overtime penalties assessed against subcontractors. Prior Decisions of the Director, however, give no indication that the joint and several issue was expressly raised or decided. In any event, as DLSE also acknowledges, these Decisions do not have precedential effect.

Under SB 1328, the prime contractor remains liable for the payment of prevailing wages and benefits; however, it is relieved of liability for penalties imposed for the subcontractor's failure to pay prevailing wages to its workers unless the prime contractor had knowledge of the failure or failed to perform certain duties specified in the bill(§ 1775, subd. (b)). (See Legis. Counsel's Dig. of SB 1328, ch. 757(1997-1998 Reg. Sess.), page 1, 1997 Cal. Legis. Serv. ch. 757 (SB 1328)(West).) The bill makes the prime contractor or subcontractor subject to a penalty for its failure to produce payroll records within 10 days of a request for the records and expressly provides that the contractor is not liable for the subcontractor's failure to comply. Finally, as noted, the bill makes the prime contractor or subcontractor liable for overtime penalties for workers employed by "the respective contractor or subcontractor"(emphasis added). That this limiting language was intended to relieve the prime contractor of liability for overtime penalties for a subcontractor's failure to pay its workers overtime, to the extent not clear from the words themselves, is supported by the above-cited legislative history and shown clearly by the subsequent legislative history of section 1813.6

EXISTING LAW

(2) Provides in Labor Code 1813, that a subcontractor is responsible to pay its employees on a public works project overtime, as specified. Provides, also that the general contractor is responsible for such penalties for its employees, but not for employees of the subcontractor. This version of Labor Code 1813 will sunset on January 1, 2003. On that date a former version of this section will become operative, which will make the general contractor responsible for penalties for the failure of the subcontractor to pay overtime, as specified.

DLSE argues nevertheless that section 1813 must be construed in light of section 1743, which makes prime contractors liable for "all amounts due" including penalties against the subcontractor under section 1813. However, given the clear legislative history of section 1813, I find that section 1743 does not independently impose joint and several liability on a contractor for penalties assessed against its subcontractor under section 1813.

The Associated Builders and Contractors have filed a late letter of opposition, 'strongly objecting to the provision that the contractor and subcontractor would be jointly and severally liable for the penalties imposed by AB 1646.' The sponsor asserts that AB 1646 simply makes express what are [sic] already the law, citing subdivisions (b) and (d) of Section 1775. They also note that, as in existing law, the prime contractor specifically would not be liable for any penalties unless the prime contractor had knowledge of that failure of the subcontractor to pay the prevailing wage or the contractor failed to follow specified requirements requiring the contractor to require the subcontractor to comply with the prevailing wage law and to monitor for compliance. Thus, they argue, a policy of joint and several liability is soundly based on some act of the contractor in allowing the subcontractor to violate the law.

Thus, the legislative history of AB 1646 shows that in providing for joint and several liability in section 1743, the Legislature was concerned only with wages and section 1775 penalties for the non-payment of wages found due in an enforcement action. The legislative history cautions against a literal construction of section 1743, which would result in joint and several liability for section 1775 penalties if the order of the Director found such penalties are due under section 1775, subdivision (a) from the subcontractor even though the prime contractor established under section 1775, subdivision (b) that it was not liable for such penalties. This would be contrary to the clear intent of the legislation. The same is true with regard to penalties under section 1813. Nothing in the legislative history of AB 1646 suggests that the Legislature intended to make the prime contractor liable for overtime penalties assessed against its subcontractor in contravention of a statute passed only three years previously (and extended indefinitely two years later) which relieved the prime contractor of liability for such penalties.

Based on the foregoing, I find that Brown is not liable for overtime penalties assessed against Weber.

It shall be lawful for any contractor to withhold from any subcontractor under him sufficient sums to cover any penalties withheld from him by the awarding body on account of the subcontractor's failure to comply with the terms of this chapter, and if payment has already been made to the subcontractor the contractor may recover from him the amount of the penalty or forfeiture in a suit of law.

Thus, the Legislature has provided a vehicle to the prime contractor who hired the subcontractor to protect the prime contractor's own interests where funds are withheld by the awarding body on account of the subcontractor's violations after the prime contractor has paid the subcontractor.

Based on the foregoing, I find that Humboldt State University properly withheld contract payments due Brown pursuant to the Assessment issued by DLSE to satisfy the section 1813 penalties due from Weber.

FINDINGS

1. Affected prime contractor Brown and affected subcontractor Weber filed timely Requests for Review of the Civil Wage and Penalty Assessment issued by DLSE with respect to the Project.

2. There are no wages due for the Project.

3. DLSE did not abuse its discretion in setting section 1775, subdivision (a) penalties at the rate of $50.00 per violation, and the resulting total penalty of $21,850.00 assessed for 437 violations is affirmed against Weber.

4. Penalties under section 1813 at the rate of $25.00 per violation are due from Weber for 297 violations on the project, for a total of $7,425.00 in penalties.

5. Brown is not jointly or severally liable for the section 1813 penalties.

6. The amounts found remaining due in the Assessment as affirmed by this Decision are as follows:

Penalties under section 1775, subdivision (a): (against Weber only) $21,850.00

Penalties under section 1813 (against Weber only): $7,425.00

TOTAL: $29,275.00


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