DIR $551k Penalty Dropped - Abuse of LCP Power

Read the entire DIR Civil Wage Assessment against Vector Resources, Inc. 6/17/13 here.


Contractor Vector Resources, Inc. (Vector) worked on the San Diego Unified School District (LCP) Specified Proposition "S" School Sites (Project) in San Diego County. The Notice determined that $551,627.28 in estimated contract payments due Vector were being withheld.

The Director finds that Vector has carried its burden of proving that the basis of the Notice was incorrect in that it did not submit inadequate payroll records and that the LCP exceeded its authority in issuing the Notice. Therefore, the Director issues this Decision dismissing the Notice.


The San Diego Unified School District (SDUSD) advertised the Project for bid in November 2008 and awarded the contract to Vector. Vector and SDUSD entered a contract (Contract) on February 10, 2009, to design and install communications technology upgrades consisting of local area network electronic components and pathways for specified middle, high, and elementary schools under Proposition S. The Contract provided that Vector would furnish services pursuant to the California Multiple Award Schedule (CMAS), incorporating five CMAS contracts, in accordance with Public Contract Code section 12100.7, et seq. Contract amendments were entered on April 15, 2011, and December 13, 2011, for the respective purposes of replacing two expired CMAS contracts and extending the Contract for two years. Under the Contract, the Awarding Body issued Notices to Proceed (NTPs) for increments of work. Vector's employees have been working on the Project at more than one school from February 2009 through the present.

The Notice: LCP issued the Notice on February 26, 2013. LCP believed that given its statutory obligation to verify compliance with the prevailing wage law, it had no alternative but to temporarily withhold contract payments since, during an audit, it became aware of potential violations and was unable to resolve the issues with Vector.

The Notice announced that pursuant to Labor Code section 1771.5, subdivision (b)(5) and California Code of Regulations, title 8, section 16435, contract payments in the amount of $2,551,627.28 were being withheld due to delinquent or inadequate payroll records for multiple employees working in the weeks ending July 31, 2011 through August 5, 2012.

The Notice identified four areas of payroll discrepancies on Vector's certified payroll records (CPRs):

1. Misclassification and underpayments for Sound and Signal Technicians (SSTs) performing work listed under the scope of work for Inside Wireman;

2. Payrolls listing multiple classifications per employee per payroll, not distinguishing between classification, hours, and wages;

3. Check numbers not matching payroll; and

4. No Operating Engineer classification being reported on CPRs for each week commencing February 10, 2009, through August 5, 2011, when trenching work was reported.

The audit supporting the Notice found underpayment of wages in the amount of $1,936.392.96 and penalties, presumably under section 1775, in the amount of $615,234.31. Underpayment of fringe benefits is also reflected in the audit.

The Notice alleges that Vector's payroll records are inadequate, not that they are delinquent or uncertified. As to the first issue of inadequacy, Graham Champion, LCP's Labor Compliance and Construction Contracts Supervisor, testified that Vector's CPRs showed workers in the SST classification, but the workers are pulling wire and should be listed as Inside Wireman. Because the workers are not listed as Inside Wireman, on their face the CPRs are inaccurate, and, hence, inadequate.

As to LCP's second issue of inadequacy, LCP's written explanation states that from its standpoint there are three relevant dates for the purpose of determining the applicable prevailing wage determination (PWDs): the February 2009 date of the Contract, the April 2011 amendment to the Contract, and the December 2011 amendment to the Contract. SDUSD authorized Vector's work by issuing NTPs, which direct Vector to proceed on certain scopes of work, typically at a given school. For work authorized.

During the Contract's initial period from February 10, 2009 through April 11, 2011, LCP would apply the 2008-2 PWD. For work authorized during the period of the first amendment to the Contract, April 12, 2011 through December 12, 2011, LCP would apply the 2011-1 PWD. For work during the period of the second amendment to the Contract, December 13, 2011, through February 9, 2014, LCP would apply the 2011-2 PWD. LCP states the CPRs are inadequate because they do not indicate how many hours each employee has worked under the separate NTPs. Champion testified there could be two PWDs that apply to a given employee in a given week for work under separate NTPs. LCP's position is that for accuracy of payroll, Vector should identify on a separate line on employee timecards which NTP is associated with specific hours to allow LCP to verify if the proper PWD has been applied.

Vector responds that only one applicable PWD applies, the one in effect on the bid advertisement date, known as the benchmark date. Nevertheless, Administration Department Manager Jennifer Sinnott testified that Vector has provided LCP with all the information necessary to identify the applicable NTP, as shown by LCP's audit.

According to Sinnott, even though the NTPs were not broken out on time cards, the LCP has the school location numbers to correlate the time worked to a NTP to identify the applicable PWD. Sinnott stated Vector provided back-up information for the CPRs, including direct deposit documents, reports for fringe benefits, cancelled checks, and daily time logs.

As to the third issue of inadequacy, LCP's written explanation states the standard CPR form includes a requirement that the contractor list the check number for the payments of wages in order for the LCP to verify receipt of payment. LCP states that for direct deposit transactions of wage payments, no check number exists and Vector included in its CPRs either a "phantom" number or no number at all. Vector has produced bank documents depicting itemized payments outgoing to employees, but those documents do not indicate a transaction number to confirm receipt by each employee.

LCP auditor Josh Harris testified that the phantom numbers affect LCP's ability to verify payment using third party documentation, as could be done with a cancelled check. However, Harris agreed that employees have been asked and did not deny receipt of their wages, and that Vector provided substantially enough information to show that employees were paid as indicated on CPRs. Still, Harris maintained that LCP was unable to correlate payment to the CPRs because to do so involves looking at four different documents and the absence of a check number and use of the phantom number meant the CPRs were inaccurate.

Sinnott testified that Vector's use of phantom numbers for direct deposits was done at LCP's request because no check numbers exist when employees elect direct deposit. Sinnott identified both bank and Vector documents that were submitted to LCP to enable it to verify that Vector's employees actually received the stated amounts via direct deposits.

As to the fourth and final issue of inadequacy, LCP's written statement indicates that Vector employee time cards show employees potentially performed trenching work, for which they should have been classified as Operating Engineers. Because the Vector CPRs do not show employees classified as Operating Engineers, the CPRs were inadequate. In response, Vector witness Sinnott testified that no Vector employees performed the trenching work. That work was done by a subcontractor's employees. The subcontractor's payroll records were submitted to LCP as corroboration. LCP did not rebut this evidence.


Assuming that Vector bears the burden of proof to show the basis for the Notice is incorrect, Vector has carried that burden. The only reason given on the Notice is inadequate payroll records. Delinquent records, lack of certification, and lack of declaration were not given as reasons. The regulatory definition of "inadequate payroll records" is "lacking any of the information required" by section 1776. (Cal. Code Regs., tit. 8, § 16435, subd. (d)(1).) Section 1776, subdivision (a), in turn, required Vector to keep "accurate payroll records, showing the name, address, social security number, work classification, straight time and overtime hours worked each day and week, and the actual per diem wages paid" to the employees. (Cal. Code Regs., tit. 8, § 16435, subd. (d)(l); § 1776, subd. (a).) LCP identifies no documents listed in section 1776 that have not been produced by Vector. Vector presented testimony and samples of the documents that, in six boxes, include all names of employees on the Project, and their social security numbers, work classifications, straight time and overtime hours, and actual per diem wages paid. LCP did not rebut that evidence.

LCP's argument is that the produced documents amount to "inadequate payroll records" justifying the Notice because section 1776, subdivision (a) uses "accurate payroll records" as a preface to the list of specific information required to be kept and produced on payroll records after an LCP request. Under that theory LCP asserts the records are not accurate for purposes of the Notice when on their face (a) they do not show the Inside Wireman and Operating Engineer classifications LCP asserts should apply; (b) they do not identify how many hours each employee worked under each NTP issued by the Awarding Body which, in LCP's view, establishes the benchmark date for determining which PWD applies; and (c) they do not contain check numbers for employees who elected wage payment by direct deposit where check numbers are non-existent.

A problem exists with LCP's theory that inadequacy of payroll records under section 1771.5, subdivision (b)(5) can be based on perceived misclassification and absence of NTPs on timecards. Allowing LCP to use these issues as basis for finding inadequate records would inject into an expedited, limited hearing substance that is potentially and more properly heard in review of a notice of withholding under section 1771.5, subdivision (b)(6), which accommodates a broader review. (Cal. Code Regs., tit. 8, § 16435.5, subd. (c) ["amount equal to the underpayment" as used in a withholding under section 1771.5; subdivision (b)(6) includes the difference between amounts paid and the "correct" general prevailing wage rate due workers in the classification].) It would transform a simple hearing on whether the information necessary to conduct an audit has been submitted into a more complex hearing on whether the facts on the ground bear out the rates and classification used by Vector. In doing so, the statutory intent for a limited scope of an expedited hearing would be subverted and duplicative hearings could occur in the event a withholding under section 1771.5, subdivision (b)(6) is later reviewed.

Further, the basis for a notice of withholding under section 1771.5, subdivision (b)(6) is that, after investigation, it is established that underpayment has occurred. Prior DLSE approval of the notice is required, with DLSE affirming, rejecting, or modifying the withholding in whole or in part as to both wages and penalties being found due. (Cal. Code Regs., tit. 8, §§ 16436, subd. (c) and 16437, subds. (a) and (d).) In contrast, a notice of temporary withholding under section 1771.5, subdivision (b)(5) based on delinquent or inadequate records does not require the prior approval of DLSE. (Cal. Code Regs., tit. 8, §16435, subd. (e).) Because a notice of withholding under section 1771.5, subdivision (b)(6) involves many more issues than inadequate payroll records, DLSE provides an important check on the work of a labor compliance program, which often has considerably less experience in prevailing wage enforcement than does DLSE.

In hearings after DLSE approval of notices of withholding, DLSE may intervene to represent the awarding body, providing a further check on the withholding process. (Cal. Code Regs., tit. 8, §§ 16439, subd. (b).) Hearings on the two types of withholding have distinctive features. However sincere and well-intentioned LCP may be in seeking misclassification and other information to complete its audit, to allow misclassification of Inside Wireman and Operating Engineer and the lack of identification of NTPs to form a basis on which to find the produced records inaccurate impermissibly blends the two procedures.

A second problem with LCP's theory is that it treats the phrase "accurate payroll records" as a separate category of information to be produced in addition to the list of specific information required by section 1776. Under the principle of ejusdem generis, general words are construed to embrace only things similar in nature to those enumerated by the specific words. (International Federation of Professional and Technical Engineers, Local 21, AFL-CIO v. Superior Court (2007) 42 Cal.4th 319, 342 [doctrine of ejusdem generis "presumes that if the Legislature intends a general word to be used in its unrestricted sense, it does not also offer as examples peculiar things or classes of things since those descriptions then would be surplusage"][intemal quotation marks and citations omitted].) Section 1776's general phrase "accurate payroll records" immediately precedes the list of specific types of information called for, and it cannot be construed to embrace other things that are not similar in nature to the enumerated list.

As applied here, the principle means that LCP cannot use its claim that payroll is inaccurate because the wrong classifications are used, non-existent check numbers are missing in instances of payroll direct deposit, or NTPs are omitted from timecards, because that information is not similar to the specific categories of information listed in section 1776, all of which have been produced. Nor is "accurate payroll records" a separate catch-all category encompassing classifications not used, NTP dates, or non-existence check numbers.


1. The Notice was incorrect in that Vector did not submit delinquent or inadequate payroll records for all hours worked on the Project by the affected workers.

2. LCP exceeded its authority under Labor Code section 1771.5, subdivision (b)(5) and California Code of Regulations, title 8, section 16435 in issuing the Notice.

3. The Notice of Temporary Withholding of Contract Payments should be dismissed.

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