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New Reqirements in Construction Law Impacting How Contractors and Sureties Do Business

New Law Creates Additional Hurdles for Public Works Contractors

Senate Bill 854, which amends the sections of various statutes including the Government and Education Code, was signed into law by Governor Brown on June 20, 2014, and creates significant changes to laws directly impacting public works contractors. Among these changes is the new online registration requirement imposed on contractors. Under this new law, contractors and subcontractors who intend to bid and work on public works projects must pay a registration fee (initially set at $300.00) and register with the Department of Industrial Relations (“DIR”). Significantly, prior to registering the contractor or subcontractor must meet certain requirements. Registration must be renewed on an annual basis.

In order to qualify to register, these contractors must (1) have workers’ compensation coverage for any employees and only use subcontractors who are registered public works contractors; (2) have Contractors State License Board license if applicable to the contractor’s trade; (3) not be under federal or state debarment; (4) have no delinquent wage or penalty assessment owed to any employee or enforcement agency; and (5) not be in prior violation of the registration requirement once it becomes effective (although there is a protection built-in for the first 12 month period whereby a contractor may qualify for registration by paying an additional penalty). Registration began July 1, 2014. As of March 1, 2015, the law requires only registered contractors and subcontractors be listed on bids.

For public works projects awarded on or after April 1, 2015, only registered contractors and subcontractors may be used on public works projects.

The requirements that have to be met before a bidder may even register with the DIR are significant. When applied, these requirements essentially result in all bidders on public works projects having to prequalify in order to even register. Notably, one of these requirements is that the contractors must not have any delinquent wage or penalty assessments owed. This reinforces the recent trend of cracking down on compliance with prevailing wage laws. In effect, the registration ensures that all contractors deal with any outstanding assessments and are not allowed to let them go by the wayside while still bidding and being awarded public works jobs. By making the payment of delinquent assessments a prerequisite to registration, contractors will be denied the opportunity to bid on all public works jobs until the delinquency has been handled.

Furthermore, for any contractors that may be thinking that this new law will provide new ground for raising bid protests, this is not the case. There are protections built into the law which provide, among other things, that the inadvertent listing of an unregistered subcontractor on a bid will not necessarily invalidate that bid and an unregistered contractor or subcontractor can be replaced with one who is registered, despite the fact that the registration of contractors is easily verifiable public information. Additionally, a contractor whose registration lapses will have a 90 day grace period within which they are able to pay a late fee and renew.

The takeaway for contractors is to make sure they meet all requirements for registration in time for the March 2015 deadline for bidding. Failure to do so may result in denial of the opportunity to bid on any public works project. Further, the transparency of the system (and the failure to meet requirements) will become public information and could result in ramifications on other projects. Finally, compliance with prevailing wage laws will become increasingly imperative. Not only is payment of delinquent assessments a prerequisite of registration, but all of the fees collected through the new program will go to fund all of the DIR’s public works activities, including compliance monitoring and enforcement. The wage and penalty assessments assessed have already been increasing in the past few years, so the additional steady funding will only further reinforce that trend.

Impact on Sureties of the New Law Extending the Time for Enforcement of Prevailing Wage Violations

Under Labor Code 1741 & 1771.2 the Labor Commissioner now has 18 months (rather than 180 days under the previous law) to serve a civil wage and penalty assessment for underpayment of wages. However, the impact on the sureties bonding those contractors is something that may be overlooked. This “tail of liability” might extend too far, creating various challenges.First, the extended time leads to inevitable loss of evidence to the surety over time, diminishing the surety’s ability to adequately contest the assessment. The reason is that under Labor Code Section 1743(d) the 6 month statute of limitations to sue on a public works payment bond is extended up to and including the time when the wage assessment is final.

Second, how can a surety properly price the cost of a bond without an expectation of a cut off of its liability under the payment bond?

Third, the extension to 18 months is longer than most warranty periods. A wage claim could be made when the project has long been completed and forgotten about. Fourth, requiring certified payroll records may no longer be sufficient protection against wage claims. Requiring subcontractors to bond back to the general contractor is the best way to transfer the risk to the subcontractor’s bond company.

Given the impact of the new law, it seems likely that this bonding back may become a requirement of the general contractor’s surety, in order to protect its own payment bond. Although this can be costly, the benefit surely outweighs the risk and soon, this may be the standard required by the sureties bonding general contractors.

Rights Against Owner for Costs Resulting From Public Work Determination

A looming area of concern for contractors has been the ramifications of performing work on a project not knowing it was a prevailing wage job and later discovering the project was subject to payment of prevailing wages. This finding results in additional wage costs and penalties to the unknowing contractors. Contractors can now take some comfort in knowing the owner on the project may be held accountable, depending on the circumstances.

A contractor now has a cause of action against a public agency if the agency affirmatively represents that a project is not a public work and it is later determined that prevailing wages should have been paid. (Labor Code § 1726(c)(1)). A public agency may also be liable to a contractor if the public agency receives “actual written notice” from the Department of Industrial Relations that a project is a public work and fails to disclose that information prior to bid opening or award of a contract. (§1726(c)(2)). In both situations, a contractor may be able to recover increased wage costs, penalties, and costs and attorney fees incurred as a result of having to pay prevailing wages.

Further, a public agency may also be liable to a contractor if, after a contract is awarded, it is determined that the work performed under the contract was a public work and the agency failed to identify it as a public work in the relevant bid documents. (§1781). If the awarding body is not contracting directly with the contractor, the work must be identified as a public work in the written agreement or other writing by which the work is undertaken.

The contractor blind-sided by a prevailing wage requirement on the project may now have recourse against the awarding body. The new statutes provides innocent contractors with a remedy to recover its unanticipated costs from the awarding body responsible for notifying contractors of the classification of the project prior to bidding. This should remove some fear contractors have working on projects that may involve public funds or resources unbeknownst to the contractor. In contrast, these new statutes should result in heightened caution on the part of awarding bodies to ensure the classification of the project is correct from the beginning.