Acting as a private investigator is not within the description of a Class B contractor’s license, or the scope of work for a public works prime contractor.  However, when faced with allegations that one of its subcontractors violated wage and hour requirements, the tools of Jim Rockford or Magnum P.I. can become as important as any in avoiding or limiting exposure.  One such claim recently led a contractor down a path that included undercover video footage obtained from hidden bluetooth earpiece cameras, envelopes of cash, labor representatives soliciting kick-backs, and dirty check-cashing operations.  The story of how the contractor found itself having to uncover and unravel these details starts with California’s prevailing wage and hour laws.

California’s prevailing wage laws establish minimum wage and hours regulations designed to benefit workers on public works projects.  A public works project is any project that is paid for “in whole or in part” with public funds.  In most instances, contractors are aware that they are performing on such a project and that the payment of prevailing wages is required.

However, the source of “funding” for a project, and the impact it has on whether the project is considered “public,” is sometimes less obvious.  For example, a public agency’s waiver or reduction of fees, or the sale of property for less than fair market value, can be considered public funding, such that prevailing wages must be paid.  The nuances and factors that apply to determining whether a project is being funded by public monies is beyond the scope of this article, but is raised as an issue to consider when taking on a new project.

California Labor Code § 1742 requires that all workers on public projects be paid no less than the prevailing wage of per diem wages for similar work in the locality of the project.  While this may be well known and accepted as a cost of doing business on public projects, the financial impact that a subcontractor’s violations of wage and hour laws can have on an unsuspecting and innocent prime contractor can be staggering.  The California Labor Commissioner, acting through the Division of Labor Standards Enforcement (the “DLSE”), investigates potential wage and hour violations on behalf of workers, often following a complaint or tip by either a worker or a labor representative.

If the DLSE determines that a violation has occurred, it will issue a Civil Wage and Penalty Assessment (“CWPA” – commonly pronounced, “kwapa”) against both the subcontractor accused of underpaying its workers or underreporting their hours, and the prime contractor.  While the Labor Code calls for the DLSE to collect any unpaid wages or penalties from the subcontractor first, to the extent the subcontractor is unable to defend against the violation, or satisfy the CWPA, the prime contractor, and possibly its surety, are also responsible for paying the wages and, potentially, the penalties.  If the subcontractor can’t defend itself or fund the wages and penalties, the prime contractor is placed in a difficult position and must quickly put on its private investigator hat to determine whether the violations occurred as alleged by the DLSE, and what defenses, if any, exist to defeat or reduce the claim.

What To Do When A CWPA Is Issued

When a CWPA is issued by the DLSE for a subcontractor’s alleged violations, it triggers a few critical deadlines, and also typically raises more questions than it provides answers to a prime contractor.  First, the deadlines:

  • Within 30 days of the service of the CWPA, the prime contractor and/or subcontractor can request a settlement meeting with the Labor Commissioner.  The settlement meeting can be conducted in person or telephonically, and is protected like a mediation, in that no evidence of anything said in the meeting is admissible in a subsequent hearing.
  • Within 60 days of service of the CWPA, each party that intends to contest all or any portion of the claim, must submit a Request for Review to the Labor Commissioner’s office.  (Even if the subcontractor submits a request, the prime contractor must do so also in order to be a party to the action.)  The CWPA will identify where this request is to be sent.  The Request for Review essentially puts the case into litigation-mode, as it triggers the appointment of a Hearing Officer, who will act as judge and jury for trial of the case, if necessary.  It also triggers the right to review the evidence the DLSE has used to prepare the CWPA, which, as discussed below, is critical.  Failure to request review in a timely manner can result in a judgment in the full amount of the CWPA being entered against the prime contractor and/or the subcontractor.
  • After 60 days following service of the CWPA, the affected prime contractor, subcontractor, and surety, can be liable for liquidated damages in an amount of wages that still remain unpaid as of that time.  These “liquidated damages” diverge from the common meaning of the term, as they are simply a doubling of the amount of wages found to be due!  However, there is no liability for liquidated damages if the full amount of the CWPA is deposited for holding in escrow with the DLSE within the 60 days.  While the Labor Code (§ 1742.1) does provide the DLSE with discretion to waive these liquidated damages if the director believes there were substantial grounds for appealing the CWPA, the only way to ensure that the amount of the unpaid wages won’t simply be doubled, is to make this deposit prior to the deadline.

Again, the information provided in the CWPA will raise questions for a prime contractor.  The CWPA will state a basic description of the nature of the violations of the Labor Code, and the basis for the assessment.  For example, it may state that the subcontractor failed to:  (1) properly classify workers; (2) pay required wages; (3) accurately report actual hours worked; or (4) pay overtime, etc.  It will then state the amount of total wages found to be due, and the amount and statutory basis for any penalties being assessed.  A prime contractor learning for the first time about these alleged violations by its subcontractor must act quickly to gather and process information relevant to the claim.  Some ways to accomplish this fact gathering include:

  •  Submit to the DLSE a request to review all evidence to be utilized by the DLSE at the hearing.  This will allow the prime contractor to review the DLSE’s file, and the evidence used to support and calculate the alleged unpaid wages and penalties.  For example, the file will typically include witness statements by the workers, the labor commissioner’s notes, spreadsheets indicating the means by which the wages were calculated, evidence supporting the nature of the work being performed, and whatever else was used to prepare the CWPA.  These materials are critical, as the CWPA itself provides the bare minimum, while the file materials identify the workers, what they say they were paid, how much and when they say they worked, etc.  It is the roadmap for the investigation.
  •  Meet with an interview the subcontractor’s management and field personnel.  Find out if they dispute the claims and if so, what evidence they have to support the defense.  Key evidence includes time sheets, certified payroll records, pay stubs, bank records, daily reports and any other documents or witness testimony that refute the workers’ allegations as to the number of hours worked, the actual wages paid, and/or the nature of the work performed (if classification is at issue).
  •  If it appears the CWPA is overstated in whole or in part, gather your own records and evidence that can support a reduction.  Again, daily reports, subcontracts or other records identifying the scope of work, witness testimony regarding the number of workers for the subcontractor and/or their typical hours worked, correspondence related to work hours or manpower, etc., can all provide useful evidence for defending the claim.

In the case of the contractor mentioned at the start of this article, it was faced with a CWPA totaling over half a million dollars, and a subcontractor (and its workers!) who at first totally denied the accusations.  These accusations included that the workers were required to endorse the back of their certified payroll checks, give the endorsed checks back to their employer, and sign fake timesheets indicating fewer hours than actually worked.  They were then handed envelopes of cash whereby they were paid a fraction of the required prevailing wage.

From there the sordid tale continues with the owner of the company taking its workers’ endorsed paychecks to his local (and friendly) check-cashing market, and cashing the checks. After the subcontractor went out of business and left the prime contractor holding the bag for this mess of allegations, it had to investigate the claims, gather evidence, subpoena records, take depositions and, based on the subcontractor’s initial denial of the claims but lack of cooperation, determine on its own what was true.

In the end, the workers’ (and DLSE’s) claim was overstated, but the basic allegations appeared true, and the prime contractor was able to negotiate a resolution with the DLSE.  However, if it hadn’t taken many of the steps identified in this article, the prime contractor would have faced even greater exposure as a result of the CWPA.