Here’s a little snippet of the Construction Law update presentation I will give at the Ohio State Bar Association Convention in May. Since preparation of the materials, we’ve received the Ohio Supreme Court decision on our “Huntington Ballpark” case in ABC of Central Ohio v. Franklin County Board of Commissioners et al., 2010-Ohio-1199. While I agree with the result of the Ballpark case, the rational by the court is a little screwy. Justice Cupp has been writing all of the prevailing wage and construction protest cases for the court lately. The court found the County Commissioners abused their discretion in awarding the painting contract to the second bidder and not our client The Painting Company. If you want to look at the full decision, e-mail me and I’ll pdf it to you.
I. Ohio Court Decisions
A. Prevailing Wage Cases
Ohio’s prevailing wage law is codified in Chapter 4115 of the Revised Code. Generally, the “prevailing wage” must be paid on public construction projects, and is the wage rate that the Department of Commerce determines prevails for similar workers performing comparable work on similar public projects in the locality where the work is to be performed.
The past year has seen significant developments in Ohio’s prevailing wage law, with the Ohio Supreme Court deciding three cases on the subject. In the Gene’s Refrigeration case, the Court addressed standing to pursue claims for prevailing wage violations, as well as the application of prevailing wage law to work performed off of the project site. In the NWOBTC case, the Court addressed how public funding triggers application of the prevailing wage law. And, in the Bergman case, the Court addressed penalties in employee-initiated actions.
Sheet Metal Workers’ Int’l Assn. v. Gene’s Refrigeration, Heating & Air Conditioning, Inc.
(2009) 122 Ohio St.3d 248
The Ohio Supreme Court held that “a labor organization that is an ‘interested party’ under R.C. 4115.03(F) may file a prevailing-wage complaint only on behalf of the employee who specifically authorized the action.” Id. at 249.
The Court also held that “R.C. 4115.05 applies only to persons whose work is performed directly on the site of the public improvement project.” Id.
The case involved the construction of the Grainger Fire Station in Medina County, Ohio. Gene’s Refrigeration contracted to provide duct work including both field construction and off-site, in-shop sheet metal fabrication. Sheet Metal Local 33 was not the bargaining representative for Gene’s employees, but one of Gene’s shop employees gave the Local written authorization to pursue prevailing wage claims for him.
The Local argued that it could pursue prevailing wage claims on a project-wide basis on behalf of all of Gene’s employees because one of the employees had authorized the Local to represent him. The Supreme Court rejected this argument, and held that the Local could only represent the interests of the employee that had given authorization. The Court concluded that “one employee’s authorization does not extend to all remaining employees.” Id. at 252. The Court reasoned that “[t]o allow the union to bring a complaint on behalf of employees who did not authorize the union to act on their behalf would violate the employees’ right to select their own legal counsel or labor representative.” Id.
The Supreme Court next addressed whether an employee whose work is not performed on the actual project site, but who works on materials that will be used in or in connection with the project, must be paid prevailing wage. Id. at 252. The employee had fabricated ductwork for the fire station project at Gene’s off-site shop.
At issue was the meaning of the sixth paragraph of R.C. 4115.05, which provides: “The prevailing rate of wages to be paid for a legal day’s work, to laborers, workers, or mechanics, upon any material to be used in or in connection with a public work, shall not be less than the prevailing rate of wages payable for a day’s work in the same trade or occupation in the locality within the state where such public work is being performed and where the material in its final or completed form is to be situated, erected, or used.” The Court noted that there is “no reference in R.C. 4115.05 to where the work must be performed.” Id. at 253. As a result, the Court reviewed other provisions of the prevailing wage law and concluded: “Construing the language of the entire prevailing-wage statutory scheme along with related regulations, … R.C. 4115.05 does not mandate that prevailing wages be paid to persons who work off-site even if they are working on materials to be used on or in connection with the project.” Id. at 255. The Court held that “R.C. 4115.05 applies only to persons whose work is performed directly at the site of the public improvement project[.]” Id. at 257.
Northwestern Ohio Building & Constr. Trades Council v. Ottawa County Improvement Corp.
(2009) 122 Ohio St.3d 283
The Ohio Supreme Court held that “[t]he prevailing-wage law applies only when a public authority, including an institution, spends public funds to construct a ‘public improvement,’ which by definition must be constructed by a public authority or must benefit a public authority.” Id. at syl.
Fellhauer Mechanical Systems, Inc., is a private company that purchased property in Ottawa County and decided to renovate it. Fellhauer financed the project through both private and public sources. Ottawa County loaned funds to Fellhauer through the Small Cities Community Development Block Grant program, which involves federal funds distributed through the Ohio Department of Development upon an application from Ottawa County on Fellhauer’s behalf. In addition, the Ottawa County Improvement Corporation (a publicly funded corporation) lent Fellhauer money for the project. The funds were used to buy the property, the building, and office machinery. The renovation work was paid for using funds secured through private sources.
A taxpayer and the NWOBTC complained that prevailing wage must be paid on the project, and filed a complaint seeking injunctive relief to force the County and the Ottawa County Improvement Corporation to comply with the prevailing wage law and to prevent the award of contracts until the project complied with the law.
The NWOBTC argued that “once an institution expends public funds, the prevailing-wage requirement applies automatically[.]” Id. at 287. The Ohio Supreme Court rejected that argument, explaining that the General Assembly “wanted to stress that institutions, which, unlike the state or a political subdivision, may have private sources of funding, are still required to comply with the prevailing-wage law even if some of the expenditures come from private sources.” Id. The Court also stated that the “argument that any spending of public funds by an ‘institution’ would … unjustifiably expand the scope of prevailing wage to include projects that are not public improvements, that are not constructed by a public authority, or that do not benefit a public authority.” Id. The Court concluded that the “prevailing-wage law applies only when a public authority, including an institution, spends public funds to construct a ‘public improvement,’ which by definition must be constructed by a public authority or must benefit a public authority.” Id. at 288.
Bergman v. Monarch Constr. Co.
2010-Ohio-622 (Ohio Supreme Court)
The Ohio Supreme Court held that the penalties for prevailing wage violations found in R.C. 4115.10(A) (which require payment of a 25% penalty to the employee and a 75% penalty to the Ohio Department of Commerce) are mandatory, and must be imposed unless the violations resulted from the exceptions specified in R.C. 4115.10(C) (which create exception for misinterpretation of the prevailing wage statutes or an erroneous preparation of payroll documents, provided restitution of the underpayment is made, no further proceedings will occur and no penalties are assessed).
Monarch Construction was the general contractor on a student housing project for Miami University. Monarch subcontracted with Don Salyers Masonry. The Department of Commerce found that Salyers had underpaid its employees. Monarch was also determined to be responsible for the underpayment as a general contract responsible for ensuring that its subcontractors pay prevailing wage.
During the course of the project, Salyers had submitted certified payrolls attesting that it had paid the prevailing wage, and both Salyers and the University had told Monarch that everything was being paid and that there were no problems. Monarch first learned of the investigation and prevailing wage violations when it received the Department’s letter stating that it had determined that violations had occurred.
The employees who decided not to assign their claims to the Department of Commerce for collection filed suit against Salyers, Monarch, and the University. Default judgment was entered against Salyers. The University was dismissed before trial, and Monarch was found liable for the underpaid wages. However, the trial court denied the employees’ request for penalty. The trial court decided that the 25% penalty was discretionary, and because Monarch cooperated as soon as it received notice of the violations, the penalty was unwarranted. The trial court also refused to award the 75% penalty as discretionary and unwarranted. The Court of Appeals affirmed.
The Supreme Court considered the meaning of the penalty provisions in R.C. 4115.10(A), which provides:
“Any employee upon any public improvement, except an employee to whom or on behalf of whom restitution is made pursuant to division (C) of section 4115.13 of the Revised Code, who is paid less than the fixed rate of wages applicable thereto may recover from such person, firm, corporation, or public authority … the difference between the fixed rate of wages and the amount paid to the employee and in addition thereto a sum equal to twenty-five per cent of that difference. The person, firm, corporation, or public authority who fails to pay the rate of wages so fixed also shall pay a penalty to the director of seventy-five per cent of the difference between the fixed rate of wages and the amount paid to the employees on the public improvement.”
The Supreme Court reversed the lower court decisions, concluding that the use of the words “may recover” simply “pertain to the choice the underpaid employee has to enforce his or her right to recover the underpayment” and does not mean that an award of the underpayment and 25% penalty is discretionary. 2010-Ohio-622 ¶14.
Department of Commerce Policy Change
In light of the Gene’s and NWOBTC decisions, the Director of the Ohio Department of Commerce announced a change in the Department’s guidelines for the payment of prevailing wage. Now, the Department states it is going to review whether prevailing wage must be paid on a project on a “categorical” basis, breaking down a project into its components and asking whether public funds were used for any portion of the project, with those portions being subject to prevailing wage.
Director Zurz explained at an Ohio Economic Development Association meeting:
Think of it categorically. If you got the funds for site preparation, then that site preparation would be subject to prevailing wage. That doesn’t mean then construction would be then subject to prevailing wage as it was before. If you got funds for machinery and equipment, then the installation of that machinery and equipment would be subject to prevailing wage. That does not mean the construction of the building around it would be subject to prevailing wage.
The Department appears to have concluded that prevailing wage should once again be applied in a “pre-2008 way.”
Zurz v. 770 West Broad AGA, LLC
Franklin County Court of Common Pleas
Case No. 09CVH09-13412, Jan. 25, 2010 Decision
Pending in the Tenth District Court of Appeals
Case No. 10-APE-02-154
In a case that made headlines, on Labor Day in 2009 the Department of Commerce filed a prevailing wage action against 770 West Broad AGA, LLC (“Property Owner”), and Anchor Realty Construction (“Contractor”), which is described as one the largest enforcement action in recent years. See The Columbus Dispatch, Attorney General Files Large Wage Lawsuits (September 5, 2009).
In January 2008, the State entered into an agreement to lease space from July 1, 2008, through June 30, 2009, from the Property Owner for offices for the Ohio Department of Rehabilitation and Correction. The agreement required the Property Owner make numerous improvements, however, at the Property Owner’s expense. No public funds were used to pay for those improvements.
The Department of Commerce investigated after receiving prevailing wage complaints, and levied penalties against the Property Owner and the Contractor of $508,458.75.
The Property Owner and Contractor moved for a summary judgment dismissing the Department’s enforcement action, arguing, among other things, that the project was not subject to prevailing wage. The court agreed, noting that this was “a conclusion that should be obvious to everyone.” Id. at 4. Although the court agreed that the project fit the definition of a “public improvement” under R.C. 4115.03(C), that was insufficient to trigger prevailing wage as explained in the NWOBTC decision because public funds also must be used to make the “public improvement.” Id. at 6. “[I]t is just logical to rule that if improvements are not made with public money, then they should not be subject to prevailing wage.” Id. at 5. The trial court went on to explain: “The State is free to put whatever conditions it wants on a project when it is the party paying for it. When it is not, it has to accept what it gets.” Id. at 6.
On February 19, 2010, the Department appealed the decision to the Tenth District Court of Appeals, where it is pending review.