|January 8, 2014|
Previously published on January 3, 2014
One of the greatest risks contractors working on public works projects face is that of debarment. If a contractor is either permanently or even temporarily debarred from contracting with local, state or federal governmental agencies, it can very seriously impact if not completely cripple that contractor’s business depending on how much government contracting the contractor typically does. That is why it is imperative public works contractors work diligently to eliminate the risk of debarment.
One way to mitigate the risk of debarment is to strictly comply with any and all applicable prevailing wage laws. For most public works contractors, prevailing wage laws apply to their projects because the federal government and 32 states currently have prevailing wage laws such as the Davis-Bacon Act, which is applicable to federal government construction projects and federally assisted projects. Those laws typically require that contractors pay their laborers and mechanics at least the specified wage per hour as set forth in the contract as “the prevailing wage rates” and then certify to the relevant owner governmental agency that they and their subcontractors have paid the required wages. Recently, the California courts issued a decision that further defined what type of prevailing wage law violation will result in debarment. See Ogundare v. Dep’t of Ind. Rel’s, Div. of Labor Stds. Enforcement, 214 Cal. App. 4th Supp. 822 (2013).
Allegations of Intent to Defraud - Payroll Discrepancies
The issue in Ogundare was whether or not the contractor intended to defraud the state of California when it submitted certified payroll records certifying hours paid to various employees that were different than what the employees testified to at the debarment proceeding. The state Division of Labor Standards Enforcement (“DSLE”) had debarred the contractor but the trial court reversed the decision. The DSLE appealed the trial court’s reversal and won the appeal because the appellate court concluded that there was substantial evidence to support the administrative finding of intent to defraud. Simply put, the evidence cited by the appellate court was as follows.
The contractor had submitted certified payroll records showing that it had paid one employee the prevailing wage of $36.10 per hour for 25 hours of work in one week. The records also showed that two other employees were not eligible to receive overtime wages. The contractor’s certified payroll records were not signed but instead the owner’s name was type written on the signature line.
One employee testified at the debarment proceeding that he had actually worked 61 hours that week and had been paid $15.00 per hour. The employee’s paycheck stub indicated that he was paid $915.00 for 61 hours that same week which equates to $15.00 per hour. The other two employees testified that they had worked sufficient weekly hours to be paid overtime prevailing wages but had not been paid such wages and that their total number of hours had been split between them on the certified payroll records.
In order for the DSLE’s debarment decision to stand, the DSLE had to produce “substantial evidence” that the contractor had intended to defraud the state. The legal test used to determine whether the record contained “substantial evidence” has two prongs: (1) “evidence of ‘ponderable legal significance . . . reasonable in nature, credible, and of solid value’”; and (2) “relevant evidence that a reasonable mind might accept as adequate to support a conclusion.”
The contractor argued the DSLE had not produced substantial evidence to support the debarment because the one employee had not kept a record of the hours he worked in any particular week, the discrepancy between the records and the testimony did not amount to a showing of an intent to defraud, the contracting owner had not actually signed the payroll record, and that any errors were the result of clerical mistakes caused by inexperienced payroll employees.
In response, the DSLE argued that the discrepancy between the payroll records and the one employee’s testimony did in fact evidence an intent to defraud even if he had not kept track of his hours because the paycheck itself corroborated his testimony. The court agreed stating that “[n]o satisfactory explanation was ever provided by [the contractor] for [the] glaring discrepancy between [the] actual paycheck reflecting $15 per hour and the contrary representation by [the contractor] to the DSLE.” The court came to this conclusion because the original debarment decision “rejected [the contractor’s] explanation as inherently implausible in light of [the contractor’s] extensive experience in public contracts and knowledge of recordkeeping that is required.” The appellate court then issued an order directing the trial court to reinstate the DSLE’s one-year debarment. Even though the debarment was only for one year, it may well have much longer lasting effects on the contractor’s ability to obtain any future government contracts because most agencies’ requests for proposals require that a bidder disclose whether they have ever been disbarred, as well as why it occurred.
Points to Consider
This case illustrates that a compliance failure with a prevailing wage law may have adverse consequences that are far more serious than merely making economic restitution of back wages. Public agencies now seem more willing than ever to exercise the debarment sanction.
There are a number of lessons to be learned from this decision that, if heeded, will reduce if not eliminate the risk for this type of compliance problem and the risk of debarment. It is imperative that each member of a contractor’s staff who works in payroll is oriented to the requirements of relevant prevailing wage laws that apply to the contractor’s various public works projects. That training should be updated at least once a year so that any changes in those wage laws can be highlighted for the relevant staff members. The contractor should also implement accounting procedures and protocols that will ensure strict compliance with prevailing wage laws during the accounting and payroll processes. Lastly, a contractor should diligently self-audit its accounting and payroll activities to ensure that the proper procedures and protocols are being followed and implemented. If these steps are taken, the contractor can more readily demonstrate that it is complying with the applicable prevailing wage laws.