By: Jared A. Hand Published: September 2013

The Prevailing Wage Loophole in Labor Law Section 220 is Closed...for Good

The New York Court of Appeals issued a decision on February 19, 2013, demonstrating that the prevailing wage loophole that once existed in Labor Law § 220 is officially closed.

In the Matter of M.G.M. Insulation Inc. v. Gardner, 2013 NY Slip Op. 01017 (2013), a not-for-profit volunteer fire department (the "Department"), located in the Village of Bath (the "Village"), sought financing for the construction of a new firehouse. Historically, the Department operated from a building that was owned and operated by the Village but had since grown inadequate for the Department's needs. After the Village declined to take part in the construction of the new firehouse, the Department solicited bids for the job and selected R-J Taylor General Contractors, Inc. ("Taylor") as its general contractor. Taylor then proceeded to hire a number of subcontractors to construct the various portions of the fire house.

Shortly thereafter, the Department of Labor ("DOL") issued an opinion letter, concluding that the firehouse project was a public work and thus subject to the prevailing wage law. The subcontractors learned of the DOL's determination and work on the project came to a halt. In an effort to keep the project on schedule, the Department agreed to indemnify Taylor and its subcontractors from any liability resulting from their failure to pay the prevailing wages. In the meantime, an administrative hearing was held on the question of whether the prevailing wage law applied to the firehouse project.

The Hearing Officer determined that the project was in fact subject to the prevailing wage law. Specifically, the Hearing Officer concluded that volunteer fire corporations, such as the one involved in this case, are the "functional equivalents" of municipal corporations making them "covered entities" under Labor Law § 220. Alternatively, the Hearing Officer concluded that the protection services agreement in place between the Department and the Village made the Department a public entity. Further emphasis was placed on the fact that the Village authorized and supported the firehouse project, the object of which was to provide protective services for the community.

Taylor petitioned for an Article 78 proceeding to challenge the Hearing Officer's determination. The Appellate Division confirmed the Hearing Officer's decision and dismissed the petition. The Court of Appeals, however, reversed the determination of the Hearing Officer.

In reversing the Hearing Officer's determination, the Court of Appeals conducted an analysis using the framework of the two-pronged "Erie County" test arising out of Erie County Indus. Dev. Agency v. Roberts, 63 NY2d 810 (Ct App 1984). The first prong of the test considers whether the entity involved is a public agency as defined in the Labor Law, and the second prong considers whether the project meets the criteria of a public work.

In evaluating the first prong, the Court of Appeals noted that Labor Law § 220 covers contracts involving each of four specific entities: the State, public benefit corporations, municipal corporations, or commissions appointed pursuant to law. The Court found it undisputed that the Department was not one of the four entities listed in the statute and that it could therefore not be considered the "functional equivalent" of a municipal corporation. In dismissing the "functional equivalent" argument, the Court relied on its decision in the Matter of New York Charter School Assn. v. Smith, 15 NY3d 403 (Ct App 2010). There, the Court of Appeals rejected the argument that charter schools are public benefit corporations because they serve a valuable public purpose and their existence is the result of a charter issued by a state or local municipal entity. Importantly, the Court of Appeals stated the following: "...while charter schools, like volunteer fire corporations, may be "quasi-public" in nature, they are not a specified public entity and thus, do not fit within the ambit of the statute."

In finalizing its reversal, the Court of Appeals pointed out that in 2007, the Legislature expanded Labor Law § 220's coverage to include contracts involving other types of entities, but only when it can be shown they were acting on behalf of the public entity. While under the amended statute the fire department likely would have been considered a public entity, the Court pointed out that the contract involved was entered into prior to 2007 when the amendment to the prevailing wage law did not exist. The Court of Appeals did not move on to the second prong of the Erie test since it determined the Department was not a public entity.

The importance of this case comes to life in Chief Judge Lippman's dissenting opinion. There, Judge Lippman points out that the relevant provisions of the State Constitution and Labor Law have been judicially read as limiting the prevailing wage requirement to work contracted for by a public agency. Judge Lippman notes that despite this construction being addressed as mere dicta in Erie, such interpretation has stuck with unforeseen consequences. To highlight the misapplication of the prevailing wage law since Erie, and prior to its 2007 amendment, Judge Lippman briefly discusses the Matter of Pyramid Co. of Onondaga v. New York State Dept. of Labor, 223 AD2d 285 (3d Dept 1996). In that case, a highway ramp constructed by a private party pursuant to a State Department of Transportation permit was found to be a public work. However, the Appellate Division was compelled to deem it immune from Labor Law § 220's prevailing wage requirement because, notwithstanding the State permit and the contemplated State ownership of the ramp once completed, the State had not itself contracted for the improvement.

The Onondaga case provides a prime example of the loophole that existed in Labor Law § 220 prior to its 2007 amendment. Specifically, the loophole allowed certain contracts to be exempt from the prevailing wage requirements simply because a public entity had not contracted for it. To address and essentially close this loophole, Labor Law § 220 was amended in 2007 to provide that the public agency contract requirement could be met not only by the already specifically enumerated public entities, but also by third-parties contracting for a public work on a public entity's behalf. In Judge Lippman's view, such amendment is on par with the Legislature's original intent as to how the prevailing wage laws are to be applied.

In concluding his dissent, Chief Judge Lippman went on to state that had the contract between the fire department and R-J Taylor General Contractors, Inc. been entered into subsequent to Labor Law § 220's amendment, it would have qualified as a prevailing wage trigger because (1) it was for the construction of a firehouse having as its purpose the provision of a quintessentially governmental service under municipal control; and (2) it was executed by a party (the fire department) contracting on behalf of a municipal entity.

Recommendation:

When entering into a contract that may at first glance appear private and therefore exempt from Labor Law § 220's prevailing wage requirements, one must consider whether they are contracting with a third-party on behalf of a public entity. While such a situation would not act as a prevailing wage trigger in contracts entered into prior to Labor Law § 220's 2007 amendment, as Chief Judge Lippman pointed out this loophole is now closed and the prevailing wage requirements are applicable to such contracts. The cases above highlight the importance of being completely aware of the status of the entity you are contracting with. Such awareness can prevent unnecessary project delays, litigation, and in extreme cases, criminal convictions.

If you have any questions about the information set forth in this Legal Alert, call us at 914-428-2100.

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