On October 1, 2012, the U.S. Court of Appeals for the Sixth Circuit held in United States ex rel. Brian Wall v. Circle C. Construction, LLC that the submission of false payroll certifications required by the Davis-Bacon Act can form the basis for a False Claims Act (FCA) violation, at least where the proper classification of employees is not at issue. This latest step in the continuing expansion of FCA coverage further exposes contractors doing business with the federal government to potentially harsh penalties under the FCA, making the need to ensure regulatory compliance at all levels more important than ever.

Background

The Davis-Bacon Act requires contractors performing construction work for the federal government to pay their employees the “prevailing wages” set by the Secretary of Labor for each job classification in a particular geographic area. Such wage requirements must be included in the language of the contract itself, and it is the contractor’s duty to ensure subcontractor compliance. In addition, contractors must submit weekly certified payroll reports (including reports for subcontractors) covering all workers. Davis-Bacon does not provide individuals with a private right of action in federal court. Rather, an individual claiming a Davis-Bacon violation must file a complaint with the U.S. Department of Labor’s Wage & Hour Division.

Broadly speaking, the FCA was originally enacted, and subsequently expanded, to address problems with defense contractors either providing the federal government with fraudulently substandard products or grossly overcharging for the products and services they provided. More recently, however, the FCA’s definition of fraud against the government has been interpreted to cover a widening range of industries and conduct, including many legal violations that were previously considered merely administrative or contractual in nature. Violations of the Davis-Bacon Act were one such area where administrative and contractual remedies were previously considered the norm.

Liability under the FCA can be established by showing that a defendant knowingly made a materially false statement to the government in order to receive payment for goods or services. Because there is no requirement of a specific intent to defraud, a reckless disregard for the truth or falsity of the statements in question is sufficient to satisfy the knowledge requirement. At issue in Circle C, then, was whether a government contractor’s certification of payroll reports falsely claiming compliance with Davis-Bacon constituted a fraudulent claim for the purposes of FCA liability.

The Circle C Decision

In Circle C, a Tennessee district court held that a government contractor had violated the FCA when it submitted Davis-Bacon payroll certifications that falsely claimed its subcontractor’s electricians were paid the correct prevailing wages. On appeal, the contractor first argued that Davis-Bacon violations were properly within the jurisdiction of the DOL, not the federal courts. Citing a number of cases from other jurisdictions, however, the Sixth Circuit held that there is a key distinction between the misrepresentation of wages paid and the misclassification of employees. Where the latter is involved—i.e., where the falsity of a certification depends on whether certain employees were properly classified and thus entitled to a particular wage—the court agreed that it should defer jurisdiction over the issue to the DOL because of the agency’s greater familiarity with Davis-Bacon’s complex classification scheme.

In this case, however, it was undisputed that the subcontractor’s employees performed electrical work for which Davis-Bacon wages were clearly defined in the contract. Therefore, the court held that the central issue was one of misrepresentation—i.e., whether the wages claimed and certified were, in fact, paid—and reasoned that the court was fully capable of evaluating the FCA claim because it did not “necessitate technical, agency specific expertise.”

Circle C further argued that the district court improperly found the essential elements of an FCA claim—falsity, knowledge and materiality—to be present. The Sixth Circuit disagreed. First, the court held that the payroll certifications were expressly false because they (a) claimed to be complete when none of the electrical subcontractor’s employees were listed on the project and (b) wrongly represented that the prevailing wages were paid to subcontracted employees. Second, the court affirmed the finding that Circle C had acted with reckless disregard, and thus had the requisite knowledge for an FCA violation. The court noted the fact that the Davis-Bacon requirements and wage rates were explicitly contained in the contract, and also that Circle C was an experienced government contractor that had an admitted familiarity with those requirements. The contractor thus had a duty to oversee its subcontractor’s payments and to verify its payroll certifications, both of which it failed to do. Finally, it was clear that the false statements were material to the government’s decision to make the payments sought in Circle C’s claims. Therefore, the court upheld the district court’s finding that an FCA violation had occurred.

Implications

For contractors and subcontractors doing work with the federal government, ensuring compliance with the Davis-Bacon Act requirements is now more important than ever. The Sixth Circuit’s ruling creates a considerable incentive to recast Davis-Bacon violations as fraudulent claims under the FCA. Plaintiffs filing claims under the FCA would be whistleblowers eligible to receive a percentage of the total recovery, and that recovery could be significantly higher under the FCA due to penalties that are unavailable under Davis-Bacon. Most importantly, this includes the possibility of treble damages, but also civil penalties up to $10,000 assessed on an invoice-byinvoice basis, recovery of the government’s cost of bringing suit and even criminal penalties in egregious cases.

Primary contractors in particular need to educate themselves on the strict requirements of both statutes, recognizing that they can be held liable for the noncompliance of subcontractors in addition to their own violations. Indeed, for anyone who does business with the federal government, the continuing expansion of FCA coverage suggests that any certification regarding government work could bring unexpected liabilities. Government contractors would therefore be well-advised to consult with their counsel for assistance in establishing mechanisms to verify the accuracy and completeness of subcontractor reports—and all other reports and information—before certifying and submitting them to the federal government.

The Circle C opinion is available here:

http://www.ca6.uscourts.gov/opinions.pdf/12a0351p-06.pdf.