In the last year, the Ohio Supreme Court decided three cases involving Ohio’s prevailing wage laws. These cases potentially impact public and private owners as well as the contractors that perform their work. It is important, therefore, for Ohio project participants to be aware of the effects of these decisions.

General Contractors Face Mandatory Penalties

First, in Bergman v. Monarch Construction, Co. Nos. 2009-0558, 2009-0649, 2010 WL 744222 (Ohio 2010), the court determined that the imposition of hefty statutory penalties upon a contractor, whose subcontractors fail to pay workers prevailing wages, is mandatory – even when the contractor has no knowledge of its subcontractors’ violations.

Under Ohio Prevailing Wage Laws, any construction worker paid something less than prevailing wage on a public project is entitled to the difference between the amount paid and the prevailing wage rate. In addition, Ohio law imposes a penalty essentially doubling the worker’s back wages. Twenty five percent of the penalty is awarded to the worker and seventy five percent is paid to the Ohio Department of Commerce (“DOC”) to fund future prevailing wage investigations.

In Bergman, Monarch Construction served as the general contractor on a student housing project for Miami University. Monarch, in turn, hired various subcontractors, including Don Salyers Masonry, Inc., to complete the work.

Monarch reviewed Salyers' payroll records during the course of construction and was assured by both Miami University and Salyers that Salyers was complying with prevailing wage laws. The DOC later conducted an investigation and determined that Salyers had not paid employees prevailing wage rates. As a result, the DOC determined both Salyers and Monarch were liable to the employees for $368,266.34 in back wages and $368,266.34 in penalties.

Based on the DOC’s determination, the underpaid employees filed suit against Monarch, Salyers, and the University. The trial court found Monarch liable to the employees for back wages, but chose not to enforce the statutory penalty. In support of its decision, the court cited Monarch’s ignorance to the fact that Salyers was short-paying its employees along with Monarch’s cooperation in the DOC’s investigation. The court of appeals affirmed the trial court’s decision.

The issue before the Ohio Supreme Court was whether or not imposing the penalty on a general contractor was discretionary or mandatory. A divided Supreme Court found that the plain language of the statute, as well as public policy underlying Ohio prevailing wage laws, made the penalties mandatory. Accordingly, the Supreme Court sent the case back to the trial court for further proceedings regarding the amount and allocation of the penalty.

The Bergman decision gives Ohio contractors cause for shortfall concerns. Not only are contractors at risk concerning paying prevailing wages to their employees, but they also may face potential penalties for all of their subcontractors’ prevailing wage transgressions. The fact that a contractor makes reasonable inquiry and is misled to believe that all statutory requirements are fulfilled provides the contractor little defense. This type of risk is clearly difficult to anticipate or liquidate and will likely drive up contractors’ costs for performing public work. Contractors must account for these prevailing wage risks before submitting bids on future public projects, must be vigorously attentive to their subcontractors’ payroll practices and should be careful in their selection of subcontractors.

What Is a ‘Violation’ of Prevailing Wage Laws?

In another case, the Ohio Supreme Court held that a disappointed bidder had a legitimate protest when a public owner misinterpreted what constituted a “violation” of Ohio’s prevailing wage laws. In Associated Builders & Contractors of Ohio v. Franklin County Board of Commissioners (“ABC”), No. 2008-1479, 2010 WL 1135921 (Ohio 2010), an apparent low bidder was disqualified because of previous “violations” of Ohio’s prevailing wage laws. What constituted a “violation” was in dispute before the court.

After investigating alleged prevailing wage violations, the DOC makes recommendations if it finds prevailing wage laws were not followed. A ”violation” can be classified as unintentional and not sanctioned. There are varying degrees of “intentional violation” recommendations. For example, DOC could deem a violation ”excusable” upon restitution. Other violations are resolved through settlement. Still others are appealed by the contractor and overturned. Finally, others are upheld on appeal and the violation is recorded with the Secretary of State.

The dispute in ABC arose out of the meaning of an ”intentional” violation that was resolved prior to final appeal. In ABC, the DOC made recommendations of violation against the disappointed bidder on several prior occasions, but none of the previous violations were deemed intentional or resulted in liability after all appeals had been exhausted. Further, none of these prior violations had resulted in the disappointed bidder being sanctioned or barred from performing public work. Nonetheless, the public owner used the lesser “violations” as the basis for disqualifying the bidder. The ABC court found the definition of violation applied by the Board of Commissioners was inconsistent with the type of violation contemplated by the statute. As a result, the court found that the Board of Commissioners abused its discretion and returned the case to the trial court for further review.

The ABC decision has as significant an impact upon Ohio’s public procurement laws as it does upon Ohio’s prevailing wage laws. Ohio courts had previously shown very strong deference to a public owner’s discretion in rejecting bids and awarding contracts. Only on rare occasions has a court disturbed the decision of a public authority. Indeed, even the ABC court noted that a “disappointed bidder must present clear and convincing evidence that the public authority abused its discretion in awarding a contract.” However, the ABC court found that such an abuse of discretion had occurred. This decision may encourage disappointed bidders on future public projects to become more aggressive in protesting contract awards.

When Is a Project a "Public Improvement”?

Finally, in Northwestern Ohio Building and Construction Trades Council v. Ottawa County Improvement Corporation, 910 N.E.2d 1025 (Ohio 2009), the Ohio Supreme Court found that prevailing wage laws apply only when a public owner spends public funds to construct a “public improvement.” By definition, a public improvement must be constructed by a public authority or must benefit a public authority.

In Northwestern, the court found the public money at issue was not used for construction costs nor was the project constructed by, or for the benefit of, the public authority. Thus, the court decided that the use of public funds to merely subsidize the private purchase of the building did not trigger any obligation to comply with prevailing wage laws. This limitation should provide a clearer picture of when the prevailing wage laws apply to projects funded by a mixture of public and private money.

These three cases could change the landscape on Ohio’s public construction industry. All public owners, contractors, and private developers are well-advised to keep these principles in mind when planning, bidding upon, and performing future work.