Highlights: Prevailing wage is required on most Federal and Ohio construction projects. Failure to pay the prevailing wage can result in severe penalties to the unwary contractor. In this article, Andrew Balcar looks at two recent cases where contractors were held liable for their subcontractors’ failure to pay prevailing wage.

Contractors working on federal and state projects in Ohio must, in most cases, pay prevailing wage.1 The Davis-Bacon Act requires the payment of prevailing wage on federal projects. Whereas Ohio Revised Code Chapter 4115 requires the payment of prevailing wage on public improvement projects in Ohio.2

What are the penalties for failing to pay prevailing wage? Examples of how the penalties are calculated and applied can be found in a pair of recent decisions from the United States District Court for the Middle District of Tennessee and the Supreme Court of Ohio.

Federal False Claims Act – Penalties

In Circle Construction, the federal government entered into an agreement with Circle C Construction, LLC for the construction of buildings at the Fort Campbell military base.3 Circle C allegedly had a long history of working on government contracts. In addition, Circle C’s representatives attended training classes on the various prevailing wage requirements for federal government projects. Circle C also acknowledged that it was familiar with prevailing wage requirements and had knowledge of the Bacon-Davis Act requirements.

Circle C’s contract with the government required Circle C to pay prevailing wage to the electricians working on the project and to submit payroll certifications to the government as a prerequisite for payment. Circle C was also required to include similar language in its subcontracts. Subcontractors, as a result, were to pay prevailing wage. Prior to submitting a request for payment, Circle C was required to certify that subcontractors complied with the Davis-Bacon Act and that the payroll certification was complete and accurate.

Phase Tech, Inc. was hired by Circle C to do the majority of the electrical work on the project. Phase Tech, however, was not immediately aware of the prevailing wage requirements for the project. There was no written agreement between Phase Tech and Circle C despite the fact that Circle C’s contractual obligations required Circle C to include specific prevailing wage requirements in all subcontracts.

Phase Tech failed to submit any payroll certification for 2004 and 2005, and Circle C initially submitted payroll certifications without listing Phase Tech’s employees. It was not until after the Circle Construction action was filed when Circle C asked Phase Tech to provide certifications for the years when Phase Tech’s employees were not included on the previous certified payrolls.

Phase Tech provided new payroll certifications, but Circle C allegedly never verified the new payroll certifications for accuracy. Phase Tech’s contemporaneous records were available including daily calendars with employees’ names, assigned job sites, and the times when the employees worked. Phase Tech’s pay stubs were also available, but not for the Fort Campbell project. Phase Tech’s owner testified that he told a representative of Circle C that the certifications “weren’t complete.” Despite the alleged failure to verify the new payroll certifications, Circle C apparently submitted them to the government.

After an investigation, the Department of Labor concluded that there were 62 inaccurate or false payroll certifications of which 53 were from Circle C’s original payroll certifications. Apparently, “Circle C did not list Phase Tech’s employees” even though contemporaneous records indicated the Phase Tech employees worked on the project. As a result, the Department of Labor found that the payroll certifications were false.

Claims against Circle C and Phase Tech were filed under the False Claims Act (31 U.S.C. § 3729(a)(1)(B)). The basis of the claims was that Circle C “knowingly submitted false payroll certifications to the Department of the Army in violation of its agreement to abide by the Davis-Bacon Act requirements in the construction of the buildings on the Fort Campbell military facility.” In its decision, the court considered the level of proof needed to prove a violation of the False Claims Act. Prior to June 7, 2008, when the Act was amended, a plaintiff needed “to show that ‘the defendant intended the false record or statement be material to the Government’s decision to pay or approve the false claim.’”4 After June 7, 2008, a defendant was liable for a violation of the False Claims Act if the defendant “knowingly makes…a false record or statement that is ‘material to’ a false or fraudulent claim.” The court eventually determined that Circle C violated the False Claims Act under the amended and pre-amended version of the false statements provision.

The court determined that the total amount of damages was the amount “that would not have been paid if the United States had known about Circle C’s false certifications.” Phase Tech performed about 98% of the electrical work on the project for an amount totaling $553,807.71. “Given the clarity of the certification and payment requirements of Circle C’s contract and Circle C’s history with government contracts and its wage requirements, the Court concludes that under the FCA, the United States is entitled to three times it actual damages.” As such, Circle C was to pay $1,661,423.13 in treble damages to the United States.

Ohio’s Prevailing Wage Law – Penalties

Ohio’s prevailing wage laws also include strong penalty provisions. According to the Ohio Supreme Court, “the primary purpose of the prevailing wage law is to support the integrity of the collective bargaining process by preventing the undercutting of employee wages in the private construction sector.”5 In Bergman v. Monarch Construction Company, a case we covered in the March 2010 issue of BrickerConstructionLaw.com, the Ohio Supreme Court determined whether the prevailing wage penalties in R.C. Chapter 4115 are mandatory or discretionary.6

The penalties for violation of Ohio’s prevailing wage laws are found in R.C. § 4115.10(A). An employee is entitled to “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 percent of that difference.” The employer “also shall pay a penalty to the director of seventy-five percent of the difference between the fixed rate of wages and the amount paid to the employee.”

The Supreme Court determined that the 25 percent and 75 percent penalties are mandatory. According to the Court, the statute clearly indicates that the legislative intent was for the penalties to be mandatory.

Conclusion

In each of these decisions it’s clear that a general contractor allegedly failed to ensure that its subcontractor paid prevailing wage to the subcontractor’s employees. Prevailing wage statutes usually require the contractor to include prevailing wage requirements in a written agreement with their subcontractor. In addition, contractors must not submit certified payroll that is inaccurate or incomplete. Where prevailing wage is required, a contractor must be careful about the subcontractor that they select, and the contractor must be sure to check time sheets, daily reports, and/or pay stubs with the certified payroll of a subcontractor to be sure the payroll is complete and accurate.

Contractors working on most state and federal construction projects must adhere to prevailing wage requirements that apply to the work. Prevailing wage may also be required where government funding, through loans, grants, or other forms of assistance, is used to pay for a portion of a public improvement.7 As demonstrated in the Circle C and Monarch cases, the penalties for noncompliance are severe.