In United States ex rel. Wall v. Circle C Const., LLC, 697 F. 3d 345 (6th Cir. 2012), the Sixth Circuit Court of Appeals recently reinforced a concern felt by many federal contractors: a subcontractor’s failure to completely comply with the Davis-Bacon Act can subject a general contractor to harsh liability, not just with the Department of Labor, but also under the False Claims Act. The Sixth Circuit’s decision in Wall is a strong warning to federal contractors. However, as discussed below, contractors can take certain measures to help ensure they avoid a similar outcome.

In Wall, the Sixth Circuit held that a construction contractor violated the civil False Claims Act (FCA) when it failed to ensure that its weekly certified payroll records—required under the Davis-Bacon Act as a condition of its public works construction contract—were complete and accurate in all material respects. Specifically, the army hired a contractor to construct buildings on a military installation and required the contractor to comply with the Davis-Bacon Act, including paying prevailing wages, and submitting certified payroll records on a weekly basis. As is common, the contractor also was required to ensure that its subcontractors complied with the Davis-Bacon Act in the same manner.

The project began in 2004, and the contractor submitted its own certified payroll records, but did not list the employees of one of its subcontractors in those records. The subcontractor did not submit any certified payroll of its own. Further, although the contractor passed down the wage determination excerpts from its own contract, it did not discuss the Davis-Bacon Act’s requirements with the subcontractor, verify whether the subcontractor submitted its own payroll records, provide the subcontractor with blank payroll forms or ensure that the subcontractor was paying the appropriate prevailing wages. According to the subcontractor, the contractor did not inform it of the need to provide certified payroll until 2006.

In January 2007, an employee of the subcontractor filed suit under the FCA against his employer and the contractor, alleging they violated the FCA by knowingly submitting false payroll certifications. The United States intervened and filed an amended complaint specifically alleging that all of the contractor’s payroll certifications were false, because the subcontractor and contractor (1) failed to disclose that the subcontractor’s employees performed work called for in the contractor’s contract; and (2) the payroll records falsely asserted that the contractor paid the proper prevailing wages to all employees, when this was not the case.

After the action was filed, the contractor asked the subcontractor to provide new certified payroll records for the years when the subcontractor’s employees had not been included. The subcontractor provided this information to the contractor, who in turn submitted it to the government, but never verified the records for completeness and accuracy.

Ultimately, the district court granted the plaintiff’s motion for summary judgment and entered judgment against the contractor in the amount of $1,661,423.13, representing treble the amount of actual damages believed to have been suffered by the government as a result of the contractor’s failure to ensure the subcontractor’s compliance with the Davis-Bacon Act. On appeal, the Sixth Circuit concluded that the contractor’s payroll certifications were expressly false because (1) certain certifications stated on their face that they were complete, when in fact they did not include information about one of its subcontractors; and (2) other certifications wrongly represented that the prevailing wages were paid to the subcontractor’s employees, when the subcontractor’s records proved they were not.

Further, the court found that the contractor acted “knowingly,” a requirement for liability under the FCA, because the contractor admitted its familiarity with Davis-Bacon requirements and conceded that it should have submitted payroll certifications for all employees on the project. Moreover, the contractor acknowledged that it had no first-hand knowledge regarding the subcontractor’s payments to its employees, did not timely inform the subcontractor of the need to submit payroll certifications and did not verify the accuracy of those payroll certifications it received from the subcontractor.

Finally, the court held that the false statements were “material” to the government’s decision to make payments to the contractor, thereby triggering liability under the FCA.

On the issue of damages, however, the court reversed. The plaintiffs argued, and the district court held, that the government’s “actual damages” were the full amounts paid to the contractor for the work performed by the tradesmen who were not paid proper wages, ostensibly because the government would not have made any payments at all had it known the payroll certifications were false. On appeal, the court found that the amount of the award should have been the difference between what the government actually paid to the contractor and the payments to which the contractor would have been entitled in the absence of fraud, and remanded the case to the district court for recalculation of damages.

This case serves as another example of recent instances where a contractor’s administrative missteps have been used as the predicate basis for liability under the False Claim Act. In the specific context of prevailing wages, this case serves as an important reminder to contractors of not only their own obligations under the Davis-Bacon Act, but as significantly, their obligation to ensure and monitor that their subcontractors comply.

Generally speaking, and as highlighted by Wall, under the Davis-Bacon Act, contractors are responsible not only for themselves, but also their subcontractors, when their contract contains an express requirement to comply with Davis-Bacon. In order to comply with the Act, contractors must follow this checklist:

  1. pay their workers the proper prevailing wages and fringe benefits;
  2. maintain and submit, on a weekly basis, payroll records for each laborer and mechanic working on the project;
  3. certify that such payroll records are correct and complete;
  4. flow down, in every subcontract, specific statutory language setting forth the Davis-Bacon requirements;
  5. ensure that all subcontractors also submit certified payroll records; and
  6. ensure that all subcontractors pay their workers prevailing wages and fringe benefits.

These requirements are, without question, onerous on a contractor and require a significant amount of time and cost to ensure compliance. In light of decisions like Wall, contractors must start by making sure their own personnel understand the unique rules and regulations inherent in government contracting, and to establish protocols for ensuring compliance with such rules and regulations.

But that is not enough — contractors must understand they are responsible for down stream compliance with regulations equally applicable to subcontractors. As demonstrated by Wall, merely flowing down the requisite Davis-Bacon Act contract clauses to contractors is not compliance, and can instead result in FCA liability. The contractor must take affirmative steps to ensure that the subcontractor’s employees are being paid appropriately, that certified payroll records are being submitted and that such records are complete and correct.

These requirements may demand additional personnel and perhaps implementation of protocols that were never previously considered necessary. However, with the FCA’s treble damages, as well as the Davis-Bacon Act’s own liability provisions, which include possible debarment, it is well worth the time and costs for contractors to ensure their compliance and their subcontractors’ compliance with all prevailing wage requirements.