Our first case for the month of March comes from the Ohio Supreme Court. The Court was asked to determine if the statutory penalties were mandatory where a contractor was alleged to have violated the prevailing wage laws. The Court held that, unless a statutory exception applies, the penalties in R.C. § 4115.10(A) are mandatory penalties that must be imposed against a party that violates the prevailing wage law. Our second case this month comes from the U.S. Court of Appeals for the Sixth Circuit. A contractor’s defective foundation work resulted in the complete replacement of the new structure. The court was asked to determine what effect a policy exclusion had on the insurer’s duty to defend the contractor against claims resulting from the defective work and resulting from the damages that were caused by the defective work.

Ohio Supreme Court Declares Prevailing Wage Penalties Mandatory

Prevailing wage in Ohio continues to be a hot button issue. The most recent development answers the question of whether penalties associated with prevailing wage violations that do not meet a statutory exception are mandatory or discretionary. In Bergman v. Monarch Construction Company, 2010-Ohio-622, the Supreme Court of Ohio determined that the statutory penalties for a violation of the prevailing wage laws are mandatory where the violation did not result from one of the statutory exceptions.

In Bergman, Miami University hired Monarch Construction Company as the general contractor to construct student housing. Monarch hired a subcontractor, Salyers Masonry, to perform the masonry work on the project.

The Department of Commerce investigated Salyers and found that it had underpaid multiple employees. Many of these employees filed suit against Monarch, Salyers, and Miami University. The trial court dismissed Miami University because there was not a single allegation of wrongdoing alleged in the complaint. The court issued a default judgment against Salyers because it failed to respond to the complaint—leaving only Monarch to answer the complaint.

Ohio Revised Code 4115.10(A) states:

Any employee upon any public improvement, except an employee to whom or on behalf of whom restitution is made pursuant to division (C) of section 4115.13 of the Revised Code, who is paid less than the fixed rate of wages applicable thereto may recover from such person, firm, corporation, or public authority that constructs a public improvement with its own forces the difference between the fixed rate of wages and the amount paid to the employee and in addition thereto a sum equal to 25 per cent of that difference. The person, firm, corporation, or public authority who fails to pay the rate of wages so fixed also shall pay a penalty to the director of 75 per cent of the difference between the fixed rate of wages and the amount paid to the employees on the public improvement.

The code provides for two penalties for a violation of the prevailing wage law. In addition to recovering back pay, an employee may recover a sum equal to 25 percent of the back pay, and the director of commerce shall receive a payment equal to 75 percent of the back pay.

Both the trial court and the appellate court found Monarch liable for back pay but refused to penalize Monarch with the statutory penalties. The trial court held that the statutory penalty was a discretionary penalty. The appellate court agreed.

The appellate court determined that the penalties were discretionary because of the use of the words “may recover” in the statute. The Supreme Court, however, declared that this language is not discretionary with regard to levying the penalty. The language “may recover” pertains to the choice the employee has “to enforce his or her right to recover the underpayment.” If an employee commences and proves his or her case, the penalties are mandatory.

The Supreme Court stated that the legislative intent of prevailing wage law is to “provide a comprehensive, uniform framework for, inter alia, worker rights and remedies vis-a-vis private contractors, sub-contractors and materialmen engaged in the construction of public improvements in this state.”

The Court further declared that “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.”

In addition, the language of the statute includes the words “shall be paid to the director” where it refers to the 75 percent apportionment of the penalty. Statutory use of the word “shall” must be construed as mandatory unless legislative intent dictates otherwise.

The Supreme Court distinguished between a violation that requires a mandatory penalty from a violation that incurs no penalty. There are exceptions to the mandatory penalty in the Ohio Revised Code. No penalty is assessed where the wage underpayment results from a “misinterpretation of the prevailing-wage statutes or an erroneous preparation of the payroll documents” and where restitution is made.

Despite Policy Exclusion, Insurer Has Duty To Defend Contractor

In this dispute over insurance coverage for defective foundation work, the contractor contracted with Frisch’s Restaurants, Inc. (Frisch’s) to build a Golden Corral restaurant in North Canton, Ohio. When the building was nearly complete—but not yet open—a shift in the soil led to the discovery that the foundation was defectively constructed.

The contractor tried to get its insurer to cover the damage—which was a total replacement of the entire building. The insurer refused citing that its policy excluded coverage for “that particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.”

The contractor sued in state court to enforce coverage. The insurer had the case moved to Federal Court based on diversity. The trial court granted judgment for the insurer holding that the defective workmanship exclusion applied, and the contractor appealed in Fortney & Weygandt, Inc. v. Am. Mfrs. Mut. Ins. Co., 2010 U.S. App. LEXIS 2836.

The crux of the matter was whether the exclusion excluded damages for the particular piece of defective work—here, the foundation only—or whether it excluded all of the damage caused by the defective work—here the replacement of an entire building.

The Court of Appeals, relying on a similar decision from another court, acknowledged the parties’ agreement that the defective foundation would be excluded; but held that the insurer had a duty to defend the remainder of the claims because the language of the exclusion was specific to the particular piece of defective work and not to the rest of the non-defective work.