New York to Require Contractors to Pay Prevailing Wages on Certain Private Projects

New York to Require Contractors to Pay Prevailing Wages on Certain Private Projects

6.12.2020

By Stephen D. Rosemarino and Chad J. Caplan

 

On April 3, 2020, New York lawmakers passed a $177 billion budget bill that significantly expanded the application of prevailing wages on construction projects in the state. While previously the payment of prevailing wages had been reserved for public construction projects only, the new bill expands the prevailing wage requirement to certain private projects for the first time in our state’s history.

Prior to the bill, Labor Law § 220 and Article 1, § 17 of the New York State Constitution mandated that all workers be paid the prevailing rate of wages on “public works construction projects.” Exactly what constituted a “public works construction project” had been a matter of debate since the inception of the prevailing wage law in the 1890s.

Contemporary courts eventually settled on a two-part test, finding that projects were subject to prevailing wages if: “(1) [a] public agency [was] a party to a contract involving the employment of laborers, workmen, or mechanics; and (2) the contract . . . concern[ed] a public works contract.”^[1] The relative simplicity of this test provided litigants with flexibility to argue that a wider variety of projects were “public” and subject to prevailing wages. The absence of “public funding” as an express dispositive factor also left room to argue that projects receiving little to no public money still constituted “public work.”

Legislation and numerous judicial decisions refining and interpreting the bounds of this test were issued in the decades that ensued. In 2013, the New York State Court of Appeals unveiled a new three-part test, relying heavily on the dictionary definition of the term “public works,” and providing that prevailing wage requirements would now apply to projects where: “[f]irst, a public agency [is] a party to a contract involving the employment of laborers, workers, or mechanics[;] [s]econd, the contract . . . concern[s] a project that primarily involves construction-like labor and is paid for by public funds[; and] [t]hird, the primary objective or function of the work product [is for] the use or other benefit of the general public.”^[2] The Court’s decision was almost universally received as a narrowing of the prevailing wage law, which now explicitly required projects to be imbued with public funds to be considered a “public works construction project.”

Challenges to this more restrictive interpretation were largely rebuffed by the Court^[3] (holding that the use of public funds is indeed a prerequisite to finding a project subject to prevailing wages under De La Cruz, and for the specific project at issue, the absence of evidence that certain ostensibly public funds were earmarked for the project, or that the state had transferred such funds directly to the project owner, indicated that the project was not a “public works construction project”). As a result, organized labor has called for a legislative expansion of the prevailing wage law for years. Industry opposition has been equally vocal on the other side.

On April 3, 2020, New York State passed its annual budget bill containing the aforementioned expansion. The law, which becomes effective on January 1, 2022, extends prevailing wages to projects that previously both sides may have viewed as “private,” where total project costs exceed $5,000,000 and where the project receives 30% or more of its total construction project costs from public funds. This expansion will result in significantly more construction work in New York subjected to prevailing wage requirements.

Once again, exactly how much more will likely be the subject of judicial interpretation and dispute. Indeed, the absence of a definition of “project costs” and “construction project costs” has already divided interested parties in their interpretation. Other defined terms in the bill, however, evince a clear intent by lawmakers for a significantly expanded reach. For example, the bill’s definition of what constitutes “public funds” goes beyond direct public investment, the traditional touchstone, and now includes:

1. The payment of money by a public entity or by a third party acting on behalf of a public entity (public entity is defined below) that is not subject to repayment;
2. The savings achieved from fees, rents, interest, rates or other loan costs, or insurance costs that are lower than market rate;
3. The savings from reduced taxes stemming from tax credits, tax abatements, tax exemptions or tax increment financing;
4. Savings from payments in lieu of taxes (PILOT programs);
5. Any other savings from reduced, waived or forgiven costs that would have otherwise been at a higher or market rate but for the involvement of a public entity;
6. Money loaned by a public entity that is to be repaid on a contingent basis; or
7. Credits that are applied by a public entity against repayment of obligations to the public entity.^[4]

State lawmakers have also defined “public entities” for purposes of the bill broadly to include the state, local development corporations, municipal corporations, industrial development agencies or authorities, and any trust created by any of the foregoing entities.

Despite this wide net, however, certain construction projects will likely be exempt from prevailing wage requirements even if they otherwise meet the foregoing criteria, including:

1. Certain one or two family dwellings;
2. Certain not-for-profit corporations with revenue under $5 million;
3. Certain Affordable Housing projects;
4. Certain manufactured home park projects;
5. Certain projects performed under a pre-hire collective bargaining agreement;
6. Projects performed under a project labor agreement or its equivalent;
7. Projects funded by § 16-n of the Urban Development Corporation Act or the Downtown Revitalization Initiative;
8. The installation of renewable energy systems, renewable heating or cooling systems, or energy storage systems with a capacity of five (5) megawatts (AC) or less;
9. Projects for supermarket retail space built or renovated with tax incentives provided under the Food Retail Expansion to Support Health program through the New York City Industrial Development Agency;
10. Interior fit-outs and improvements under 10,000 square feet through Small Business Incubation Programs operated by the New York City Economic Development Corporation;
11. Schools under 60,000 square feet pursuant to a lease from a private owner to the New York City Department of Education and the School Construction Authority; and
12. Projects that receive certain tax benefits related to historic rehabilitation.

In addition to extending prevailing wage requirements to additional types of projects, the bill also imposes additional responsibilities on owners and developers, including but not limited to:

1. Within five days of the start of construction, owners or developers must certify under the penalty of perjury that prevailing wages are required on the project.
2. Owners or developers must retain original payroll records for six years after completion of the work, which records will be subject to inspection by the Commissioner of Labor upon demand (and any such records obtained by the Commissioner will be subject to disclosure under the Freedom of Information Law (FOIL)). While owners and developers may task prime contractors with the responsibility of retaining and maintaining payroll records, they will be held jointly and severally liable for any violations committed.
3. Owners and developers required to pay prevailing wages must also comply with the objectives and goals of the Minority- and Women-Owned Business Enterprises (MWBE) program pursuant to Executive Law Art. 15-A, and the Service-Disabled Veteran-Owned Businesses program pursuant to Executive Law Art. 17-B.

The legislation also vests the Commissioner of the Department of Labor with new responsibilities and power. For example, the Commissioner may issue a notice of intent to stop work if he or she finds cause to believe that any person has “substantially and materially failed to comply with” the provisions of the prevailing wage law. The recipient of such a notice has the right to a hearing, after which the Commissioner may convert the notice into a stop work order. Notably, however, the law does not require that the notice be served on the prime contractor or other key players on a project – it is sufficient that it be posted at the jobsite. The law also leaves open the possibility that the Commissioner can issue a stop work order on one project based on a failure to comply with the law on a different project, a situation that could result in scenarios where jobs are stopped due to one bad actor on an unrelated project.

In addition to the Commissioner’s increased authority, the bill also calls for the creation of a board of public subsidies (the “Board”), consisting of 13 members appointed by the governor and chaired by the Commissioner. The Board will be vested with far-reaching powers, including the ability to issue binding determinations as to any matter related to existing or potentially covered projects (including the applicability of prevailing wages to such projects).

While the governor appears to have ultimate say in who will be appointed to the Board, the bill provides that one member must be a representative of the “largest trade labor association representing building and construction workers with membership in New York City,” one member must be a “representative of a statewide organization representing building owners and developers,, and one member must be recommended by the “speaker of the assembly.”

Again, this overhaul of New York’s prevailing wage laws goes into effect on January 1, 2022. The Board may, however, delay implementation if “the [B]oard finds that there is or likely would be a significant negative economic impact of implementing the [new] prevailing wage requirements . . . .” This provision was likely inserted in light of the COVID-19 pandemic, which much like this bill, promises to have an unclear but substantial impact on our State and economy for years to come.

Stephen D. Rosemarino and Chad J. Caplan are attorneys in Hinckley Allen’s Construction and Public Contracts Group based in Albany and New York City.

[1] Erie Co. Indus. Dev. Agency v. Roberts, 94 A.D.2d 532, 537 (4th Dep’t 1983), aff’d, 63 N.Y.2d 810 (1984).

[2] De La Cruz v. Caddell Dry Dock & Repair Co., Inc., 21 N.Y.3d 530, 538 (2013) (emphasis added).

[3] See, e.g., W.M. Schultz Constr., Inc. v. Musolino, 147 A.D.3d 1259, 1261‒62 (3d Dep’t 2017).

[4] Specifically excluded from the definition of “public funds” are, among other things, benefits from the Affordable New York Housing Program and tax benefits related to Brownfield remediation and redevelopment.