Increased Risks from AB 3018 Amendments to “Skilled and Trained Workforce” Requirements. By: Jennifer L. Dauer

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Jennifer L. Dauer, Partner Diepenbrock Elkin Gleason LLP

Increased Risks from AB 3018 Amendments to “Skilled and Trained Workforce” Requirements.

By: Jennifer L. Dauer

In recent years, unions have pushed legislation designed to make it more difficult for non-union contractors to compete for certain public works (construction) contracts. Some of that legislation requires contractors to provide a “skilled and trained” workforce on public works jobs constructed using the “design-build” or “lease-leaseback” methods. Those methods allow government contractors to get involved earlier in the process and to minimize change orders, disputes, and ideally costs to the public.

Most people would agree that construction workers should be skilled and trained. Under the current requirements, all journeypersons on applicable lease-leaseback and design-build public contracts must be skilled and trained. However, requirements that an increasing percentage of journeypersons be graduates of apprenticeship programs have caused problems. Changes to the requirements adopted in Assembly Bill 3018 (AB 3018), effective in January 2019, only increase and exacerbate the problems.

Existing difficulties arising from the requirement that an increasing percentage of journeypersons be graduates of apprenticeship programs

Over time, a rapidly-increasing percentage of skilled and trained journeypersons must be graduates of an apprenticeship program—most of which are operated by unions—rather than just having sufficient, supervised, on-the-job experience to have graduated from such a program. Beginning in January 2019, half of the journeypersons on jobs to which the requirements apply must be graduates of a certified apprenticeship program.

Even unions periodically have had a difficult time finding sufficient program graduates to meet the statutory requirements, including in 2017 and 2018 when the graduate percentage was lower. As a result, the requirements recently were amended to reduce the graduation percentage requirement for certain occupations, such as bricklayers, carpenters, drywall installers, roofers, and surveyors. Even with this amendment, the busy construction marketplace makes it difficult for many contractors to locate sufficient program graduates to satisfy the graduate percentage.

The difficulty finding sufficient program graduates to meet statutory percentages is exacerbated in more rural areas. On some rural government contracts, the requirements dramatically and unnecessarily increase the costs of public construction and harm local contractors and construction workers. The requirements may force government contractors to “import” labor meeting the graduation standards from other areas. Some rural public entities can use only the more traditional design-bid-build method of construction contracting and must forego the benefits of early government contractor engagement.

AB 3018 introduces additional risks and costs into skilled and trained workforce requirements

The unions have doubled-down with AB 3018, recently passed by the Legislature and signed by the Governor. AB 3018 amends skilled and trained workforce requirements in Public Contract Code sections 2600 et seq. in several ways which dramatically increase risks, particularly to non-union contractors who are less likely to employ graduates of union apprenticeship programs. Those risks likely will reduce competition and increase costs on design-build and lease-leaseback government contracts without real benefit to the public.

AB 3018 establishes monthly penalties

Critically, AB 3018 establishes monthly penalties for violating the skilled and trained workforce requirements. Before AB 3018, the law was best understood to require compliance with the graduate percentage by the end of the contract. In other words, a government contractor or subcontractor might fall short of the journeyperson graduate percentage in a given month, but make it up in another month.

AB 3018 provides for a penalty of up to $5,000 per month of work performed in violation of the percentage requirements. A contractor or subcontractor that commits a second or subsequent violation within a three-year period may be penalized up to $10,000 per month in which it violates the requirements. Because the penalties apply monthly, a government contractor may be subject to the penalties, including at the $10,000 level on a single contract, even if it complies overall by the end of the contract.

AB 3018 requires the Labor Commissioner to assess penalties, and provides little guidance for how to quantify penalties

Not only does AB 3018 shift to a monthly requirement, but the public entity awarding and overseeing the government contract does not impose the penalties. Instead, the Labor Commissioner imposes the penalties. The Labor Commissioner will have no firsthand knowledge of the project, the contractor’s efforts to comply, or the specific challenges in the local labor market. However, the Labor Commissioner’s decision as to the amount of the penalty is reviewable only for an abuse of discretion. Absent clear regulatory standards governing penalties, the Labor Commissioner’s penalty decision will be unreviewable as a practical matter because of the broad discretion that AB 3018 grants.

Clear regulations could minimize this risk. AB 3018 allows a reduction or waiver of the maximum penalty “if the amount of the penalty would be disproportionate to the severity of the violation.” AB 3018 requires consideration of five factors in reducing the penalties: 1) whether the violation was intentional, 2) whether the contractor committed other Labor Code violations, 3) whether the contractor took steps “voluntarily” to remedy the violation, 4) the severity of the violation, and 5) whether the contractor complied with its plan to achieve substantial compliance with the requirement. However, AB 3018 provides no guidance for how to apply these factors.

For example, AB 3018 could have precluded penalizing a government contractor that meets the graduate percentage requirement by the end of a project. It did not do so. AB 3018 could have provided that a government contractor that makes good faith efforts to comply with the graduate percentages, but cannot do so without substantial delay or added cost, cannot be penalized. It did not do so. The contractor’s good faith is relevant only if the Labor Commissioner decides to consider it with reference to the violation being intentional or the severity of the violation.

Simply stated, the factors for reducing a penalty are ambiguous. Is a violation “intentional” if the government contractor does not reduce hours or delay work when it knows it does not have sufficient program graduate journeypersons on the job because its program graduate is ill? Is it an “intentional” violation if the contractor cannot find sufficient graduates and elects to use skilled and trained journeypersons with sufficient on-the-job experience to avoid contract delays and liquidated damages? Has a government contractor acted “voluntarily” to remedy a violation if its actions are required by its contract? These and other ambiguities allow the Labor Commissioner to interpret AB 3018 either leniently or harshly. Absent implementing regulations, government contractors will bear a substantial risk of penalties with little ability to evaluate their risks.

AB 3018 potentially imposes penalties on the prime contractor for a subcontractor’s failure to meet requirements

Prime contractors face an additional risk from AB 3018. If a prime contractor has knowledge of its subcontractor’s failure to comply with skilled and trained workforce requirements, AB 3018 imposes the subcontractor’s penalties on the prime contractor. Because contractors must submit skilled and trained workforce reports monthly, the prime contractor should know within a month of any subcontractor violation. The contractor may know or suspect earlier, based on monitoring personnel who are on the project site.

Even if the prime contractor did not have actual knowledge of a subcontractor violation, it can be subject to the subcontractor’s penalties. To avoid liability for its subcontractor’s penalties, a prime contractor must 1) attach a copy of the statute (not a summary) to its subcontracts, 2) “periodically monitor” its subcontractor’s skilled and trained workforce, 3) take “corrective action” including withholding 150% of the amount due to the subcontractor for work performed until the violation is cured, and 4) require a declaration under penalty of perjury, before final payment, that the subcontractor met the requirements. In particular, if the subcontractor does not meet the requirements by the end of the project, it will be impossible for the prime contractor to fall under this exemption because the subcontractor cannot sign the required declaration.

Skilled and trained workforce requirements for apprentices may be particularly problematic. The statute requires 100 percent of apprentices to be registered in an apprenticeship program approved by the Chief of the Division of Apprenticeship Standards of the Department of Industrial Relations. Use of a single apprentice not registered in an approved apprenticeship program on a single day precludes a subcontractor from ever meeting the requirement. As a result, the contractor would have no choice but to seek to substitute a subcontractor using such an apprentice to avoid being responsible for penalties for every month remaining in the project.

Because of the risk to the prime contractor, a prime contractor likely will withhold the full potential amount of penalties from a subcontractor for any reported violation. The penalties are assessed under Labor Code section 1741, so the Labor Commissioner may not assess penalties until eighteen months after the project is complete or accepted. However, potential penalties withheld from subcontractors may impact the subcontractors’ ability to pay their workers and suppliers, and may delay projects or force subcontractors to default.

AB 3018 provides for up to a three-year suspension from public contracting for contractors that violate the requirements

Finally and critically, a contractor that commits any violation of the requirements “with intent to defraud” or two or more “separate willful violations” within a three-year period is suspended from public contracting for up to three years. The Labor Commissioner also may suspend any firm in which the contractor has any interest. As with other key terms, a “willful” violation is not defined. However, Labor Code section 1777.1(e) defines “willful” as when a contractor “knew or reasonably should have known” of obligations under the law and “deliberately fails or deliberately refuses to comply with its provisions.”

It is hard to imagine a violation that would not fall under that definition of “willful.” Presumably, the contractor will know its obligations under the law. The contractor also will know the number of workers it employs and hours worked, and should know whether its workers qualify as program graduates. Thus, any direct violation by the contractor arguably would be “willful.” For example, it is easy to imagine a contractor being forced to choose to violate the graduate requirements where insufficient program graduates are available to avoid default termination or substantial liquidated damages. Without clarification of standards for suspension, contractors that are not absolutely certain of their ability to secure enough journeyperson graduates may forego bidding on lease-leaseback and design-build contracts.

The need for regulations reasonably interpreting AB 3018 is urgent

AB 3018 substantially increases the risks of performing on design-build or lease-leaseback government contracts, particularly to non-union contractors. Absent implementing regulations, AB 3018’s provisions are too broad and ambiguous for contractors reasonably to assess the law’s risks. As a result, AB 3018 likely will reduce competition on design-build or lease-leaseback contracts, particularly among non-union contractors and subcontractors. AB 3018 may entirely deny public entities the benefits of lease-leaseback and design-build projects.

Even where contractors subject to AB 3018 are willing to bid, their costs must go up to cover anticipated penalties and costs of compliance with AB 3018. Subcontractor costs may increase based on anticipated prime contractor withholds pending the significant delays of a Labor Commissioner penalty assessment process. Practically, AB 3018 will deny rural public entities access to valuable contracting methodologies.

Notwithstanding the hasty and inadvisable legislation, rational regulations may preserve valuable design-build and lease-leaseback methodologies for the public’s benefit. Such regulations should establish that, where a contractor or subcontractor met graduation percentage standards over the total project period, it will not be penalized for any month of shortfall. Regulations also should provide that a violation is not willful or intentional if the contractor makes good faith efforts to secure sufficient program graduates but cannot do so in a reasonable time and within a reasonable distance of the job site. Additional clarifying regulations will reduce risks to contractors, may reduce costs of AB 3018, and should minimize the effect on competition when public entities use lease-leaseback and design-build contracting methodologies.

For additional information about skilled and trained workforce requirements, lease-leaseback contracting, design-build contracting, or other government contracts matters, please contact:

Jennifer L. Dauer