JULY 10, 2012 California charter cities do not have to pay prevailing wages on local public projects involving local public funds By Kent Jonas and David Kolek On July 2, 2012, the California Supreme Court ruled that the state’s charter cities are not required to pay prevailing wages under the state’s prevailing wage law for local public projects that are funded by local funds.1 In State Building and Construction Trades Council of California, AFL-CIO v. City of Vista, the state’s highest court made clear that charter cities in California have the autonomy to decide individually whether to pay prevailing wages for local construction projects. Ultimately, the decision is likely to be a local, political one. It may also depend on the size of the particular project and the source of funding—for example, state or federal funds for projects will probably still require the payment of prevailing wages. That said, this decision may tempt cities not organized as charter cities to change their legal status, as the city of Vista did in this case, in order to avoid the prevailing wage law. At a minimum, the temptation and political pressure not to pay prevailing wages on local projects is likely to be quite strong in some charter cities, especially those facing budget crunches and those with a more conservative constituency. Facts and procedural history In 2006, the city of Vista, California, located in San Diego County, adopted a sales tax to fund construction of several public buildings. In 2007, the Vista City Council authorized a special ballot initiative to change Vista from a general law city to a charter city.2 This change was motivated, in part, by the belief that by doing so the city would have the option of not paying prevailing wages laws for the planned public works projects. The ballot measure passed and Vista converted to a charter city. Shortly thereafter, a city ordinance was amended to prohibit any city contract from requiring payment of prevailing wages except under limited circumstances. Subsequently, the city entered into contracts for the planned public works projects. These contracts, which totaled several million dollars, did not require compliance with the state’s prevailing wage laws. 1 State Building and Const. Trades Council of California, AFL-CIO v. City of Vista, et al., No. S173586, --- Cal.4th ---, July 2, 2012. 2 Under the Government Code, cities in California are either “general law cities,” which are organized under the general law of California or “chartered cities,” organized under a charter. There are more than 100 charter cities in California, including such large ones as San Diego, San Francisco, and Los Angeles. The State Building and Construction Trades Council of California, AFL-CIO (“Union”), a labor federation collectively representing 300,000 construction workers in California, filed suit and sought a writ of mandate ordering Vista officials to comply with the state’s prevailing wage law. The trial court denied the union’s petition, citing an earlier court of appeals decision, which had upheld a charter city’s right to bar payment of prevailing wages for certain public projects.3 The court of appeals, by a 2–1 decision, affirmed the trial court’s decision. The union appealed to the California Supreme Court. By a vote of 5–2, the California Supreme Court held that charter cities are free not to pay prevailing wages on local projects funded by local money. Analysis The majority began by discussing the history and policy justifications behind California’s prevailing wage laws. Adopted during the Depression and later codified in the California Labor Code,4 prevailing wage laws generally require contractors working on “public works” projects to pay the general prevailing rates for work of similar character in the locality where the work is performed. Those rates are usually taken directly from union contracts. The majority observed that the premise behind prevailing wage laws, which have been adopted in many states, is to prevent contractors from “circumvent[ing] locally prevailing labor market conditions by importing cheap labor from other areas.”5 The majority then explored the tension between this state law and the California Constitutional provision that grants charter cities the right to enforce ordinances and regulations “in respect to municipal affairs,” free from interference or regulation by the legislature. (California Constitution, Article XI, Section 5(a)). Whether a matter falls within this so-called “home rule” authority of charter cities is determined by a four-part test that examines: (1) whether the city ordinance regulates a “municipal affair,” (2) whether there is an actual conflict between the state and local law, (3) whether the state law addresses a matter of statewide concern, and (4) whether the law is “reasonably related” to that statewide concern and “narrowly tailored” to avoid interference with local governance. The majority found that the construction of a city-operated facility for the benefit of the city’s inhabitants with city funds was “quintessentially a municipal affair.” The court placed significant emphasis on the fact that this was a local project, locally based, and paid for with local, municipal funds. It seems possible that if the project had been more regional in nature or had involved the expenditure of a mixture of local and other funds, the outcome may have been different on this initial factor. Next, the majority concluded that the prevailing wage law was clearly in “actual conflict” with the Vista ordinance exempting the project from paying prevailing wages under that law, given that the prevailing wage law did not exempt charter cities from its reach. Most critically, the majority then concluded that the wage levels of contractor works constructing locally funded public works was not a “statewide concern.” Here, the union argued that wage levels in a local area are more likely now than when the prevailing wage laws were first adopted to have an effect regionally and statewide. The union also argued that refusal of charter cities to pay prevailing wages will have a depressing impact on wages, thus creating a statewide concern. Finally, the union argued that charter cities would also be able to avoid the prevailing wage requirement of hiring 3 Vial v. City of San Diego (1981) 122 Cal. App. 3d. 346. 4 California Labor Code, sections 1720 and 1861. 5 Independent Roofing Contractors v. Dept. of Industrial Relations (1994) 23 Cal. App. 4th 345, 356. 2 apprentices, an important conduit for the next generation of workers, and thus another unmistakable statewide concern. The court rejected these arguments. The court noted that while these issues might raise statewide concerns in the abstract, they did not in the specific situation of one charter city being required to pay prevailing wages on a local building project funded by local funds. Because the case did not involve a statewide concern, the majority did not have to analyze the fourth factor of the test of whether the law was reasonably related to a statewide concern and narrowly tailored. Justices Werdegar and Liu each wrote dissents, and each joined the other’s dissent. Justice Werdegar criticized the majority decision for being “neither fair nor reasonable” and for failing to recognize the significant statewide impact prevailing wages have on wage levels. Justice Werdegar also argued that the majority ignored repeated statements and findings from the legislature about the statewide impact prevailing wages have on wage levels in the state. Impact and next steps The full impact of this decision will depend on the actions of the more than 100 charter cities in California and on whether cities that do not currently have charters convert to that status. In either case, a charter city cannot exercise the power granted by this decision without an ordinance exempting public projects from the prevailing wage law. Assuming that such a measure is passed or is already on the books, then it will be up to the local politicians to decide whether and when to exempt a project from the prevailing wage laws. The scope of this decision is somewhat limited. It well may not apply to projects involving a mix of local, state, and/or or federal funding or that have a more regional character. The majority repeatedly emphasized that the project in Vista was of a local nature, funded by local money, and was intended for the benefit of the citizens of Vista. For these reasons, it qualified for “home rule” autonomy from state law. If a project draws on state or federal funding, it will in all likelihood be subject to prevailing wage requirements. Similarly, if a project has a more regional impact or character, it is less clear that the “home rule” would apply and permit a charter city to exempt the project from prevailing wage requirements. For more information, please contact your Nixon Peabody attorney or: Kent Jonas at 415-984-8350 or at [email protected] David Kolek at 415-984-8348 or at [email protected] 3.