The United States District Court for the Eastern District of Pennsylvania in Philadelphia recently issued an opinion that should get the attention of any contractor or subcontractor performing work on a federal funded construction project. In U.S. ex rel IBEW Local 98 v. The Fairfield Company, the federal court held that a contractor on a SEPTA project could be held liable under the False Claims Act for failing to pay its workers under the Davis Bacon Act. The court found that liability was appropriate under the FCA even through the contractor did not knowingly violate the Davis Bacon Act. The court awarded the plaintiff over $1,000,000 in damages and an additional over $1,000,000 in attorneys fees.
An Extremely Brief Primer on the FCA
A full discussion of the FCA is beyond the realm of this blog post and you could write a book on FCA cases. But in a nutshell, the FCA prohibits a contractor from knowingly submitting a claim for payment to the federal government (or an entity receiving funding from the federal government, like SEPTA) that is false. Importantly, knowingly does not equal actual knowledge of the falsity of the claim. Rather, “reckless disregard of the truth or falsity” of the submission is sufficient. As explained below, this standard played an important role in the court’s decision and should give contractors performing work on federally funded projects pause.
The FCA is designed to ferret out fraud against the federal government. In fact, its roots go back to the Civil War when Congress first passed legislation aimed at unscrupulous contractors supplying materials to the Union army. The FCA is a privateer statute in that it allows private individuals to initiate an FCA claim. The FCA incentivizes private individuals (and their lawyers) to bring FCA claims by allowing them to share in any recovery that the federal government makes. That plaintiff in an FCA case is known as a relator (sometimes people refer to them as whistleblowers but relator is the legal term for an FCA plaintiff). Under FCA rules, the plaintiff – relator has to give the government the first crack at prosecuting an FCA claim. If the Department of Justice declines to prosecute the FCA claim, the relator is still free to prosecute the claim on its own.
Finally, the FCA permits the award of trebel (triple) damages and attorneys fees, plus a statutory civil penalty of up to $10,000 per violation.
Again, there is much much more to the FCA than this. But hopefully this gives you a rough idea of what the FCA is.
The Fairfield Case
Fairfield had a contract with SEPTA (for anyone reading outside of the Pennsylvania area SEPTA is a regional transit authority and is an acronym for Southeastern Pennsylvania Transit Authority). Like all contracts, Fairfield’s contract required it to comply with all federal, state, and local laws. It also required Fairfield to comply with the Davis Bacon Act.
Everyone is familiar with the Davis Bacon Act. It requires contractors to pay prevailing wages to their employees when they are working on a federally funded construction project. But comply with the Act is not always simple. The Department of Labor issues wage rates for various classifications of employees. Employers are supposed to pay employees the wage rate that corresponds to the classification of work that is being performed. Where contractors run into trouble is when employees are misclassified. Sometimes this is innocent and a byproduct of the vagaries of each classification of employees. The DOL does not provide precise definitions for each of its employee classification. Instead each classification is determined by the type of work that an employee is performing and the prevailing area standards of the classification of that employee’s work. Its confusing and sometimes an employee can be perform one classification of work with one wage rate and then perform a different classification of work with a higher wage rate. Other times it is not good-faith confusion that causes an employer to fail to comply with the Davis Bacon Act and a contractor blatantly fails to follow the classifications in paying its employees.
IBEW Local 98 brought an FCA against Fairfield alleging that Fairfield misclassified certain employees as groundmen and laborers, which were paid a lower rate, rather than journeymen, which received a higher wage rate under the Davis Bacon Act. Local 98 contended that Fairfield violated the FCA by submitting certified payroll reports with its payment applications which contained these misclassifications.
In sum (and I am condensing a lot , the opinion is over 30 pages), the court agreed with Local 98. It found that Fairfield acted with reckless disregard for truth or falsity of it certified payroll. It founds that accurate certified payroll is a material part of SEPTA’s payment process. And it found Fairfield liable for $1,055,320.62 in damages of which $316,596 went to Local 98 as a reward for bringing the action and the remaining $738,724.43 to the United States. The court also awarded Local 98 attorneys fees and costs, which it later determined to be over $1,000,000.
What it means
There are numerous important takeaways from this case. I am going to hit what I think are the top 4.
1. Violating the Davis Bacon Act can serve as the basis for an FCA claim.
Probably the most important takeway is that the court ruled that a violation of the Davis Bacon Act could serve as a basis for an FCA violation. This means strict compliance with the Davis Bacon Act is critical. In recent years, organized labor has brought FCA cases against non-union contractors based on alleged Davis Bacon Act violations. Interestingly, Fairfield appeared to be a union contractor with a CBA with a competing IBEW Local. This means union contractors are not immune to similar suits.
2. Quality control is key.
Fairfield did not simply ignore the Davis Bacon Act. Rather, the court found that it basically lacked any quality control regarding how employees were classified for payment purposes. Fairfield’s on site foreman assigned work and decided how employees should be classified. The court found this was not enough. Contractors already struggle to properly classify employees under the Davis Bacon Act in many cases. That difficult task just became way more important.
3. A DOL audit is no defense.
The court found that Fairfield acted with reckless disregard even though the DOL had conducted an audit and found no wage violations. But the court said that a clear DOL audit was only evidence of compliance with the Davis Bacon Act. It was not conclusive as a matter of law. This ruling will no doubt be the basis for an appeal.
4. Little things turn into big things.
The court found that Fairfield’s underpayment of wages was not rife. It found an underpayment of $159,273.54 in wages which represented only 13.5% of the hours worked on the project. So, how did an underpayment of about $160,000 turn into a judgment in excess of $2,000,000? Because of the FCA penalty provisions. As stated above, the FCA allows for trebel damages. So the court first permitted the $159,273.54 to be multiplied by 3 or $477,820.62. Next the court determined that each incorrect certified payroll was a FCA violation. It determined that the statutory penalty for each violation should be $5500. And it found that Fairfield had submitted 105 incorrect certified payrolls. So it imposed an additional amount of $577,500 ($5500 x 105) in statutory penalties. Finally, the Court awarded Local 98 attorneys fees and costs, which it determined to be over $1,000,000.
So, a lack of quality control that resulted in underpayment of wages on 13.5% rapidly led to a damage award of over $2,000,000.
Again, there is much more to this decision and its implication that I cannot cover in a blog post. If anyone has any questions, please feel free to contact me. I am currently at how in lockdown reading obscure case law regarding the FCA in between homeschooling my kids.