On Friday, November 6, 2020 at 10:00 a.m. I am hosting a free zoom webinar on federal and state prompt payment act (primarily New Jersey and Pennsylvania).  Owner learn how not to get smacked with heavy interest and attorneys fees on small payment disputes.  Contractors and subcontractors learn how to get your invoices paid and to recover your interest and attorneys fees.

https://zoom.us/webinar/register/WN_G_hopYTtRd6473th5tQmrA

On September 22, 2020, President Trump signed an executive order prohibiting federal contractors from using diversity training to peddle false theories that America is a racist country and that white men are inherently racist and sexist. As the executive order points out, examples of diversity training gone awry include recent training at the Smithsonian Institute – of all places.  That training claimed “concepts like “[o]bjective, rational linear thinking,” “[h]ard work” being “the key to success,” the “nuclear family,” and belief in a single god are not values that unite Americans of all races but are instead “aspects and assumptions of whiteness.” The museum also stated that “[f]acing your whiteness is hard and can result in feelings of guilt, sadness, confusion, defensiveness, or fear.'”

Under the executive order, during the performance of a federally funded contract, contractors may not require their employees to participate in workplace training that promotes these ideologies.  Moreover, labor unions with whom government contractors maintain collective bargaining agreements cannot engage in similar training.  The penalties for a contractor ignoring the executive order are severe. A contractor can have its contract terminated and could be disbarred.

Critically, contractors must now include language in their subcontracts that make the executive order binding on subcontractors.   This is particularly important because a subcontract that requires its employees to attend a diversity program that violates the executive order could be in breach of its subcontract and open itself up to a false claims act violation.

The Office of Federal Contract Compliance (OFCCP) has set up a hotline for individuals to call to report violations of the executive order. Employees and contractors that are aware of violations of the executive order are urged to call the hotline.

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.

I am back.  It feels like an entirety since I last posted. But a hellacious trial schedule got me off the blogosphere for some time.  Plus, there was nothing to write about.

But I am back with a bang thanks to a decision from the Eastern District of Pennsylvania concerning the interplay of a forum selection clause appearing in an arbitration clause in a construction contract and the Pennsylvania Contractor and Subcontractor Payment Act.  In Bauguess Electrical Services, Inc. v. Hospitality Builders, Inc., the federal court (Judge Joyner) ruled that the federal arbitration act preempted the Payment Act’s prohibition on forum selection clauses and held that an arbitration must proceed in South Dakota even though the construction project were the work was performed was located in Pennsylvania.

The Payment Act applies to all commercial construction projects performed in Pennsylvania. As some you might know, Section 514 of the Payment Act, 73 P.S. 514, prohibits choice of law and forum selection clauses.  It states “[m]aking a contract subject to the laws of another state or requiring that any litigation, arbitration or other dispute resolution process on the contract occur in another state, shall be unenforceable.” Therefore, if a construction contract is for a project located in Pennsylvania, Pennsylvania law must apply and all disputes must be adjudicated in Pennsylvania.

The case involved a typical construction project payment dispute between a subcontractor and general contractor. Bauguess Electrical was an electrical subcontract that entered into a contract with Hospitality Builders for work on Hotel project in Delaware County Pennsylvania. Bauguess claimed it performed all of its work required under the subcontract but was still owed $80,000. Bauguess filed a petition to compel arbitration. Hospitality Builders responded to the petition claiming that under the subcontract, arbitration was required to take place in South Dakota.  Bauguess replied by stating that Section 514 of the Payment Act prohibited arbitration in South Dakota and required arbitration to occur in Pennsylvania. Defendant countered by stating that the Federal Arbitration Act preempted the Payment Act.  The federal court resolved the dispute by agreeing with the defendant that the FAA preempted the Payment Act and ordered that arbitration occur in South Dakota.

The federal court began its discussion by reiterating the federal courts’ liberal policy towards arbitration under the FAA.  The court then turned to whether the FAA preempted the Payment Act. The court found that the FAA preempted the Payment Act under a “conflict preemption” theory of preemption. Conflict preemption occurs when there is an actual conflict between the application of federal and state law.  The court held that one of the primary purposes of the FAA is “to ensure ‘that private agreements to arbitrate are enforced according to their terms.” If the parties reach an agreement to arbitrate in a forum other than Pennsylvania, there is a conflict between the purpose of the FAA and the Payment Act which would prohibit such an agreement.  The federal court concluded that under a conflict preemption, the FAA acts to preempts the Payment Act.  So it ordered the parties to resolve there dispute through arbitration in South Dakota.

The All Important Take Away

1.   As it applies to arbitration, Section 514 is essentially invalid.  Section 514 specifically applies to arbitration. But, if the parties reach an agreement to arbitrate a dispute involving a Pennsylvania construction contract in a place other than Pennsylvania, the Payment Act will not prevent that from happening.

2.   With this in mind, when reviewing a construction contract for a Pennsylvania project, if the matter is to be arbitrated, the location of the arbitration should be addressed. If you represent a smaller subcontractor, you should not agree to arbitrate in some far flung forum.

For nearly 36 years, the United States Supreme Court’s decision in Williamson County Regional Planning Commission v. Hamilton Bank of Johnson City, 473 U.S. 172, 105 S.Ct. 3108, 87 L.Ed.2d 126 (1985)  severely frustrated, if not all but foreclosed, a property owner’s right to bring a claim in federal court based on a regulatory taking.  Under the Fifth Amendment, a property owner whose land has been “taken” by the government is entitled to just compensation.  There are two types of takings direct or “inverse” or regulatory takings.  A direct taking is where the government declares that it needs your land for public use and offers to pay you compensation.  You might disagree with the amount offered – and that often is the case.  But, a mechanism exists whereby a neutral third party – a condemnation board – will arrive at the compensation that is owed.  On the other hand, an inverse condemnation or regulatory taking occurs when the government takes some action that restricts the use of the land in such a way as to severely impact it beneficial economic use.  For example, if you own a strip of commercial property and intend to develop it and then the municipality comes along and suddenly changes the zoning classification of the parcel such that you can no longer develop it in a beneficial way, then you might have a regulatory takings case.

Under the Court’s Williamson County decision, property owners falling within the later category were required to exhaust state remedies before proceeding to federal court under a claim that their Fifth Amendment rights were violated.  The problem with this is that, as the Supreme Court explained, it creates a Catch-22. If property owners exhaust their state remedies and the state remedies result in an unfavorable outcome, the federal court is powerless to overturn that decision under the doctrines of res judicata and the full faith and credit clause of the Constitution.

Well, yesterday, the Court overturned Williamson County, in Knick v. Township of Scott, 588 U.S. _____ (2019). There the Court held unequivocally a “property owner has suffered a violation of his Fifth Amendment rights when the government takes his property without just compensation, and therefore may bring his claim in federal court under Section 1983 at that time.”

The right to bring a claim in federal court under Section 1983 is significant because that statute permits the award of attorneys fees and costs to the land owner.  What this means is that if a property owner has suffered a final adverse land use decision, he should consider an action against the government authority in federal court.  What type of adverse decisions might be subject to such a claims?

  • A change in zoning classification that impacts the future use of a parcel;
  • Environmental regulations that impact the future plans for the parcel;
  • Revoked building permits;
  • A historical designation that impacts the future development of the parcel; and
  • Additional burdensome conditions placed on a previously partially approved parcel.

These a but a few of the types of cases that might be ripe for a challenge.  And, again, the upside is that a challenge could result in the government having to pay your attorneys fees and costs.

 

Posting this for two reasons.  First, folks apparently really liked the lien and bond chart I posted a few weeks ago.  Second, I want mix things up and mess around with video as a medium for discuss. So, I am going to do series of video blog posts over the next few weeks.  Next week back to more labor law with a video discussion – sans power point I promise – on union employee grievances.