Lusardi Construction Co. v. Aubry

• Decision Date: 24 February 1992
• Docket Number: No. S011121,S011121
• Citation: 4 Cal.Rptr.2d 837,824 P.2d 643,1 Cal.4th 976
• Court: California Supreme Court
• Parties: , 824 P.2d 643, 30 Wage & Hour Cas. (BNA) 1281, 121 Lab.Cas. P 56,852, 123 Lab.Cas. P 57,112 LUSARDI CONSTRUCTION COMPANY, Plaintiff and Respondent, v. Lloyd W. AUBRY, Jr., as Labor Commissioner, etc., et al., Defendants and Appellants.

Page 837

4 Cal.Rptr.2d 837

1 Cal.4th 976, 824 P.2d 643, 30 Wage & Hour Cas. (BNA) 1281,

121 Lab.Cas. P 56,852, 123 Lab.Cas. P 57,112

LUSARDI CONSTRUCTION COMPANY, Plaintiff and Respondent, v. Lloyd W. AUBRY, Jr., as Labor Commissioner, etc., et al., Defendants and Appellants.

No. S011121.

Supreme Court of California In Bank.

Feb. 24, 1992.

[1 Cal.4th 980] [824 P.2d 645] H. Thomas Cadell Jr., Dept. of Indus. Relations, Chief Counsel, D.I.R., San Francisco, for defendants and appellants.

John W. Prager Jr., Santa Ana, for plaintiff and respondent.

KENNARD, Justice.

The prevailing wage law governs wages and other conditions of employment on public works, which include "[c]onstruction, alteration, demolition or repair work done under contract and paid for in whole or in part out of public funds...." (Lab.Code, § 1720, subd. (a); all further unlabeled statutory references are to the Labor Code.) "Public works" contracts awarded to private contractors must include stipulations requiring the contractors and subcontractors to pay their employees no less than the applicable prevailing wage rates, as determined by the Director of the Department of Industrial Relations (the Director). (§§ 1773.2, 1775.)

This case involves an $18 million expansion of a public hospital. To keep the construction costs as low as possible, the public entity entered into a written agreement with a third party corporation, which appointed the public entity as its agent for all purposes on the construction project. The public entity, purportedly acting as agent for the third party corporation, then hired a private contractor to construct the project, without entering into the statutorily required stipulations that the contractor pay its employees the prevailing wage rates.

The Director sought to require the contractor to pay its employees prevailing wages; the contractor then brought this action challenging enforcement of the law against it. The trial court granted injunctive and declaratory relief, and the Court of Appeal affirmed, concluding on constitutional and equitable grounds that the Director could not enforce the prevailing wage law against the contractor.

This case involves the following issues:

First, does the prevailing wage law apply only when the contractor agrees to comply with it as part of the contract, or does the obligation to pay prevailing wages have an independent statutory basis?

Second, is the Director statutorily authorized to make the administrative determination that a contract for the construction of a public improvement is one for a public work? If so, does the making of such a determination constitute an adjudication, so that procedural due process protections are required?

Third, does the doctrine of equitable estoppel preclude any determination that in this case the contractor is bound by the prevailing wage law?

Fourth, is a civil penalty sought to be imposed on the contractor by the state invalid?

We hold that the statutory obligation to pay the prevailing wage does not depend on the contractor's assent, that the Director may validly and constitutionally determine that a given project is for a public work, and that the doctrine of equitable estoppel does not prevent the Director from proceeding against the contractor. We emphasize, however, that the contractor may be entitled to indemnity from the public entity if it reasonably relied on the public entity's representations that the project was not subject to the prevailing wage law, and that when, as here, a contractor does rely in good faith on such representations, equity prohibits the imposition of statutory penalties against the contractor for failing to pay the prevailing wage.

We conclude that the judgment of the Court of Appeal should be reversed.

FACTS

The parties stipulated to these facts: Tri-City Hospital District (the District) is a public hospital district and an independent political subdivision of the State of California. In 1983, the District wanted to expand its hospital facilities. On June 28, 1983, the District entered into a written agreement with Imperial Municipal Services Group, Inc. (Imperial), a private corporation, for the construction of new facilities at Tri-City Hospital (the Expansion Project). The contract with Imperial specified that the sole role of Imperial was that of the seller of the property, and that the District was appointed as Imperial's "agent and attorney-in-fact for all purposes respecting construction of the Expansion Project, including, without limitation, the engagement of contractors ... and the management and supervision of the construction of the Expansion Project." The contract further provided that "Purchaser [the District], as agent, shall cause contractors under such contracts to ... pay prevailing wages in accordance with the California Labor Code...."

Although Lusardi Construction Company (Lusardi) had served as a contractor on many public works, it made a business decision not to perform any public works contracts after 1980. During its negotiations with the District, Lusardi told the District that it did not enter into contracts for the construction of public works. The District represented to Lusardi that: (1) the Expansion Project was a private work and not a public work under the prevailing wage law, and therefore the payment of prevailing wages and keeping of payroll records was not required; (2) the District had received legal opinions determining that the Expansion Project was not a public work; and (3) Lusardi should compute its construction costs on the basis that the project was not a public work. Lusardi relied on the District's representations in calculating its construction costs.

With the District purportedly acting as Imperial's "agent," Imperial and Lusardi then entered into a contract for the construction of the Expansion Project. Lusardi agreed to construct a "four-phase," 108,000-square-foot addition to Tri-City Hospital at a maximum cost of $18,350,000. The contract between Imperial and Lusardi did not refer to prevailing wages.

In July 1983, Lusardi began work on the project. Lusardi and its subcontractors did not pay the prevailing wage, and did not comply with prevailing wage law requirements governing the hiring of apprentices and the maintenance of certified payroll records. After two and one-half years, Lusardi had completed significant portions of the project.

In January 1986, the Director informed the District in writing of his tentative determination that the Expansion Project was a public work. In May, the Division of Labor Standards Enforcement (the DLSE), a part of the Department of Industrial Relations (the Department), requested Lusardi to submit payroll records, and warned that failure to comply would subject Lusardi to statutory penalties. In August, the Department's Director notified Lusardi and the District that he had made a final determination that the Expansion Project was a public work. In September, the Division of Apprenticeship Standards (the DAS), another arm of the Department, requested evidence of compliance with the statutory apprenticeship requirements from Lusardi.

When Lusardi did not submit the certified payroll records, the DLSE sent a "penalty assessment letter" to the District in November 1986, with a copy to Lusardi. The DLSE purported to assess a statutory penalty of $25 per day per employee, calculated on the basis of a minimum of 200 employees, retroactive to August 1986. Although the construction contract provided that Lusardi was paid by Imperial and not by the District, the DLSE directed the District to withhold future payments due Lusardi, and to increase the amount withheld by $5,000 a day for each day of noncompliance beyond November 13, 1986.

The DAS wrote to Lusardi on November 13, 1986, that if it did not receive satisfactory proof of compliance with the statutory apprenticeship requirements within five days of the letter's receipt, it would initiate "proceedings for determination of willful noncompliance ... pursuant to Labor Code section 1777.7...." The DLSE and the DAS warned Lusardi that it could be subject to back-wage payments, civil penalties, public work debarment, and civil and administrative litigation.

In November 1986, Lusardi filed this lawsuit and ceased all work on the Expansion Project. Lusardi's complaint sought declaratory and injunctive relief, alleging that the prevailing wage provisions of the Labor Code could not lawfully be applied to it consistent with due process. ¹

The trial court issued a temporary restraining order and a preliminary injunction restraining defendants from enforcing or attempting to enforce the prevailing wage law against Lusardi. It subsequently granted Lusardi's motion for summary judgment. Based on the stipulated facts, the trial court ruled that the prevailing wage law could not be applied to Lusardi because of the absence of the requisite contractual provisions and because Lusardi's due process rights had been violated.

The trial court determined that under the prevailing wage law the responsibility for ensuring that the prevailing wage provisions were in a public work contract was on the agency awarding the contract. Because the contract contained no provisions requiring the prevailing wage to be paid, the trial court ruled that Lusardi had acted reasonably as a matter of law in concluding that the prevailing wage law did not apply to it. The trial court also concluded that the Department's application of the public works standards to Lusardi violated Lusardi's right to reasonable notice and an opportunity to respond.

The Court of Appeal affirmed, holding that the Director's determination that the project was a public work without giving Lusardi notice and an opportunity to be heard violated procedural due process, and that the Director was barred under the doctrine of equitable estoppel from proceeding against Lusardi.

DISCUSSION

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