PAUL'S ELEC. SERVICE, INC. v. Befitel

• Citation: 91 P.3d 494,104 Haw. 412
• Decision Date: 10 June 2004
• Docket Number: No. 23800.,23800.
• Parties: PAUL'S ELECTRICAL SERVICE, INC., Appellant-Appellant, v. Nelson BEFITEL, Director of the Department of Labor and Industrial Relations, Appellee-Appellee.
• Court: Hawaii Supreme Court

91 P.3d 494

104 Haw. 412

PAUL'S ELECTRICAL SERVICE, INC., Appellant-Appellant, v. Nelson BEFITEL,¹ Director of the Department of Labor and Industrial Relations, Appellee-Appellee.

No. 23800.

Supreme Court of Hawai'i.

June 10, 2004.

As Corrected July 14, 2004.

Richard M. Rand and Karen R. Tashima (Torkildson, Katz, Fonseca, Jaffe, Moore & Hetherington), Honolulu, on the briefs, for appellant-appellant Paul's Electrical Service, Inc.

Bruce W. Rudeen and Frances E.H. Lum, Deputy Attorneys General, on the briefs, for appellee-appellee Nelson Befitel, Director of the Department of Labor and Industrial Relations.

MOON, C.J., LEVINSON, NAKAYAMA, and DUFFY, JJ.; with ACOBA, J., concurring separately.

Opinion of the Court by DUFFY, J.

Appellant-appellant Paul's Electrical Service, Inc. (Paul's Electrical) appeals from the judgment of the first circuit court, the Honorable Eden Elizabeth Hifo presiding, in favor of appellee-appellee Nelson Befitel (Director Befitel), Director of the Department of Labor and Industrial Relations (DLIR). Specifically, Paul's Electrical appeals from the circuit court's final judgment, filed on September 18, 2000, affirming DLIR's decision to suspend Paul's Electrical from new government construction contracts for a period of three years.² Based on the following, we vacate the judgment of the circuit court and remand with instructions to enter judgment in favor of Paul's Electrical.

I. BACKGROUND

Hawai'i Revised Statutes (HRS) chapter 104, entitled "Wages and Hours of Employees on Public Works," provides that any entity that contracts with the government to provide construction of public works must strictly follow certain labor practices. See, e.g., HRS §§ 104-2 to 104-3 (1993 & Supp. 2003). HRS § 104-24 (Supp.1997) provides for an escalating series of penalties for violations of HRS chapter 104, culminating in a three-year suspension from performing government contract work after the contractor is found to have committed a third violation of HRS chapter 104.³

On February 9, 1995, Paul's Electrical received its first notice of violation [hereinafter, NOV] of HRS chapter 104 from DLIR. The NOV arose from DLIR's investigation of Paul's Electrical from November 1993 to October 1994. In response to this NOV, Paul's Electrical paid $1,623.36 in back wages and did not appeal DLIR's allegation that Paul's Electrical had violated HRS chapter 104. The NOV became final and conclusive twenty days after it was mailed to Paul's Electrical because Paul's Electrical did not appeal the notice. HRS § 104-5 (Supp.1995).

On June 26, 1996, DLIR filed a verified complaint alleging that Paul's Electrical committed a second violation of HRS chapter 104 within two years of its first violation.⁴ The complaint stated that Paul's Electrical had committed a second violation by underpaying its employees a total of $20,001.52; the complaint also stated that Paul's Electrical had since paid this amount to the affected employees. This verified complaint, representing Paul's Electrical's second violation of HRS chapter 104 (and referred to as "NOV # 2" by the circuit court), arose from DLIR's investigation of Paul's Electrical from April 1995 to November 1995 (i.e., within two years of the first violation). The complaint sought $535,224.90, representing ten percent of the total contract amount ($5,352,249.00), as a penalty for a second violation of HRS chapter 104 as mandated by HRS § 104-5(b). On February 24, 1998, the Labor and Industrial Relations Appeals Board (Appeals Board) held a hearing on DLIR's complaint; the Appeals Board did not issue its decision and order, however, until March 18, 1999. The Appeals Board found that Paul's Electrical had committed a second violation, but that the violation was not committed "knowingly" such that no penalty (apart from the $20,001.52 in underpayments) could be imposed under the then-existing version of HRS § 104-5(b).

While the Appeals Board proceedings were pending on the second violation, DLIR conducted a third investigation of Paul's Electrical. The investigation began in October 1996 and ended in March 1997 and covered the period from August 1995 to January 1997. The investigation uncovered further violations of HRS § 104, and on March 24, 1997, DLIR sent Paul's Electrical a letter requesting the payment of $304.23 in back wages. This letter did not specifically indicate that Paul's Electrical had violated HRS chapter 104; instead, the letter stated that the investigation "revealed that four employees were paid less than the prevailing wage rate[.]" The letter did not include information on Paul's Electrical's appeal rights and did not indicate that DLIR intended to impose any penalty for the underpayments. Instead, the letter stated that "we request that all back wages be paid no later than April 14, 1997." Paul's Electrical immediately paid the $304.23.

DLIR did not issue an NOV for the third violation (the wage discrepancy of $304.23) until April 7, 1999—over two years after the completion of the investigation revealing the third violation, but less than three weeks after the Appeals Board issued its decision and order on Paul's Electrical's second violation. The NOV for the third violation indicated that a finding of a third violation carried with it a penalty of a three-year suspension.

Director Befitel argues that the decision to wait for two years after the completion of the investigation to issue the third NOV was reasonable under the circumstances: he argues that DLIR did not know whether to categorize this violation as a third violation or a second violation (with different penalties for a second versus a third violation) until the completion of DLIR's proceedings on the second violation. Director Befitel further argues that Paul's Electrical had actual notice of the third violation in March 1997 and that Paul's Electrical has not demonstrated any prejudice from DLIR's delay. Paul's Electrical, on the other hand, argues that the two-year delay rendered the April 7, 1999 notice of violation a nullity. Paul's Electrical contends that it need not demonstrate prejudice because DLIR is obligated to issue notifications of violations promptly. The relevant statute, HRS § 104-23 (Supp.1995),⁵ does not provide a specific time frame in which an NOV must be issued.

Paul's Electrical appealed from the third NOV. On September 22, 1999, the Appeals Board issued its Decision and Order affirming the third violation and the penalty of a three-year suspension from government contract work. On September 23, 1999, Paul's Electrical appealed to the first circuit court; on September 8, 2000, the circuit court affirmed DLIR's decision and order. The circuit court ruled that DLIR's decision to wait to issue the third NOV until the proceedings surrounding the second NOV had been completed was reasonable under the circumstances, although a two-year delay in other circumstances would be unreasonable. The circuit court concluded that "[i]f there were evidence that such delay had prejudiced Paul's in this case, that would constitute grounds for reversal. Absent such evidence, the Court cannot say that the delay caused by awaiting the decision following Paul's own appeal of NOV # 2 was arbitrary, capricious, or in violation of Section 104-23 as unreasonable."

II. STANDARDS OF REVIEW

A. Review Of Administrative Agencies' Findings and Conclusions

1. Secondary appeals

Review of a decision made by the circuit court upon its review of an agency's decision is a secondary appeal. The standard of review is one in which this court must determine whether the circuit court was right or wrong in its decision, applying the standards set forth in HRS § 91-14(g) [(1993)] to the agency's decision.

Korean Buddhist Dae Won Sa Temple of Hawaii v. Sullivan, 87 Hawai'i 217, 229, 953 P.2d 1315, 1327 (1998) (quoting Bragg v. State Farm Mutual Auto. Ins., 81 Hawai'i 302, 304, 916 P.2d 1203, 1205 (1996)) (alteration in original). HRS § 91-14, entitled "Judicial review of contested cases," provides in relevant part:

(g) Upon review of the record the court may affirm the decision of the agency or remand the case with instructions for further proceedings; or it may reverse or modify the decision and order if the substantial rights of the petitioners may have been prejudiced because the administrative findings, conclusions, decisions, or orders are:

(1) In violation of constitutional or statutory provisions; or

(2) In excess of the statutory authority or jurisdiction of the agency; or

(3) Made upon unlawful procedure; or

(4) Affected by other error of law; or

(5) Clearly erroneous in view of the reliable, probative, and substantial evidence on the whole record; or

(6) Arbitrary, or capricious, or characterized by abuse of discretion or clearly unwarranted exercise of discretion.

"[U]nder HRS § 91-14(g), conclusions of law are reviewable under subsections (1), (2), and (4); questions regarding procedural defects under subsection (3); findings of fact under subsection (5); and an agency's exercise of discretion under subsection (6)." In re Hawaiian Elec. Co., 81 Hawai'i 459, 465, 918 P.2d 561, 567 (1996) (citing Outdoor Circle v. Harold K.L. Castle Trust Estate, 4 Haw.App. 633, 638-39, 675 P.2d 784, 789 (1983)).

2. Deference to administrative agencies

HRS § 91-14(g)(6) provides that an agency's exercise of discretion will not be disturbed unless "[a]rbitrary, or capricious, or characterized by abuse of discretion or clearly unwarranted exercise of discretion." In the past, this court has utilized various tests and standards in implementing this statutory provision. See, e.g., In re Wai'ola O Moloka'i, Inc., 103 Hawai'i 401, 420, 83 P.3d 664, 683 (2004)

("This court's review is ... qualified by the principle that the agency's decision carries a presumption of validity[,] and appellant has the heavy burden of making a convincing showing that the decision is invalid because it is unjust and...