Garret Murai | California Construction Law Blog
As most public works contractors know, Labor Code section 1777.5 requires the hiring of apprentices on public works projects and, under Labor Code section 1777.7, violations are subject to civil penalties of up $100/day and up to $300/day days for repeated violations within a three-year period.
In Lusardi Construction Co. v. Dept. of Industrial Relations, 102 Cal.App.5th (2024), a prime contractor learned the hard way that not only could it be penalized for its failure to hire apprentices but that it could also be liable for its subcontractor’s failure to hire apprentices. Forewarned is to be forearmed.
The Lusardi Construction Case
In 2014, general contractor Lusardi Construction Company hired subcontractor Pro Works Contracting to perform iron reinforcing work on a public works project owned by the San Marcos Unified School District.
A. The Civil Penalty Citation
In 2015, the Department of Labor Standards Enforcement opened an investigation into a complaint that Pro Works violated the state’s apprenticeship laws by failing to: (1) provide contract award information; (2) request dispatch of apprentices from applicable apprentice committees; (3) employ registered apprentices in compliance with a required apprentice to journey person ratio; and (4) make certain required training fund contributions to an approved apprenticeship program.
The DLSE later issued a citation finding that Pro Works failed to hire apprentices or to submit compliant DAS 140 and 142 forms and other required information and assessed civil penalties of $30,800 calculated at $200/day over 154 days applying the five-factors under former Labor Code section 1777.7.
B. The Administrative Hearing
Lusardi (I’m not sure where Pro Works was at) filed a request for administrative review. At the hearing, Lusardi requested the appearance of Senior Deputy Labor Commissioner Michael Nagtalon, who it had subpoenaed because the penalty had been assessed by Nagtalon, but was informed by DLSE’s counsel that he was out of the country. DLSE’s counsel offered to stipulate to produce Nagtalon at a rescheduled hearing.
Note: The hearing officer, correctly to my mind, applied the 2014 versions of Labor Code and implementing regulations.
However, in an unusual series of events, Lusardi’s counsel declined the offer and instead informed the hearing officer that, “Lusardi will rest without presenting any further evidence and will not move any of Lusardi’s exhibits into evidence in this matter” and, further, that “We are not going to present any evidence because we feel very strongly the Labor Commissioner has failed to meet its burden in this matter.” My guess is that since Nagtalon did not testify, Lusardi’s counsel’s view was that the DLSE could not show how it arrived at the penalties imposed and therefore had not met its burden.
C. The DLSE Decision
Following the hearing, the Director of DLSE affirmed the hearing officer’s findings that the DLSE had not only met its burden but that Lusardi knew of Pro Works’ violations and was liable for the penalties. Among other things, the Director determined:
- “There is no dispute that Pro Works failed to employ any apprentices on the Project.”
- “Pro Works had first assigned an Iron Worker journeyperson to work on the Project on December 23, 2014. In light of that evidence, it was reasonable for DLSE to infer that Pro Works knew of its apprentice needs by February 23, 2015. Indeed, given all the facts in the record, it is also reasonable to infer that Pro Works never had any intention of employing apprentices on this Project in December of 2014, in February of 2015, or even in May of 2015 when it finally submitted a complete and valid DAS 140 form. That Anderson did not directly inquire of Pro Works or make a finding as to the state of Pro Works'[s] knowledge of apprentice needs does not detract from the record of Pro Works'[s] violations in this case.”
- “Pro Works'[s] violations of apprentice requirements are deemed to be `knowing’ within the meaning of [former] section 1777.7, subdivision (a)(1). This is so because, as reflected in DLSE records, Pro Works had previously been found to have violated [former] section 1777.5.”
- “According to [DLSE staff] testimony and the penalty review, Nagtalon considered the five penalty factors, approved the penalty review prepared by [DLSE staff], and set the penalty rate at $200.00 per violation `due to the nature of the violations,’ before returning the penalty review to [DLSE staff] for preparation of the assessment. These facts establish a prima facie showing that Nagtalon reviewed the summary of the investigation prepared by [DLSE staff], considered the statutory factors, and properly exercised his discretion in setting the penalty rate.
- “In this case, DLSE produced prima facie evidence that Lusardi had knowledge of Pro Works'[s] apprentice violations, thus satisfying the first prong of [former section 1777.7,] subdivision (d). This conclusion could have conceivably been rebutted by Lusardi, but Lusardi did not deny it had knowledge. Had Lusardi denied knowledge, evidence may have been explored as to whether Lusardi failed to comply with the second prong of subdivision (d). However, in the absence of such evidence, it is reasonable to infer that Lusardi possessed knowledge, thereby depriving Lusardi of the safe harbor from liability for Pro Works'[s] violations.”
- “Given DLSE’s evidence supporting a prima facie showing of Lusardi’s knowledge of actual and ongoing apprentice violations by Pro Works during the course of the Project, and given the opportunity to be heard in the form of the hearing, Lusardi was not deprived of its due process rights. Lusardi was put on notice by the contents of DLSE’s initial packet, and it cannot plausibly assert that its potential liability was not manifest from the start of DLSE’s investigation. . . . Further, by virtue of section 1743 and former section 1777.7, Lusardi was on notice that its liability was at issue.”
Note: In general, under the Administrative Procedures Act, administrative agencies can accept, reject, or modify the findings of a hearing officer or Administrative Law Judge. Now I can hear many of you scream “due process!” or the agency can’t act as “both judge and jury!” But parties do have appeal rights through the writ process described below as well as appeal to the Courts of Appeal as this case reflects.
D. The Writ Proceeding
Lusardi filed a writ of administrative mandate with the superior court (again, where the heck is Pro Works) arguing that the Director’s decision should be invalidated because the DLSE acted in excess of its authority and issued a civil penalty assessment against Lusardi. Lusardi further argued it was not afforded a fair hearing because Nagtalon did not attend the hearing and Lusardi was not provided an opportunity to examine how the penalty was determined.
The superior court disagreed finding that the Director had a basis to find that Lusardi could be held liable for Pro Work’s failure to hire apprentices since Pro Work’s certified payroll showed that it failed to hire any apprentices. The superior court further ruled that Nagtalon “was not the ultimate decision-maker concerning the amount of the penalty,” and “[w]hile the Court believes that the better practice for the DLSE . . . would have been to produce . . . Nagtalon for examination,” “the Court is not persuaded that the failure to produce . . . Nagtalon resulted in a violation of Lusardi’s due process rights.”
Lusardi appealed.
The Appeal
On appeal, the Fourth District Court of Appeal noted that former Labor Code section 1777.7 (Note: current Labor Code section 1777.7 is essentially the same) provides for two avenues of liability of a prime contractor for a subcontractor’s failure to employ apprentices: (1) if the prime contractor “had knowledge of the subcontractor’s failure to comply” with Labor Code section 1777.5; or (2) if the prime “fails to comply with [certain] requirements.”
Note: Under those current version of Labor Code section 1777.7 those “requirements” include any of the following: (1) the prime contractor did not include in the subcontract a copy of Labor Code sections 1771, 1775, 1776, 1777.5, 1813 and 1815; (2) the prime contractor failed to continually monitor a subcontractor’s use of apprentices, including, but not limited to, periodic review of a subcontractor’s certified payroll; (3) upon becoming aware of a subcontractor’s failure to employ apprentices, failing to take corrective action, including, but not limited to, retaining funds due to the subcontractor until the failure is corrected; or (4) prior to making final payment to a subcontractor, failing to obtain a declaration signed under penalty of perjury, that the subcontractor employed the required number of apprentices.
Here, held the Court of Appeals, substantial evidence supported the Director’s finding under the first prong of Labor Code section 1777.7, namely, that Lusardi “had knowledge of [Pro Works’] failure to comply” with Labor Code section 1777.5 because Pro Works’ certified payroll showed no hours for apprentices. The Court of Appeal further found that substantial evidence supported the amount of civil penalties since DLSE staff testified at the administrative hearing how the penalties were calculated. Finally, the Court held that Lusardi’s due process rights were not violated by Nagtalon not appearing at the administrative hearing since Lusardi decided to rest its case without requesting a continuance to obtain Nagtalon’s testimony.
Conclusion
While the Lusardi case was decided under the former provisions of the Labor Code, the current version of Labor Code sections 1777.5 and 1777.7 remains substantially the same. The lesson here for prime contractors, is that you can be liable for your subcontractor’s failure to hire apprentices, and the evidence establishing your ‘knowledge” can be as simple as certified payroll records which do not show apprentice hours. However, I am a little ambivalent of the evidence relied upon, since Labor Code section 1777.5 only requires that a contractor request apprentices, not that a contractor must employ apprentices, and that if a subcontractor makes a request but no apprentices are provided no apprentice hours of course would show up on the subcontractor’s certified payroll records.
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