LUSARDI CONSTRUCTION COMPANY v. AUBRY (1989)

This appeal relates to the requirements imposed by the Labor Code ¹ respecting public works projects (sometimes herein referred to as the “prevailing wage law”).   Contained in sections 1720 through 1815, these requirements include the payment of “general prevailing rate” wages (§ 1771), the payment of overtime and holiday pay (§ 1773), and the maintenance and preservation of payroll records (§ 1776).   A “public works” project, to which these requirements pertain, is defined as “[c]onstruction, alteration, demolition or repair work done under contract and paid for in whole or in part out of public funds․”  (§ 1720(a).)  A contractor subject to the provisions who fails to abide thereby is subject to enforced payment of the deficiency amounts as well as penalties computed by the number of workmen underpaid by days of underpayment.  (§§ 1775, 1813.)   Enforcement is by the Division of Labor Standards Enforcement (DLSE), and can be achieved by withholding payments due the contractor from the public agency (§ 1727) or by suit in a court of competent jurisdiction (§ 1775).

The code contains no direct provision as to who shall determine whether a project is a “public works.”   When the contract does involve a “public works,” however, the public agency awarding the contract is obligated to give notice of that fact.   Notice of the applicable wage rate must be included in the call for bids and the contract form.  (§ 1773.2.)   The public agency must include in the contract a stipulation for compliance with the penalty and forfeiture sections.  (§ 1775.)   The contract must contain a reference to the requirement for maintenance and retention of payroll records, the responsibility for compliance with which is “fixed” upon the primary contractor.  (§ 1776.)   And finally, a stipulation for compliance with the detailed provision relating to use of apprentices must be included in the contract.  (§ 177.5.)   In each case the obligation of inclusion of the notice provision is imposed upon “the body awarding the contract.”

The dispute in this case results from the attempts by DLSE to impose the public works provisions upon Lusardi.   The appeal is by DLSE, from a summary judgment rendered in favor of Lusardi, which judgment determined Lusardi not bound by the requirements of the prevailing wage law, and which further enjoined DLSE from attempting to enforce these provisions as to this job.   While the proceeding resulting in the judgment was technically a motion for summary judgment, we are not faced in this appeal with the usual investigation posed by summary judgment, i.e., whether triable issues of fact have been identified.  (See 6 Witkin, Cal. Procedure (3d ed. 1985) Proceedings Without Trial, § 274, pp. 573 et seq.)   Presented with the motion was a “Plaintiff's and Defendant's Joint Stipulation of Facts,” which resolved for the trial court all essential factual matters.   As part of this statement it was agreed that “an actual justiciable controversy [exists] in respect to which Lusardi is entitled to have a declaration of its rights.”   Accordingly, the hearing was in actuality a trial of the legal issues of the case upon stipulated facts.  (See 7 Witkin, Cal. Procedure (3d ed. 1985) Trial, § 1, pp. 18–19.)   We are therefore privy to the same facts upon which the trial court made its judgment, and summarize them as follows:

The Tri–City Hospital District (District) sought acquisition of a new hospital facility—a multi-story structure to cost some $20 million.   District elected to achieve construction not by dealing directly with builders, but by contracting with a separate California corporation, Imperial Municipal Services Group, Inc. (Imperial).   Although DLSE suggests in its appellate brief that Imperial is the alter ego of District, and that the transaction constitutes “creative financing,” there was no evidence permitting the trial court to find, and it did not find, that Imperial was other than an independent party contracting with District to construct a building and then sell it to District.   The contract between District and Imperial is a 34–page document giving all appearance of being a bona fide undertaking by an independent entity to construct and sell a building.

Imperial then entered into a contract with Lusardi, under the terms of which Lusardi was to construct the structure Imperial had agreed to sell to District.   In terms of compliance with the public works law, the District–Imperial contract provided:

“Purchaser [Imperial], as agent, shall cause contractors under such contracts to comply with workers' compensation insurance laws, to pay prevailing wages in accordance with Article 2 (commencing with Section 1770) of Chapter 1, Part 7, Division 2 of the California Labor Code.”

The contract between Imperial and Lusardi did not, however, contain any reference to the status of the project as “public works” or any indication the project would be governed by the prevailing wage law.   In initial negotiations for the contract, Lusardi advised representatives of the District the company did not enter into public works contracts and was not interested in doing the job if it were to be “public works.”   Lusardi was told that the expansion program was not public works, but instead was “private,” that the prevailing wage and payroll record requirements of public works projects would be inapplicable, and that he should figure construction costs and make his bid upon the assumption that the project would not be subject to sections 1720 through 1815.   He was further advised the District had obtained legal opinions stating that the work was not “public works.”

Lusardi entered into a written contract in June of 1983 and commenced performance thereof in July, in reliance upon the conclusion that the project was private.   Construction costs were estimated on that basis.   Lusardi has not complied with the Labor Code provisions relating to public works;  specifically, it has not paid “prevailing” wage rates, nor has it maintained certified payroll records.   Not only has Lusardi never received notice from District that the project is public works, but District has continued, from the inception of the project to the present time, to contend the work is private.

The first notice that DLSE considered the project “public works” came in January of 1986, after significant portions of the project had been completed and accepted by District.   Subsequent notices clearly indicated the DLSE's intention to impose sanctions and penalties against Lusardi.   Actual collection of any penalties or imposition of fines or forfeitures was forestalled by the filing of this action for declaratory relief and its attendant temporary and permanent injunctive relief against DLSE.   The judgment in declaratory relief rendered by the trial court concluded that enforcement of the public works requirements on Lusardi under these circumstances would constitute a violation of due process, in that it would deprive Lusardi of property rights without adequate notice or opportunity to be heard.   A permanent injunction against enforcement was issued.

It was stipulated that the court need not decide, and in its judgment it did not decide, whether the project was indeed “public works.”   We apprehend, however, there is little dispute but that the contract if let by the District directly would be so classified.   The appellate briefs all but assume this result.   The issue on appeal, therefore, as framed by DLSE, is the following:  Is avoidance of the applicability of the prevailing wage law provisions achievable by a public entity which seeks construction of a new project, by contracting to purchase the completed project from a third-party private entity, rather than by contracting directly for the construction? ²

Before addressing this issue, we must deal with a preliminary procedural contention.   DLSE contends it was the administrative agency authorized to make, and it did make, the initial determination that the project was “public works” within the meaning of section 1720(a).³  Lusardi's remedy, it contends, is to challenge this administrative determination by seeking a writ of mandate.  (See 8 Witkin, Cal. Procedure (3d ed. 1985) Extraordinary Writs, § 245, pp. 869–870.)   Lusardi counters by contending that where the threat of enforcement is by way of an unconstitutional taking without due process, challenge by way of declaratory relief and injunction is appropriate, citing California Restaurant Assn. v. Henning (1985) 173 Cal.App.3d 1069, 1073, 219 Cal.Rptr. 630.

We need not resolve this question.   Paragraph 28 of the joint stipulation before the trial court acknowledges the existence of “an actual justiciable controversy” and stipulates that “Lusardi is entitled to have a declaration of its rights.”   Further, the pleadings themselves constitute a stipulation to the justiciability of the claim in the form of declaratory relief.   Not only did DLSE not interpose an objection or defense on the ground of erroneous remedy, but it cross-complained in its own right for declaratory relief.   This form of action has therefore become the “theory of the trial,” and cannot on appeal be challenged.  (See 9 Witkin, Cal. Procedure (3d ed. 1985) Appeal, § 316, p. 327.)

We arrive, therefore, at the core issue:  Assuming Lusardi's contract if made directly with District would have been “public works,” can the power of the DLSE to enforce the wage and records requirements be defeated by action of another state agency, the District, which structures the project as private?   DLSE asks that we focus upon the purpose of the law and, reviewing authorities construing the parallel Davis–Bacon Act of the federal government, points to the objective of protection of employees.  “The employees, not the contractor or its assignee, are the beneficiaries of the Act.”  (Unity Bank & Trust Co. v. United States (1985) 756 F.2d 870, 873.)  “The purpose and intent of the act is plain,” declared an early California case, “and its object should not be defeated by overnice construction.”  (Shalz v. Union School Dist. (1943) 58 Cal.App.2d 599, 606, 137 P.2d 762.)   Further, states DLSE, the statutory remedies available to the agency are all directed toward the contractor.   If the contractor can avoid liability by dealing with either a negligent or designing public agency, then the labor standards enforcement agency will be deprived of an effective remedy.

The trial court more pitied the position of Lusardi than that of DLSE.   After finding in its memorandum decision Lusardi entered into the contract in the good faith belief that it was “private,” the court then found that the penalties to which Lusardi would be subjected by late enforcement of the law would be most substantial.   As the court stated, “Lusardi finds itself in the unenviable position of being in the middle of a dispute between the District on the one hand, claiming that the work is a ‘private work,’ and the defendants on the other hand, maintaining it is a ‘public work.’ ”   It concluded that the imposition of the “public works” restrictions on Lusardi's contract, both retrospectively and prospectively, constituted a taking without due process.

We conclude that the determination of the trial court was correct on two grounds:  (1) The procedures utilized by DLSE for determination that the project is “public works” did not provide procedural due process;  and (2) The state and its subsidiary enforcement entities are barred under the principle of estoppel from now asserting that the project is “public works.”

1. Procedural Due Process

 Article I, section 7 of the California Constitution, and the Fourteenth Amendment of the United States Constitution preclude governmental taking of property “without due process of law.”   Due process requirements are applicable to all branches of government, including administrative agencies.  (2 Cal.Jur.3d, Administrative Law, § 155, pp. 382–383.)   Where the activity of an administrative body is “adjudicatory,” the elements of due process are (i) reasonable notice, and (ii) an opportunity to be heard.  (Horn v. County of Ventura (1979) 24 Cal.3d 605, 610, 156 Cal.Rptr. 718, 596 P.2d 1134.)   The penalty and withholding provisions of sections 1727 and 1775 were subjected to due process scrutiny in O.G. Sansone Co. v. Department of Transportation (1976) 55 Cal.App.3d 434, 127 Cal.Rptr. 799.   These sections, then as now, provided for the withholding of payment from the contractor by the awarding agency upon the unilateral determination of DLSE that less than prevailing wages had been paid.

Appellant in the Sansone case relied on Merco Constr. Engineers, Inc. v. Los Angeles Unified Sch. Dist. (1969) 274 Cal.App.2d 154, 79 Cal.Rptr. 23.   Merco dealt with a provision of the Subletting and Subcontracting Fair Practices Act which required that a contractor list all proposed subcontractors.   The act gave the awarding authority the power to penalize contractors for violation of the act by cancelling the contract or assessing a penalty.   The Merco court held that this power, requiring no prior notice or hearing, violated basic notions of due process.   Characterizing the flaws in the statute, the court stated:  “We deal with a law which, on its face, gives the awarding authority a very wide discretion, but provides no opportunity to the party most affected, the contractor, to present any facts or arguments on which the exercise of that discretion might be predicated.”   (Id. at p. 166, 79 Cal.Rptr. 23.)

The Sansone court found the prevailing wage law sanctions to be constitutional by noting provisions which, under the circumstances, it found to afford adequate protection to the contractor subjected to penalties.   Notice of the penalty potential, it found, was provided by section 1775 to be included in all public works contracts (quoting the wording from the standard form contract which specifically advised of the penalty provisions).  (O.G. Sansone Co. v. Department of Transportation, supra, 55 Cal.App.3d at p. 451, 127 Cal.Rptr. 799.)   Noting that the prevailing wage law provided no opportunity for a prior hearing before the withholding of funds, the court nevertheless found the procedure adequate by virtue of the statutory provision for recovery of withheld funds, contained in section 1733.  (Id. at p. 453, 127 Cal.Rptr. 799.)   Finally, the court noted that the penalty provision in the prevailing wage law was specified ($25 per calendar day per workman), thereby distinguishing it from the unbridled discretion accorded the administrative agency in Merco.  (Id. at p. 453, 127 Cal.Rptr. 799.)

It is by no means clear that the Legislature intended to vest the DLSE with the adjudicatory power to determine whether a specific job is “public works.”   Nothing in the statute so suggests.   Section 1773.5 provides authority for the adoption of rules and regulations “for the purpose of carrying out the prevailing wage provisions of this article.”   The regulations which have been adopted (Cal.Code Regs., tit. 8, §§ 16001 et seq.) deal primarily with the matter of wage rate determinations, and do not address the issue of adjudication of a dispute as to whether a project is “public works.”

Assuming, however, that the present legislative framework would contemplate administration of this issue by DLSE, no procedural safeguards, consistent with minimal due process protection, have been adopted.   The District was first notified of a “tentative determination” of public works status of the project by letter in January of 1986.   No notice of this determination was communicated to Lusardi by anyone until May of 1986.   By subsequent letter, dated in August 1986, both Lusardi and the District were notified that the Division “has completed a review of the ․ project and determined it represents a public works project within the coverage of Labor Code [s]ection 1720(a).”   While informal communication or negotiation may have occurred, nothing in our record indicates any effective notice was given Lusardi before the administrative determination was made;  and certainly no formal or informal hearing opportunities were afforded.

Due process does not require any particular form of notice or type of hearing.  (Drummey v. State Bd. of Funeral Directors (1939) 13 Cal.2d 75, 80, 87 P.2d 848.)   The nature of the required proceedings depends upon the importance of the interests involved and the provision for subsequent remedial procedures.  (Fuentes v. Shevin (1972) 407 U.S. 67, 82, 92 S.Ct. 1983, 1995, 32 L.Ed.2d 556.)   In weighing the gravity of the apparent lack of due process here, therefore, we look to the circumstances.   We have available for our use no Brandeis brief or other expert testimony as to the practical effects of after-the-fact determination that a project is “public works.”   The evidence in our record, however, is sufficient to convince that it is a matter of great importance to the contractor.   The record discloses Lusardi has been in business for many years and as early as 1980 adopted a policy of refusing to bid on “public works.”   That a building contractor competent to bid on $20 million jobs will affirmatively forego the work if it involves “public works” regulation is itself suggestive.   We do not know the economic difference between the wages Lusardi paid under its contract with District and those which would have been required by the prevailing wage act.   We must assume, however, that the difference is substantial.   The trial court found the consequences of the DLSE finding “not insubstantial,” noting that its imposition of penalties merely for failing to provide DLSE with records was $380,000.

The most persuasive evidence of the significance of this determination comes, however, from the statute itself.   We have noted, above, the many requirements contained in the statute for notice of its applicability to the private contractor.   Bid forms for the project must alert the contractor to its “public works” nature;  the contract itself must contain references to certain of its provisions;  the applicable wage rates must be posted on the job.   The administrative regulations which govern DLSE's activities reinforce the conclusion that procedural due process has been conceived important in public works administration.   Regulation ⁴ section 16100 requires the awarding authority to obtain and post current prevailing wage rates.   The authority is required to “[i]nform prime contractors, to the extent feasible, of relevant public work requirements.”  (Cal.Code Regs., tit. 8, § 16100, subd. (B)(4).)   Regulation section 16300 et seq. contains detailed provisions whereby DLSE's determination of prevailing wage may be reviewed, including elaborate rules whereby a hearing will be held.  (See Cal.Code Regs., title 8, § 16304.)

In sum, the provisions for administrative due process contained in the prevailing wage law, and in the regulations adopted thereunder, indicate a strong legislative intent to provide procedural due process respecting the important determinations to be made by DLSE.   We can conceive of no adjudication under the prevailing wage law more important to a contractor than the foundational adjudication of the very nature of the job—whether it is “public” or “private” works.   We do not hereby rule that the determination is not within the jurisdiction of DLSE.   Our holding is that the determination is of such consequence to those parties affected that it must be accomplished by use of reasonable notice and hearing provisions.   There were admittedly no notice and hearing procedures utilized in the process by which Lusardi's job was determined public.   The trial court's determination that DLSE's adjudication was accomplished without adherence to due process was therefore justified.

2. Estoppel

 The black letter law of estoppel (see, e.g., Driscoll v. City of Los Angeles (1967) 67 Cal.2d 297, 305, 61 Cal.Rptr. 661, 431 P.2d 245) requires that four elements be present:

(a) The party to be estopped must be apprised of the facts.

(b) That party must intend that its conduct be acted upon.

(c) The other party must be ignorant of the true state of facts.

(d) The misled party must rely upon the conduct to its detriment.

 We have here a fact situation which shouts estoppel.   The District certainly knew of all facts pertaining to the transaction.   It obviously structured the transaction so as to avoid applicability of the prevailing wage law, even to the point of obtaining legal advice to that effect.   It assured Lusardi that the job was not “public works,” and intended that Lusardi act upon such assurance.   Lusardi accepted the District's representation, and insofar as we know from the record was ignorant of the possibility of the job's being declared “public.”   If the job is now declared “public works,” Lusardi most assuredly will have been damaged.

The only perplexity encountered in applying estoppel to bar DLSE's action is the severalty of the parties to be estopped.   District misled Lusardi.   DLSE, who was never accused of giving Lusardi false information, is the enforcement agency.   Is it appropriate to utilize the conduct of a local governmental subdivision of the state to estop the enforcement activities of the state labor agency?   Good authority holds that it is.

Waters v. Division of Labor Standards Enforcement (1987) 192 Cal.App.3d 635, 237 Cal.Rptr. 546 also involved application of the prevailing wage law.   The plaintiff had entered into a contract with the City of Willits which all parties knew to be subject to the law.   Willits, the awarding authority, published notice of applicability of the prevailing wage law, but failed to state, as required by the statute, the specific wage rates.   Waters and its subcontractor in good faith paid a rate which they assumed to be, but was not, the “prevailing” rate.   Upon action by the DLSE, Waters was required to pay the wage deficiency as well as the statutory penalty.   The court considered that Waters was bound to pay actual prevailing wage, since it had signed a contract to do so.  (Id. at p. 639, 237 Cal.Rptr. 546.)

As to the penalty, however, the Waters court found collection to be barred by estoppel.   The contractor had acted reasonably and had been misled by the negligent conduct of the awarding authority.  “Under these circumstances,” stated the court, “we find that the state, on behalf of Willits (see § 1775), is barred under the doctrine of equitable estoppel from imposing a penalty on Waters.”  (Id. at p. 641, 237 Cal.Rptr. 546.)

The Waters facts are very close to those of our case.   We see no reason why its rationale is not directly applicable.   To be sure, in Waters the estoppel is against enforcement of a penalty, while for Lusardi the estoppel is against classification of the entire job as “public.”   The detrimental impact, so far as DLSE is concerned, is obviously greater.   We know of no theory, however, upon which the issue of estoppel is made to turn on loss to the party to be estopped.   The Waters ruling as well as the decision in this case perhaps point up the problem of definition of a contract by one state agency and enforcement of it by another.   These are problems for the Legislature, however, not readily subject to judicial remedy.

DISPOSITION

We conclude, therefore, that under the facts of this case Lusardi cannot be bound by the prevailing wage law, and the judgment of the trial court, including its preclusion of enforcement against DLSE of prevailing wage law provisions,⁵ must be affirmed.   We recognize that this result poses potential obstacles to DLSE in its imposition of these provisions as to certain projects which may be structured as “private” rather than “public” by public entities whose activities are not directly subject to DLSE control.   If this possible trend in the scope of applicability of the prevailing wage law is not consistent with the public's current policy, it is properly a matter of legislative, rather than judicial, attention.

FOOTNOTES

1.   All statutory references are to the Labor Code unless otherwise specified.   When referring to statutory subparts we omit repetition of the word “subdivision.”

2.   DLSE puts the issue in more argumentative form as follows:  “At issue is the question of whether the prevailing wage owed to a worker by a contractor performing work on a public work project may be withheld as a result of the fact that the public body on whose behalf the project was performed failed to provide the contractor or his subcontractors with notice that the project was subject to the prevailing wage statutes.”

3.   The authority to make this decision is not directly gleaned from the Labor Code.   The DLSE is authorized to adopt regulations implementing the wage and hour laws, and has adopted regulations generally pertaining to prevailing wage administration.  (See Cal.Code Regs., tit. 8, §§ 16100 et seq.)   Nothing in these regulations directly pertains, however, to classification of a project as “public works.”

4.   All references to regulations are to the California Code of Regulations.

5.   In oral argument DLSE asserts that the injunctive relief granted by the trial court is so broad as to preclude enforcement activities by the DLSE other than and apart from the prevailing wage law provisions.   We are aware that the DLSE is the appropriate agency for enforcement of a number of wage and labor laws, as for instance the minimum wage law.   We do not construe the trial court's injunction as applying to any enforcement or investigatory activities other than those directed to imposition of prevailing wage law provisions.

FROEHLICH, Associate Justice.

TODD, Acting P.J., and NARES, J., concur.