California has a Right to Withhold Funds from Charter Cities that Refuse to Apply Prevailing Wages on Public Work Projects; Court Upholds SB 7

In recent years, a number of cities have become “charter cities,” in some cases because they believed it would “free” them from state laws requiring they pay prevailing wages on all public projects.  Prevailing wages typically are what the prevalent pay is in a region.

In response, Senate Bill 7 (SB 7) passed into law, which allows the state to withhold discretionary funding from charter cities that refuse to require prevailing wage to be paid to workers on public projects.

Six charter cities (City of El Centro, City of Carlsbad, City of El Cajon, City of Fresno, City of Oceanside, and City of Vista) filed a lawsuit challenging SB 7 arguing the law is unconstitutional.  In City of El Centro v. David Lanier, decided in August 2014, a judge ruled against the cities and upheld the legality of SB 7.  The Court also upheld SB 922 (2011) and SB 829 (2012), which allow the state to restrict discretionary state funding to charter cities that refuse to consider adoption of Project Labor Agreements (PLAs).

In the lawsuit, the six charter cities challenged the right of the state to enforce the Labor Code provision added by SB 7 at Labor Code § 1782 which states, “A charter city shall not receive or use State funding or financial assistance for a construction project if the city has a charter provision or ordinance that authorizes a contractor to not comply with the provisions of this article on any public works contract.”

The law  mandates a charter city to have a local ordinance requiring, at a minimum, prevailing wage be paid for all public works projects greater than $25,000 for construction or greater than $15,000 for alteration, demolition, repair or maintenance work.  The law also compels the Director of Industrial Relations to maintain a list of charter cities that are compliance with SB 7. The Department of Industrial Relations will publish the list of charter cities in compliance with SB 7 on their website sometime later this year.

The court disagreed with the cities’ argument that SB 7 was unconstitutional because of the reach of the home rule doctrine set forth in California’s Constitution.

Instead the Court found that the state had a right to use its discretionary funding to influence local governance and that just as the federal government may condition award of federal funds on certain restrictions, the state likewise could do so. The Court held:  “In sum, Labor Code § 1782 appears to legitimately influence local governance by attaching conditions on the receipt of discretionary state funding…Section 1782 is constitutional and there is no need to address the other elements within the analytical framework.

One of charter cities involved in the SB 7 challenge, the City of Oceanside, also challenged Public Contract Code § 2500 through 2503 as a violation of the same constitutional home rule doctrine.  The law requires cities to consider adoption of PLAs on a project by project basis.  State funding is withheld if a local ordinance exists preventing a city from considering the use of PLAs.  The Court likewise upheld the PLA law and rejected the City’s claim.

The other arguments set forth by the cities were also rejected by the Court.

An appeal is expected to be filed by the Cities.

Please contact your labor law counsel with any questions regarding SB 7, or other prevailing wage matters.

October 1, 2014

Legal Developments