Private Development That Relies On Public Construction Is Subject To The Prevailing Wage Law

In 2004, the City of Hesperia (“City”) began acquiring vacant property in its downtown to facilitate development of a Civic Plaza, which was to include a city hall, public library, other government buildings and complementary retail, restaurant, and entertainment establishments. In 2010, the City met with theater operator Cinema West, LLC (“Cinema West”) to discuss the construction of a state-of-the-art movie theater in the City. At the meeting, Cinema West articulated a plan to develop a new, twelvescreen digital cinema immediately west of the Civic Plaza. At the end of 2010, the City and Cinema West entered into a series of agreements for the development and operation of the theater. Under the agreements, Cinema West agreed (1) to purchase the theater site from the City at fair market value; (2) to develop the site with a 12-screen, 36,000 square foot movie theater; (3) to obtain financing for, and bear the costs of, construction of the theater and related facilities other than the parking lot; (4) to maintain the property; and (5) to operate the site as a theater for at least ten years. In exchange, the City agreed, among other things, (1) to develop a parking lot adjacent to the site for use by Cinema West and patrons of the movie theater; (2) to provide Cinema West reciprocal access and an easement for the parking lot; and (3) upon issuance of a certification of completion for the theater, to provide Cinema West an interest-bearing loan in the amount of $1.5 million forgivable over ten years and a one-time payment of $102,529 as consideration for operation of the theater. In 2012, as development of the theater was nearing completion, the International Brotherhood of Electrical Workers Local 477 (the “Union”) requested a public works coverage determination for the theater project from the Director of Industrial Relations (“DIR”). The Union asserted the theater was a public work subject to the Prevailing Wage Law. The Prevailing Wage Law provides that, with certain exceptions, the prevailing wage “shall be paid to all workers employed on public works.” (Lab. Code, § 1771.) A “public work” is defined as “[c]onstruction, alteration, demolition, installation, or repair work done under contract and paid for in whole or in part out of public funds.” (Id., § 1720, subd. (a).) Cinema West objected to a public works determination and argued the theater was a private development on the property for which Cinema West had paid fair market value. In 2013, the DIR found the construction of the theater and related facilities was a public work subject to prevailing wage requirements. In reaching this conclusion, the DIR first determined that the scope of the construction project included both the theater and the adjacent parking lot. “Given the very specific terms of the . . . agreements of the parties to construct all these improvements in tandem to serve the theatre complex there is no doubt the ‘Project’ . . . [is] to create a single complete and integrated theatre complex.” The DIR then identified three separate sources of public funds utilized on the project: the City’s one-time payment of $102,529 to Cinema West upon the filing of a notice of completion for the theater; the forgivable loan made by the City to Cinema West; and the construction of the adjacent parking lot and a water retention system for the theater and parking lot. Based on these “public subsidies,” the DIR concluded the theater development was a public work subject to the requirements of the Prevailing Wage Law. Cinema West challenged the DIR’s decision in the Superior Court. The trial court upheld the DIR’s decision. Cinema West appealed. On appeal, Cinema West argued that the construction of the parking lot did not transform the private theater into a public work. The Court of Appeal rejected Cinema West’s arguments and upheld the DIR’s decision. The Court first agreed with the DIR that the parking lot was necessary to the theater and that the theater, parking lot, and related amenities were part of a “complete integrated object.” The Court also agreed that the theater project was paid for, in part, with public funds. As the Court explained: “Cinema West indisputably received the benefit of a newly constructed, publicly funded parking lot adjacent to the theater, which, though owned by the City, is Cinema West’s and its successors’ to use for as long as they operate the movie theater. . . . [T]he parking lot was necessary to the development of the theater . . . . [and] the publicly funded parking lot was one of the ‘deal points’ in Cinema West’s proposal. The parking lot cost the City $1.5 million to construct, and even though Cinema West’s right to use it is non-exclusive the parking lot cannot be considered a de minimis contribution of public resources.” Cinema West, LLC v. Baker (2017) 13 Cal.App.5th 194.

The last time the Court's reached this sort of decision, it involved the construction of a fire station by a General Contractor for a public entity. The public entity apparently used its own funds and therefore did not require the contractor to pay prevailing wages. When challenged, the Court held that the Fire Station was a public works despite the public entity's use of its own funds and required the General Contractor to pay to the DIR the unpaid portion of the required prevailing wages. The Court left open the question if the general contractor could assert a claim against the ;public entity for additional compensation to cover the additional wages it had to pay.

In this situation, it remains unclear if the Cinema West can seek reimbursement for the additional wages it had to pay given the way the various contracts were set up. Cinema West purchased the land from the City ostensibly making the construction of the theater and adjoining facilities a private work of construction. It does not appear that Cinema West can look to the City for additional compensation given the manner in which the agreements were structured.

The morale of the story is that if you are a General Contractor constructing a project for a private owner which involves the participation of any public agency in any manner, you need to ensure that you have a clause in your contract to cover you if ultimately the Department of Industrial Relations deems the project to be a public work of construction and you are forced to pay prevailing wages despite what the actual contract states.