Worth & Co. v. Department of Labor & Industry

OPINION BY

Judge McGINLEY.

Worth & Company, Inc. (Worth) petitions for review from an order of the Prevailing Wage Appeals Board (Board) that affirmed the position of the Department of Labor and Industry (Department), as set forth in its September 7, 1999, letter to Worth, a general contractor, that requested the withholding of contract payments to First Choice Fire Protection, Inc. (First Choice), one of its subcontractors on a public works project.

On or about August 21, 2001, Worth filed a grievance with the Board and alleged that “[t]he Department has no basis to require the [Lower Merion School] District to withhold final payment from Worth.” Notice of Grievance, August 10, 2001, Paragraph 18 at 5; Reproduced Record (R.R.) at 8a.

By February 5, 2002, the Department and Worth stipulated to the following facts. In September 1998, Worth was awarded a contract by the Lower Merion School District (School District) to perform plumbing construction work at the Welsh Valley Middle School. The Pennsylvania Prevailing Wage Act¹ (Act) applied because the School District is a “public body,” as defined in Section 2(4) of the Act, 43 P.S. § 165-2(4). Worth subcontracted sprinkler work to First Choice.

Based on the Department’s investigation for violations of the Act, the Departmént concluded that First Choice failed to pay minimum wages to eleven workers. By letter dated September 7, 1999, the Department requested that Worth withhold $41,324.46² in contract payments to First Choice.³ Moreover, “the Department stated, in accordance with Section 10(a) of the Act, ‘nothing in this request shall be deemed to impair the right of the prime contractor to receive final payment due to the failure of any of the subcontractors to comply with the provisions of the Act.’ ” Joint Stipulation of Facts (Stipulation), February 5, 2002, Paragraph 9, at 2-3; R.R. at 13a-14a.

On September 14, 1999, the School District notified Worth that it would be deferring approval of Worth’s payment appliea-tions pending the Department’s resolution of the underpayments. The Department informed the School District that the amount withheld should be limited to the amount owed to First Choice. In June 2000, the School District released $67,824.43 to Worth but continued to withhold $32,890.28. By letter dated November 20, 2000, the School District notified the Department that it held $32,890.28, which represented Worth’s contract retain-age. Worth renewed its objection to the withholding pursuant to its contract with the School District.

On December 19, 2000, the Department advised the School District and Worth of a proposed settlement whereby First Choice and the Department agreed that the underpayment owed to First Choice employees was $25,797.19. The Department also noted that the Act limits the withholdings to the amount owed to First Choice. The School District then requested from Worth the amount owed to First Choice on the subcontract. Worth provided an itemization showing a negative balance due First Choice, which was also reflected in a stipulation of dismissal from First Choice’s bankruptcy proceeding.

As to Worth’s contract with First Choice in the amount of $323,000.00, Worth had paid First Choice $116,437.50 at the time First Choice defaulted. First Choice’s filing for Chapter 11 bankruptcy was converted to a Chapter 7, no-asset case in May, 2001. Upon First Choice’s abandonment of the contract, Worth contracted with a replacement, SK Mechanical, Inc., for $194,000.00 to complete the work. In addition, Worth purchased materials, provided labor, paid bills to Central Sprinkler, and incurred legal costs after First Choice defaulted. Worth sustained a net loss of $3,505.15 on its contract with First Choice.

By letter dated January 31, 2001, the School District advised the Department that it agreed with Worth that it was no longer necessary to withhold funds from Worth. The Department responded that it was proper for the School District to withhold funds because Worth owed First Choice $206,562.50 on the contract, and the funds were held in trust for the workers. On February 7, 2001, the Department and First Choice stipulated that the underpayment to the workers was $25,797.19.⁴ See Stipulation, Paragraphs 3-6, 8-12, 14, 16, 17, 19-21, 23-25, 27-34, 36, & 37, at 2-7; R.R. at 13a-18a.

On April 25, 2003, the Board issued its final determination which established that: Final Decision and Order, April 25, 2003, at 1.

[T]he ... Board, having a quorum present at the hearing on the above-captioned matter on March 11, 2002, is deadlocked with a vote of 2-2, and, as such, the Board being unable to reach a decision on the matter, the position of the Department of Labor and Industry set forth in its letter to Grievant [Worth] dated September 7, 1999 with respect to the above-captioned matter is AFFIRMED. (Emphasis in original).

On May 23, 2003, Worth petitioned for review in this Court.⁵ The issues presented for our review are: 1) whether the Department misapplied the Act when it authorized the withholding of funds to Worth based on First Choice’s violations of the Act; 2) whether the claims of First Choice employees should be directed to the trustee in bankruptcy; and 3) whether an analogous situation has arisen under the Davis-Bacon Act, 40 U.S.C. § 3142 (2004) or under state statutes similar to the Davis-Bacon Act.⁶

Misapplication of the Act

Within the context of statutory interpretation, Worth contends that the Department may not require the withholding of funds where no further payment was due to First Choice. This Court agrees.

Pursuant to Section 1921(b) of the Statutory Construction Act of 1972, “[w]hen the words of a statute are clear and free from all ambiguity, the letter of it is not to be disregarded under the pretext of pursuing its spirit.” 1 Pa.C.S. § 1921(b). Here, the Department’s final decision and order ignores the letter of the law. Section 10(a) of the Act⁷ is critical to the outcome of this controversy insofar as it protects Worth’s right to final payment despite any violations by First Choice. Adherence to the statute is of paramount importance.

Initially, the Department acknowledged the pivotal language of Section 10(a) of the Act, 48 P.S. § 165-10(a), when it clarified that “because this request [for the withholding of contract payments] is directed toward a subcontractor, nothing in this request shall be deemed to impair the right of the prime contractor to receive final payment due to the failure of any of the subcontractors to comply with the provisions of the Act.” Department Letter to Worth, September 7, 1999, at 1, Exhibit 1 to Worth’s Brief in Support of Grievance; R.R. at 32a.

Later in the proceedings, the Department switched track, as reflected in the following correspondence from the Department to counsel for the School District:

If monies are withheld against a subcontractor for prevailing wage violations, those monies are to be held in trust for the benefit of the workers, not the prime contractor. The prime contractor has no proper claim to monies set aside for the benefit of the workers. Section 10(a) of the Act, while protecting the prime contractor’s right to final payment, does not, in our view, give the prime contractor right to prevailing wage withholdings properly instituted against one of its subcontractors.

Department Letter to K. Gerard Amadio, February 6, 2001, at 2, Exhibit 17 to Worth’s Brief in Support of Grievance; R.R. at 158a.

The Department turned to Section 10(b) of the Act⁸ to support the School District’s withholding of funds from Worth to benefit First Choice’s unpaid workmen. Nevertheless, Section 10(b) of the Act, 43 P.S. § 165-10(b), comes into play only when a workman files a protest and objects to the payment to a contractor. Here, there is no indication in the record of any such protest.

Pursuant to Section 10(b) of the Act, 43 P.S. § 165-10(b), the financial officer of the public body withholds for the benefit of unpaid workmen an amount admitted by the contractor to be due and owing. In the present controversy, this Court emphasizes , that Worth had a negative balance due First Choice. See Stipulation, Paragraph 23, at 5; R.R. at 16a. Therefore, the withholding mechanism of Section 10(b) does not apply.

This Court concludes that Section 10(a) of the Act, 43 P.S. § 165-10(a), controls and that the Department’s position is a departure from explicit statutory guidelines.⁹ This Court concludes the Department misapplied the statute and erred as a matter of law.

Available Remedies

Next, Worth asserts that the Department’s proper remedy was to file a claim in First Choice’s bankruptcy proceeding.

As noted in the Stipulation, First Choice and the Department entered into a settlement agreement which indicated:

In the event that any of the Contracting Bodies or prime contractors fail, or refuse, to make the full payment within [30 days of the Agreement], the Bureau will request that the Commonwealth of Pennsylvania’s Office of Attorney General proceed to recover the unpaid balance for the workers, as prescribed in Section 11(e) of the Act, 43 P.S. § 165-ll(e), and Section 11(f), 43 P.S. § 166-11(0-

Stipulation, Paragraph 38, at 7; R.R. at 18a.

Section 11(e) of the Act, 43 P.S. § 165-11(e), provides that once it has been determined that a firm has failed to pay prevailing wages, the Secretary of Labor and Industry may request the Attorney General to take steps to recover penalties for the Commonwealth. Under Section 11(f) of the Act, 43 P.S. § 165 — 11(f), the firm that fails to pay prevailing wages is liable to the Commonwealth for liquidated damages and damages for breach of contract in the amount of underpaid wages due workmen. Based on these statutory guidelines, the Attorney General could have been requested to proceed against First Choice.

If the Department took the proper approach, it would have been able to avoid the automatic stay of First Choice’s bankruptcy proceeding. See In re Ngan Gung Restaurant, Inc., 183 B.R. 689 (Bankr.S.D.N.Y.1995) (where the governmental unit seeking to enforce labor laws was excepted from the automatic bankruptcy stay. The exception has been applied to actions for restitution payments from employers to employees).

With respect to the workmen -themselves, they could have filed claims in First Choice’s bankruptcy proceeding. Section 13 of the Act, 43 P.S. § 165-13, states that “[a]ny workmen paid less than the rates specified in the contract shall have a right of action for the difference between the wage so paid and the wages stipulated in the contract .... ”

Moreover, the workmen who supplied labor, could have initiated an action on the payment bond pursuant to the Public Works Contractors’ Bond Law of 1967, Act of December 20, 1967, P.L. 869, as amended, 8 P.S. § 194. In sum, remedies were available to the Department and workmen to pursue recovery of the unpaid wages.

No Parallel to Federal or State Statute

Lastly, Worth submits that given the statutory language and policies among various jurisdictions, prime contractors are liable for transgressions by their subcontractors where the statute provides a framework for such liability.

The Davis-Bacon Act, 40 U.S.C. § 3142, provides:

(a) Application. The advertised specifications for every contract in excess of $2,000, to which the Federal Government or the District of Columbia is a

733 party, for construction, alteration, or repair, including painting and decorating, of public buildings and public works of the Government or the District of Columbia that are located in a State or the District of Columbia and which requires or involves the employment of mechanics or laborers shall contain a provision stating the minimum wages to be paid various classes of laborers and mechanics.

(c) Stipulations required in contract. Every contract based upon the specifications referred to in subsection (a) must contain stipulations that—

(3) there may be withheld from the contractor so much of accrued payments as the contracting officer considers necessary to pay to laborers and mechanics employed by the contractor or any subcontractor on the work the difference between the rates of wages required by the contract to be paid laborers and mechanics on the work and the rates of wages received by the laborers and mechanics and not refunded to the contractor or subcontractors or their agents. (Emphasis added).

40 U.S.C. § 3142(c)(3) authorizes the withholding of funds from the contractor for prevailing wage violations by the subcontractor. However, there is no comparable provision in the Act. Under Section 10(a) of the Act, 43 P.S. § 165-10(a), the contractor’s right to final payment is protected despite any violations by a subcontractor.

New York’s prevailing wage law states that “[w]herein such evidence indicates a non-compliance or evasion on the part of a sub-contractor, the contractor shall be responsible for such non-compliance or evasion.” N.Y. Labor Law § 223 (Consol. 2004). This statutory language is substantially different from that of the Act which places no such responsibility on Worth, the general contractor. Unlike the federal and New York laws, the Act did not authorize the Department to order the withholding of funds due to Worth under the circumstances.

Accordingly, this Court reverses.

ORDER

AND NOW, this 13th day of September, 2004, the order of the Prevailing Wage Appeals Board in the above-captioned matter is reversed, and the Department of Labor and Industry shall not require the withholding of funds due to Worth & Company, Inc. on this public works project.

SMITH-RIBNER, J., dissents and files opinion.

PELLEGRINI, J., dissents and files opinion, in which SIMPSON, J., joins.

1 . Act of August 15, 1961, P.L. 987, as amended, 43 P.S. §§ 165-1 — 165-17.

2 . It is noted that a typographical error appears in paragraph 8 of the Stipulation where the amount is listed as $41,324.61.

3 .The Department noted that based on regulations, the School District had a responsibility to withhold funds for aggrieved workmen.

4 . First Choice also agreed to accept a three-year debarment from public works projects as an intentional violator of the Act.

5 . This Court’s review is limited to a determination of whether findings of fact are supported by substantial evidence, whether legal error was committed, or whether constitutional rights were violated. Linde Enterprises, Inc. v. Prevailing Wage Appeals Board, 676 A.2d 310 (Pa.Cmwlth.1996).

6 . Worth raised the first issue, while this Court directed the parties to address the second and third issues. By order dated January 21, 2004, this Court framed these issues as follows:

Should the workers’ claims be directed to the trustee in bankruptcy as valid debts, i.e., as obligations incurred by the subcontractor, First Choice; and

Whether an analogous situation has ever arisen under the Federal Davis-Bacon Act or under the numerous state statutes which are patterned after the Davis-Bacon Act.

Commonwealth Court Order, January 21, 2004, at 1.

7 .Section 10(a) of the Act, 43 P.S. § 165-10(a), specifically states ”[t]hat nothing herein shall impair the right of a contractor to receive final payment because of the failure of any subcontractor to comply with provisions of this act.”

8 . Section 10(b) of the Act, 43 P.S. § 165-10(b), provides:

In case any workman shall have filed a protest, in writing, within three months from the date of the occurrence of the incident complained of, with the secretary, objecting to the payment to any contractor to the extent of the amount or amounts due or to become due to the said workman for wages for labors performed on public works, thereupon, the secretary shall direct the fiscal or financial officer of the public body, or other person charged with the custody and disbursements of the funds of the public body, to deduct from the whole amount of any payment on account thereof the sum or sums admitted by any contractor in such statement or statements so filed, to be due and owing by him on account of wages earned on such public work before making payment of the amount certified for payment and may withhold the amount so deducted for the benefit of the workmen whose wages are unpaid, as shown by the verified statements filed by any contractor, and may pay directly to any workmen the amount shown to be due to him for such wages.... (Emphasis added).

9 . In support of its argument, the Department also relied on its regulations to withhold the amount of unpaid wages for the benefit of the workmen. See 34 Pa.Code §§ 9.104(b) and 9.110(b). When determining the validity of a regulation, one queries whether it is "within the legislative grant of power_" Rand v. Pennsylvania State Board of Optometry, 762 A.2d 392, 394 (Pa.Cmwlth.2000). The regulations cited by the Department make no mention of the contractor’s right to final payment. The Department may not circumvent the statutory protection afforded to Worth by Section 10(a) of the Act, 43 P.S. § 165-10(a).