Tuesday, August 21, 2007

The Hybrid Rate Contract Connundrum

Recently, I’ve had several inquiries regarding the appropriate wage and benefit rate to be paid on public works construction projects where the contract makes reference to both Federal Davis-Bacon rates and New York State prevailing rates. This type of "hybrid rate contract" can be extremely confusing and dangerous to the unwary contractor since payment of the "wrong" contractual rate, as may be determined by the State enforcement agency having jurisdiction, can lead to a finding that the contractor underpaid its workers and the imposition of interest and penalty.

In New York, the general “practice” (albeit uncodified and unwritten) is that the higher of the two competing rates is paid if the subject work is performed within the State. While a preemption argument might be available if the project were funded entirely by Federal monies, these types of projects are typically funded partially from State coffers, thereby giving the State jurisdiction and eliminating any claim of preemption. I’ve heard of instances where a contractor bid and was awarded the contract at the lower rate only to be surprised later that it underpaid its workers. Apparently, inquiries to the agency/owner of the project for clarification prior to the bid proved confusing, unclear or evasive.

There is also an issue as to whether payment of the “wrong” rate in a hybrid rate contract can be a willful violation under New York Labor Law Section 220. Under the statute, a contractor that receives two willful violations within a six year period is debarred and prevented from bidding on or being awarded State public work for a period of five years. On the one hand, the contractor would likely argue that it paid a lower rate permitted by contract in good faith and had no intention of underpaying its workers. On the other hand, the New York State Department of Labor (the “NYSDOL”) would likely contend that payment of a higher, statutory State prevailing rate cannot be varied by contract, even if a government owner agrees to same. Further, in making a determination as to willfulness, the NYSDOL would likely look to the contractor’s prior experience in the public work area, its familiarity with performing public contracts which reference Federal and State prevailing rates, and whether the contractor knew or should have known that it had failed to pay the proper rate. I'll give you three guesses as to which party is likely to prevail.

This is very tricky (and potentially expensive) stuff for the experienced and inexperienced contractor alike. Questions on this issue should be addressed to a qualified attorney in your State and/or to the local Department of Labor. Caveat emptor!

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