In the Matter of M.G.M. Insulation, Inc., et al., Appellants,v.Colleen C. Gardner,, Respondent.BriefN.Y.January 2, 2013STATE OF NEW YORK Court ofAppea& In the Matter of M.G.M. iNSULATION, iNC., JOSEPH 0. WESLEY, KENNEDY MECHANICAL PLUMBING and HEATING, INC., DIANE SHUTTER, LEHMANN CONSTRUCTION CONSULTANT, INC., FINGER LAKES SERVICE GROUP, INC., KENNETH R. HATHAWAY, RMS CONTRACTORS, LLC, BALTZ CONCRETE CONSTRUCTION, INC., THOMAS F. BALTZ, GOFORTH ELECTRIC, INC., LAWRENCE C. GOFORTH, J&S PROTECTION SYSTEMS, INC., DAVID JENNINGS, FINGER LAKES PAINTING and WALLCOVERTNG, LLC, RICHARD MILHAM, CUTAIA TILE, INC., ANGELO CUTAIA, ARK GLASS and GLAZING CORP., RICHARD W. KOZYRA, W.R. DRAKE & SONS, INC., WILLIAM R. DRAKE, McCLAIN ASSOCIATES, INC., NICK McCLAIN, RAYDO, INC., RAYMOND L. DOYLE, BILLONE MECHANICAL CONTRACTORS, INC., THOMAS J. BILLONE, PROVVIDENZA CONTRACTING, INC. VINCENT PROVVIDENZA, JR., R-J TAYLOR GENERAL CONTRACTORS, INC., and JAMES D. TAYLOR, Petitioners-Appellants, vs. COLLEEN C. GARDNER as Commissioner of Labor, State of New York, Respondent-Respondent. BRIEF OF AMICUS PARTY ASSOCIATED GENERAL CONTRACTORS OF NEW YORK, LLC ON BEHALF OF APPELLANTS COUCH WHITE, LLP Joel M. Howard, III, Esq. Attorneysfor Empire State Chapter of the Associated Builders and Contractors, Inc. 540 Broadway, P.O. Box 22222 Albany, New York 1220 1-2222 Telephone: (518) 426-4600 March 14, 2012 TABLE OF CONTENTS PAGE TABLE OF AUTH0RflfIfES000000000000000 00000000000000000000. PREUMNARYSTATEMENToooooaoooooaoooooaoooo STATEMENT OF FACTS 00. 3 AIRG1[JJ/I[iE19I’ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0000000 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 000000 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 4 FOuNT IF THE NEW STANDARD OF REVIIEW PROMULGATED BY THE “FUNCTIFONAL EQU]IVALENT” TEST SHALL SUBJECT PROJECTS AND ENTI[TIFES PREVIOULY DEEMED EXEMPT FROM PREVAIIL]ING WAGE REQUJIREMENTS TO RENEWED SCRUTIFNY BY THE DOL ooooooooaooooooooooooooooooooooooooooooooaooooooooooooooooo 4 POIFNT H THE UNCERTAIFNTY GENERATED BY THE “FUNCTIFONAL EQUJIVALENT” STANDARD WILL HAVE A DETRIMENTAL IMPACT ON THE CONSTRUCTION INDUSTRY STATEWIDE 000000 8 CONCji-4ILJS1I(0)1 oaooaoaoaoooaooooaoooaoaaaoooooaooaooooooooooooooooo 00000000 110 O1F AUTH©R]ITT[]ES PAGE No ablle of athories etres foudNo table of authorities entries found. NotForProfit Corporation Law §1411(c) 6 NotForProfit Corporation Law §1411(f) 6 NotForProfit Corporation Law §1411(g) .6 11 RL]IMNARY SATMENT Associated General Contractors of New York State, LLC (“AGCNYS”) submits this amicus brief in support of Petitioners-appellants’ appeal seeking reversal of the Decision and Order of the Appellate Division, Third Department dated - July 21, 201 1, which affirmed a determination by the CommissiOner of the Department of Labor (“DOL”) imposing prevailing wages against a private volunteer fire department upon the grounds that the entity constituted a “functional equivalent” of a public agency. Due to the broad discretion afforded to the DOL and the uncertainty regarding the parameters for determining a “functional equivalent”, this determination, if permitted to stand, will generate tremendous uncertainty and apprehension in the construction industry, as numerous non-public entities that have historically been beyond the reach of Labor Law §220, shall now be subject to renewed scrutiny by the DOL under this new “functional equivalent” standard. AGCNYS is a trade association representing approximately 250 general contractors and construction managers as well as 85 subcontractors and 300 associate members conducting business throughout the state. AGCNYS members include construction firms large and small, some that operate with collective bargaining agreements as well as those that operate on an open shop (non-union) basis, AGCNYS members are responsible for performing the majority of this State’s private and public sector contracts for the construction of highways, buildings, heavy industrial and municipal utility facilities. As such, AGCNYS is uniquely qualified to discuss the implications that the “functional equivalent” standard promulgated by the DOL will have on the construction industry as a whole, if permitted to stand. ACGNYS’s activities for its members encompass government representation, legal advocacy, education, workforce development and training related to the construction industry. As part of its legal advocacy, ACGNYS regularly participates as amicus curiae throughout the state in support of its members and affiliates where the issues for consideration are of statewide significance to the construction industry. This is such a case, as the Third Department’s affirmance of the DOL’ s determination shall undoubtedly generate significant uncertainty in the construction marketplace, particularly among the not for-profit community and the contractors that serve it. The Third Department’s decision in this case represents an alarming expansion of the potential reach of Labor Law §220 to construction projects by supporting, without legal citation, the DOL’s authority to make factual findings that a private entity constitutes the “functional equivalent” of a public entity subject to prevailing wage requirements under the statute. It also alters the 2 standard of review regarding the entities subject to the statute from one of strict statutory construction to one of “substantial evidence,5’as determined on a case-by- case basis by individual DOL wage investigators. If permitted to stand, the uncertainty associated with the “functional equivalent” standard, would require contractors throughout the state to essentially speculate as to whether prevailing wages are applicable on a given project for any entity that is either publicly funded, regulated or which may benefit the public in some manner, under threat of substantial underpayments, penalties, interest and even debarment if they guess wrong. This uncertainty created by the DOL “functional equivalent” standard cannot be permitted to stand, to the detriment of the construction industry statewide. STATEMENT OF FACTS AGCNYS adopts the Petitioners-Appellants’ summary of facts and prior proceedings in this case. 3 ARGUMENT JPONT ii THE NEW STANDARD OF REVWW FROMULGATED BY THE “FUNCTiONAL EQUWALENT” TEST DEFARTS FROM DECADES OF LESLATWE AND UDiIUAL DETERM1[NATONS AGCNYS asserts that the DOL impermissibly exceeded its administrative authority in promulgating the “functional equivalent” standard by expanding the scope of Labor Law §220 without the benefit of legislative action. This brief shall focus on the effect of the new standard of review under the “functional equivalent” standard and how it departs from decades of determinations by both the Legislature and the Courts. The DOL has historically attempted to expand enforcement of Labor Law §220 to non-public entities it deemed as “quasi-public” in nature, resulting in numerous lawsuits and several reported cases. See, Matter of Erie County Indus. Dev. Agency v. Roberts, 94 AD2d 532, aff’d on opinion below, 63 NY2d 810 (1984); Matter of National R.R. Passenger Corp. v. Hartnett, 169 AD2d 127 (3 Dept., 1991); Matter of Pyramid Co. of Onondaga v. New York State Dept. of Labor, 223 AD2d 285 (3’ Dept., 1996); Matter of Stephens & Rankin v. Hartnett, 160 AD2d 1201 (3 Dept., 1990), Despite the DOL’s aggressive efforts to expand the reach of Labor Law §220, these cases have consistently held that the types of 4 contracts covered by Labor Law §220 must be narrowly construed in accordance with the statutory language, and that determinations by the DOL are not entitled to any special deference. Within the past two years, the Court of Appeals provided even further confirmation that the class of entities covered by Labor Law §220 was limited in scope to the four “public” entities specifically identified in Labor Law §220(2). Matter of New York Charter School Assn v. Smith, 15 NY3d 403, 409 (2010). The Third Department’s decision in this case, however, represents a startling departure from those previous holdings, by affirming the DOL’s authority to impose prevailing wage requirements upon entities not specified in the statute, provided its wage investigators can marshal “substantial evidence” that an entity is a “functional equivalent” of a public agency. Perhaps even more alarming is the fact that the Third Department did not articulate or impose any limitations, parameters or guidelines as to how the DOL should make such determinations, or what factors may be considered, subjecting the construction industry to dramatically increased uncertainty on an issue that has already been the source of substantial litigation throughout the State, The “functional equivalent” test affirmed by the Third Department at best, confuses the standard of review regarding the entities subject to the statute from one of strict statutory construction, as articulated in cases such as Iviatter of New York Charter School Assn. v. Smith, supra, to one of substantial evidence, as determined by individual wage investigators. Prior to this case the Courts were responsible for determining whether a public agency was a party to a contract involving laborers, workers or mechanics, in accordance with the statute. Now, however, the standard appears to have been changed (without legislation) to such an extent that entities and projects previously deemed to be outside the scope of the statute, could again be challenged by the DOL. As far as the construction industry is concerned, considering the broad discretion assumed by the DOL, conceivably any entity that receives public funding, is publicly regulated or performs construction that somehow benefits the public is now subject to scrutiny as a “functional equivalent.” By way of example, projects performed by private local development corporations (LDCs) could now be exposed to risk under this new standard. While these corporations are private and clearly not one of the entities defined in the statute, they may be, and often are, incorporated by public officers for purposes such as reducing unemployment and attracting new industry to a community. Not-For Profit Corporation Law § 1411 (a). In carrying out these purposes, LDCs are “carrying out an essential governmental function”. Id. These corporations are intended to be funded by State grants ( Id, subd. [c]), are tax exempt (subd. [fj), and upon dissolution, their net assets devolve to local municipal corporation (subd. [g]). These are certainly 6 characteristics similar to a volunteer fire department and could potentially expose these corporations, which have thus far been exempt from prevailing viages, to scrutiny by the DOL under the new “functional equivalent” standard. Similarly, projects subsidized by local industrial development agencies (IDA) may also now be considered potential projects subject to scrutiny under this new “functional equivalent” standard, despite previous court rulings indicating that IDA projects were not subject to prevailing wages. Matter of Erie County Indus. Dev. Agency v. Roberts, supra. In that case, the DOL unsuccessfully argued that any project in which a public benefit corporation is a party and which furthers a public purpose is subject to Labor Law 220. Id. at 537. While the Court soundly rejected those arguments under strict statutory construction, the DOL will assuredly take another run at imposing prevailing wages on IDA funded projects through its broad authority vested in the “functional equivalent” standard, as IDAs, by statute, constitute “government agencies” whose powers are for a “public purpose essential to the public interest, and for which public funds may be expended”. General Municipal Law §852. Most notably, however, is the fact that the Third Department’s decision departs from this Court’s very recent holding in Matter of Charter School Assn. v. Smith, supra, which determined that such schools, by definition, did not constitute one of the four “public” entities specified in Labor Law §220. The Third 7 Department offers no rationale for not following the practical and legally sound analysis applied in that case by this Court. The very real threat and danger in this case is that the DOL will attempt to sidestep decades of legal jurisprudence by applying this test to pursue entities that the Legislature and the Courts have deemed to be not subject to Labor Law § 220. Since this standard can potentially undo years of judicial precedent, the Decision and Order must be reversed. POINT H THE UNCERTMNTY GENERATED BY THE “IL’UNCTIONAL EQUIVALENT” STANDARD WILL HAVE A DETRIMENTAL IMPACT ON THE CONSTRUCTION INDUSTRY STATEWIDE Under the extremely broad discretion afforded to the DOL under the “functional equivalent” test, confusion in the industry will reign because many entities which are not subject to Labor Law § 220, could again be called into question. The uncertainty associated with the “functional equivalent” analysis is particularly detrimental to contractors seeking to bid and perform construction work for the type of entities described above, It is well settled that contractors are liable for underpayrnents of prevailing wages and benefits, including substantial penalties and interest, regardless of whether they had knowledge that prevailing wages were in effect, or that such wages were not being paid by subcontractors for 8 whom they are vicariously liable. Matter ofNaftulos Painting & Sandblasting, Inc. v. Hartnett, 173 AD2d 964 (3M Dept., 1991); Matter of Taj Airconditioning & Refrigeration Co., Inc. v. Goldin, 158 AD2d 350 (1 Dept., 1990). The disparity between prevailing and non-prevailing wages in this State is substantial enough to warrant grave concern whenever the imposition of prevailing wages is subject to speculation, particularly when based upon individual determinations by the DOL investigators. The liability for wage and supplement underpayment is often substantial enough to cripple most contractors, particularly when penalties and interest are tacked on to the principal. See, Matter of Chesterfield Assoc. v. New York Dept. of Labor, 3 AD3d 491 (2”’ Dept., 2004) (contractor liable for underpayments in excess of $645,000 with interest and penalties); Matter of City Const. Dev., Inc. i’. Hartnett, 192 AD2d 651 (2 Dept 1993) (contractor liable for underpayments in excess of $541,000 with interest and penalties); Matter of Sierra Telcom Servs., Inc. v. Hartnett, 174 AD2d 279 (3 Dept., 1992) (contractor liable for wages supplement underpayments of nearly $400,000). When faced with such stiff penalties, uniformity and clarity regarding the entities subject to the prevailing wage requirements is required. When bidding on projects, contractors are not typically privy to information regarding an entity’s funding, or its affiliation with municipalities or state agencies, which are precisely 9 the factors that the Third Department focused on in confirming the DOL’s determination that the Bath Volunteer Fire Department was a “functional equivalent.” Thus, in order to avoid the risk of crushing liability for wage and benefit underpayments, prudent contractors shall be forced to either quote higher pricing to ensure payment of prevailing wages, or seek indemnification for wage underpayments from private entities at risk of being deemed a “functional equivalent”. This will inevitably result in higher construction costs and exposure to risk on capital projects for not-for-profit and even some for-profit companies, many of which have limited budgets and resources for construction and renovation projects. The imposition of increased costs during these difficult economic times will invariably result in fewer projects in the private sector and fewer jobs for AGCNYS members. CONCLUSION The “functional equivalent” standard, by its very nature, fosters uncertainty regarding the entities subject to the prevailing wage requirements, to the detriment of the construction industry statewide. The discretion afforded to the DOL is far too broad and the parameters and guideline are much too vague. This purported new standard of review needlessly calls into question several entities that have previously been declared to be outside the scope of the statute, and result in a 10 glut of new penalties, litigation and appeals. For this and all the reasons articulated in the Petitioners-Appellants’ brief, the Decision and Order should be reversed and the underlying determination by the DOL vacated. Dated: March 14, 2012 Respectfull submitted, Joel M. Howard, III, Esq. COUCH WHITE, LLP Attorneys for Empire State Chapter of the Associated Builders and Contractors, Inc. 540 Broadway, P.O. Box 22222 Albany, New York 12201-2222 (518) 426-4600 11