Prevailing Wages: City Divided Up Project to Avoid Prevailing Wage Requirement |[KY CT APP]|

In Henderson, Kentucky, a Labor Cabinet claimed that the city utility commission divided a project into multiple projects in order to avoid paying prevailing wage as required under Kentucky law. The commission owned a coal-fired power plant that required periodic power outages to complete inspection, repairs, reconstruction, and major maintenance tasks to keep the plant’s boilers operating safely and effectively. The commission, however, had contracted with a private company to operate and maintain the plant. It was through the company that the commission had reviewed and approved plant outage schedules and work budgets. From 2005 to 2008, the company awarded bids for work during scheduled outages under one project and included all the contracts under prevailing wage rates.

In Spring 2010, the commission decided to split the two million dollars’ worth of work into nineteen separate projects of which only four were over the $250,000 threshold for coverage under the Kentucky Prevailing Wage Act. These projects included inspecting the cooling tower and performing necessary repairs, replacing fill in three cooling tower cells, washing the precipitator, replacing the precipitator outlet ducts, repairing the refractory in the boiler, replacing various blowers, grinders, and mist eliminators, and performing other related tasks such as building scaffolding and operating cranes. Under Kentucky law, a public authority must include prevailing wage rates in construction projects estimated at greater than $250,000. The law additionally prohibits public authorities from dividing projects into smaller components to avoid paying prevailing wage rates. In response to the commission’s division of the project, the Labor Cabinet notified the city utility commission that it was in violation of the Act. The commission filed a suit seeking a declaration that it had not violated the Act. The lower court ruled that the commission was in violation. The commission appealed.

In CTY. OF HENDERSON UTIL. COMM’N v. DONTA, 2016 WL 3574651 (Kentucky Ct. App. June 24, 2016), the court of appeals affirmed the trial court’s decision holding that the commission’s scheduled outage at the power plant constituted a single integrated public works project subject to prevailing wages. In its determination, the court noted that the many components were unified by a central purpose. Although the outage involved numerous components, the court said that they were all coordinated, planned, and scheduled during the same time period. A condensed time period for multiple construction components, the court noted, can be indicative of their integration as one project. Financially, the court noted that the commission identified all of the necessary repairs under one, specific budget. Finally, but likely most persuasive, the court viewed the commission’s previous treatment of work during past plant outages as one project as evidence of the commission’s intent to divide the project in order to escape prevailing wage requirements. In conclusion, the court held that the condensed time, similar budgeting, and historic treatment were evidence sufficient to show that the outage constituted a single integrated public works project and, thus, required prevailing wage rates.

Best Practices:

1. Current Ohio Prevailing Wage threshold – The threshold for building (not related to roads and bridges) construction is $250,000 for new construction and $75,000 for reconstruction, enlargement, alteration, repair, remodeling, renovation, or painting. – Ohio Department of Commerce, Prevailing Wage Threshold Levels Important Notice, (Jan. 7, 2016), http://www.com.ohio.gov/documents/dico_prevailingwagethresholds.pdf
2. Ohio law on subdividing public improvement project into multiple components – Under O.R.C. 4115.033, no public authority can subdivide a public improvement project into component parts or projects to reduce the cost of the overall project beneath the prevailing wage threshold. This is the same law that the Kentucky court penalized the commission for violating.
3. Exceptions to Ohio subdivision law – public authorities may subdivide projects if they are (1) conceptually separate and (2) unrelated to each other. In the Kentucky case, the court noted that a difference in relation can arise when multiple owners exist (i.e. a private board financing part of a public institutions construction on top of the public authority’s work)
4. General purpose of Prevailing Wage rates – By requiring government contractors or contractors involved in government contracts to pay their employees the prevailing wage in the local area, the prevailing wage laws protect community wage standards and ensure that local contractors and laborers have an opportunity to compete for publicly-funded projects.
5. No Prevailing Wage requirement for maintenance work – In Ohio, maintenance is not considered construction for the purposes of prevailing wage law in Ohio. Some case law has distinguished construction from maintenance, for the purposes of prevailing wage law, as work that is a non-routine, physical improvement.

– Christian H. Robertson II

All materials have been prepared for general information purposes only to permit you to learn more about construction law. The information presented is not legal advice, is not to be acted on as such, may not be current and is subject to change without notice.