Beware of Subcontracting when Working on Ohio Public Improvement Projects
By Nick A. Nykulak
On March 2, 2010, the Ohio Supreme Court issued a decision in Bergman v. Monarch Construction Co., Slip Op. 2010-Ohio-622, holding that 100% statutory penalties are mandatory under prevailing wage law for underpayment violations in employee-instituted actions. In so holding, the Ohio Supreme Court also found that contractors are liable not only for a subcontractor’s actual underpayments, but also liable for the 100% statutory penalty (an amount equal to the total underpayment found) caused by the subcontractor’s violations of the law. The 100% statutory penalty under R.C. 4115.10(A) requires a contractor to pay an additional 25% of the underpayment amount to the affected employee and an additional 75% of the underpayment amount to the Ohio Department of Commerce.
In Bergman v. Monarch, Monarch construction had entered into a public contract with Miami University for the construction of new student housing in Oxford, Ohio. Monarch subcontracted the masonry work to Don Salyers Masonry, Inc. Employees of Salyers filed a prevailing wage complaint with the Ohio Department of Commerce alleging Salyers failed to pay them prevailing wages. The Department of Commerce investigated and determined that Salyers underpaid its employees $368,266.34 and owed the same amount as statutory penalties. No complaints were filed against Monarch, and no claims were made that Monarch had violated prevailing wage laws in any way. When Salyers went out of business, Monarch was notified by the Ohio Department of Commerce that it was liable for the back pay and statutory penalties due to Salyer’s underpayment violations.
Following the determination from the Ohio Department of Commerce, 36 of Salyers employees filed a lawsuit against Monarch, Salyers and Miami University to recover their back pay, statutory penalties and attorney’s fees. Salyers was out of business at the time the lawsuit was filed and a default judgment was entered against it by the trial court. After a bench trial, the trial court held Monarch liable for the back pay due to Salyers employees, ordered Monarch to pay attorney’s fees, but held that the 100% statutory penalty was discretionary and not warranted against Monarch given the facts of the case.
Salyers employees appealed the trial court’s decision. The Twelfth District Court of Appeals agreed with the trial court that the statutory penalties were discretionary and affirmed the trial court’s decision. A handful of Salyers employees then appealed the penalty issue to the Ohio Supreme Court, which accepted the case based upon a conflict with a decision holding statutory penalties were mandatory when rendered by the Sixth District Court of Appeals.
The Ohio Supreme Court, in a 5-2 decision (Lundberg Stratton and O’Donnell dissenting), reversed the lower courts rulings and held that the penalty provision fis mandatory and must be assessed whenever an underpayment violation is found against a contractor or subcontractor, unless the limited exceptions enumerated applied.
Prior to this Ohio Supreme Court decision, there was Ohio case law from several appellate courts which held a contractor liable for back pay found due to its subcontractor’s employees. However, no prior case went so far as to hold that the contractor would also be liable for the statutory penalties caused by the subcontractor’s violations of prevailing wage laws.
In this case, Monarch was repeatedly assured by both Salyers and Miami University that Salyers was paying the applicable prevailing wage rate for work Salyers employees were performing on the project. The first time Monarch received notice that there was a problem with Salyers prevailing wage compliance was when Monarch received a letter from the Department of Commerce stating Salyers employees were owed $368,266.34 in back pay and claiming Monarch was liable for this amount. Monarch cooperated with the Department of Commerce and paid the back pay found due to Salyers’ employees after proper fringe benefit credits had been given.
Holding a contractor liable for penalties caused by its subcontractor will certainly be a deterrent for any contractor thinking about working on public improvement projects and subcontracting work. If you would like to discuss this case or find out the best way to protect your company given this decision, please feel free to call Alan Ross or Nick Nykulak at Ross, Brittain & Schonberg Co., LPA.