July 16, 2021
By Ryan P. McCarthy
Focus Areas: Prevailing Wage, Davis-Bacon, False Claims Act
On July 13, 2021, a unanimous panel of the Third Circuit Court of Appeals provided some clarity and certainty for labor unions and construction workers who desire to hold federal contractors responsible for misclassifying and underpaying employees in violation of the Davis-Bacon Act (DBA). The Court’s opinion affirmatively establishes that a False Claims Act (FCA) case may successfully be brought in federal district court when a contractor engages in reckless Davis-Bacon violations.
In its precedential opinion, the Third Circuit addressed what it referred to as a “panoply of first impression issues” regarding the interplay of the False Claims Act and Davis-Bacon Act. In doing so, the Court upheld the District Court’s post-trial award of $2,488,474.62 against The Farfield Company (Farfield), a non-union contractor, for recklessly disregarding its obligations under the Davis-Bacon Act, which requires federal contractors to pay its construction employees in accordance with the prevailing wage rates for the type of work the employees perform. More specifically, the Court held that Farfield violated the False Claims Act by submitting false certifications (in the form of weekly certified payrolls) stating that each worker “has been paid not less than the applicable wage rate . . . for the classification of work performed” when in fact, trial evidence established that 42 workers Farfield classified and paid at the lower-wage “laborer” and “groundmen” classifications performed work that should have been classified and paid at the higher-wage “journeyman lineman” classification.
While associates at their prior firm Jennings Sigmond, Attorneys James Goodley and Ryan McCarty represented the Plaintiff-Relator, IBEW Local 98, at the District Court and Third Circuit. James and Ryan continue to focus a significant part of their legal practice on representing labor unions and workers in False Claims Act, Davis-Bacon Act, and other prevailing wage matters.
In 2002, Farfield contracted with the Southeastern Pennsylvania Transportation Association (SEPTA) for a track and signal improvement project on a 7.5 mile stretch of railroad track. As the project was partially federally funded, the contract required Farfield to comply with the Davis-Bacon Act. For example, the contract required that Farfield’s workers “be paid the appropriate wage rate and fringe benefits on the wage determination for the classification of work actually performed.”
The U.S. Department of Labor’s (DOL) prevailing wage determinations, which were also incorporated into the contract, were derived from the wage rates specified in local collective bargaining agreements (CBAs), and relevant to this case, the CBA of the IBEW Local 126. The Local 126 CBA contained the wage rates for the classifications of groundmen, who lack any electrical apprenticeship training, and journeyman linemen, who receive 7,000 hours of field training as an apprentice and had significantly higher wage and fringe benefit rates than groundmen.
The contract also required that Farfield submit weekly certified payrolls to SEPTA setting out all of the information required to be maintained under the Davis-Bacon Act, including each worker’s hours, classification, rate of pay, and actual wages paid. In each certified payroll, Farfield had to include a “Statement of Compliance” stating that the information in the payroll was correct and complete and that each worker was paid “not less than the applicable wage rate and fringe benefits or cash equivalents for the classification of work performed, as specified in the applicable wage determination incorporated into the Contract.” Each certified payroll form also stated that falsification of a payroll could subject Farfield to criminal penalties or civil liability under the False Claims Act.
On the SEPTA project in question, Farfield relied completely on the experience of Joesph McGee, Sr., vice president of Farfield’s recently formed transit division, for proper Davis-Bacon classification of its employees. However, evidence at trial made clear that under McGee’s management, Farfield delegated unfettered discretion as to worker classifications to its foreman, who received no training or instruction from Farfield on how to properly classify workers. As a result, proper classification of Farfield’s workers played only a minor role in the assignment of work to members of Farfield’s work crews, and tasks associated with the journeymen lineman classification (such as pulling wire through electrical conduit) were performed by all workers on the crew, including workers classified and paid as groundmen and laborers.
A business manager at IBEW Local 98 suspected that Farfield had won several government contracts with low bids by paying and classifying journeymen lineman work at lower-paid classifications. On September 17, 2009, after requesting and reviewing Farfield’s certified payrolls on the SEPTA project, Local 98 filed a qui tam False Claims Act complaint against Farfield in the Eastern District of Pennsylvania.
On September 26, 2017, following significant discovery and Local 98’s request for expert testimony to establish its case, the District Court referred to the case to the DOL as a “complex Davis-Bacon classification case.” However, the DOL declined the referral, and the case returned to the District Court. After the District court denied Farfield’s renewed Motion to Dismiss and Motion for Summary Judgment on various legal and factual issues, the parties agreed to try the case before a Special Master. The Special Master issued a post-trial Report and Recommendation finding that Farfield classified and paid employees as groundmen and laborers when those employees in fact performed lineman work. The Special Master found that Farfield’s certified payrolls were recklessly false and that Farfield was accordingly liable under the False Claims Act for those falsifications, which were material to a false or fraudulent claim. Farfield appealed the decision to the District Court, which then affirmed the Special Master’s decision in its entirety. Farfield then appealed to the Third Circuit, which rejected each of Farfield’s arguments and affirmed all of the District Court’s challenged orders.
The Third Circuit’s Holdings
The Court issued several important holdings regarding the Davis-Bacon Act and False Claims Act that labor unions, construction workers, and their counsel should be aware of.
First, a contractor’s false certification of compliance with Davis-Bacon classification and payment obligations in its certified payrolls may constitute a False Claims Act violation where the contractor submits the payrolls with reckless disregard as to the truth or falsity of the information contained therein.
Farfield, as explained above, delegated unfettered discretion regarding worker classification to its foreman, who had no training in worker classifications. As such, proper Davis-Bacon classification played almost no role on the SEPTA project, even though Farfield executive Joseph McGee Sr. knew that groundmen could not perform lineman tasks. The Court held that these facts, among others, were sufficient to support the District Court’s finding of recklessness.
Second, where union CBAs form the basis of the DOL’s wage determinations, the classification “practice of local signatory unions is conclusive,” even if those practices are not necessarily written in the applicable CBA.
Farfield argued that because the Local 126 CBA did not expressly prevent groundmen from performing the electrical tasks at issue in the case, it could not have violated the Davis-Bacon Act by allowing groundmen to perform those tasks. Farfield argued that the actual prevailing practices of labor unions and signatory contractors could not control, for Davis-Bacon classification purposes, in the face of a silent or potentially inconsistent CBA. The Third Circuit disagreed, holding, “it is not the language of a CBA but rather signatory parties’ local practice that controls workers classifications under the Davis-Bacon Act.”
For the reader wondering, “how was Farfield supposed to know that it could not use groundmen to perform these tasks,” it is worth noting here again that “McGee testified that a groundman could not do all the work that a lineman could, including specifically ‘pulling wire through conduit,’” which Farfield’s groundmen did.
The Court’s holding was further supported by the DOL Field Operations Handbook, which “requires that a contractor, rather than simply reading a CBA to determine for itself whether a classification is prohibited, achieve consensus with both labor and management on how individuals who perform comparable work are actually classified.” In other words, if “the DOL’s prevailing wage determinations rest on a particular CBA, then a contractor may not base classification practices on its own reading of that CBA. Rather, it must engage with the signatory union(s) and management on local classification practices, even if ‘unwritten.’ Failing that, the contractor may contact the DOL for clarification.”
Farfield, of course, did not inquire with Local 126, any signatory contractors, or the DOL regarding the proper classification of groundmen and lineman.
Third, federal district courts have jurisdiction to adjudicate Davis-Bacon complex classification issues in the FCA context.
Fourth, Farfield’s false certified payrolls satisfied the “materiality” element of a False Claims Act claim, which is defined as “having the tendency to influence, or be capable of influencing, the payment or receipt of money or property.”
The Court held materiality was satisfied because: (1) Davis-Bacon Act compliance was a mandatory condition of payment under the SEPTA contract, which incorporated several Davis-Bacon regulations; (2) those regulations make clear that the Government had the right to withhold funds from Farfield and/or debar Farfield from obtaining future Government contracts for failure to comply with Davis-Bacon obligations; (3) Farfield executives knew that noncompliance with the Davis-Bacon Act would likely result in the Government taking adverse action against Farfield; (4) there was no evidence in the record that the Government would have knowingly paid invoices associated with false certified payrolls; and (5) Davis-Bacon compliance is a “keystone” of federally funded construction projects.
Additionally, the Court rejected Farfield’s argument that the underpayments to the workers were not “substantial” and thus not “material” because the total wage underpayments (about $159,000) was relatively small in comparison to the value of the contract ($54.7 million). The Court wrote, “We refuse to measure materiality based only on the monetary value of Farfield’s wrongdoing in relation to some larger, undefined whole. After all, Davis-Bacon compliance is not concerned with minimizing costs but, on the contrary, aims to impose additional costs on contractors and the Government in pursuit of goals that Congress has prioritized for federally funded projects.” Moreover, the Court noted that “holding otherwise would require us to engage in difficult, if not impossible, line-drawing.”
Fifth, a DOL audit of the project, which did not detect the worker misclassifications revealed at trial, did not dispositively establish as a matter of law that Farfield could not have acted with the reckless disregard. Rather, it was merely evidence (considered by the District Court) going to whether Farfield acted with such reckless disregard. According to the Court, the audit evidence was “simply not compelling or specific enough to rebut the otherwise strong proof that Farfield acted recklessly.”
Sixth, the damages burden shifting analysis pronounced by the Supreme Court in Anderson v. Mt. Clemens Pottery Co., 328 U.S. 680 (1946) under the Fair Labor Standards Act, which is also frequently utilized in the Davis-Bacon context, may also be used to prove damages in a False Claims Act case premised on Davis-Bacon violations. Under this burden shifting framework, the “plaintiff bears the initial burden of proving that employees have ‘in fact performed work for which they were improperly compensated’ and ‘producing sufficient evidence to show the amount and extent of that work as a matter of just and reasonable inference.’ The burden then shifts to the employer to come forward with evidence of the precise amount of work performed or with evidence negating the reasonableness of the inference to be drawn from the employee’s evidence.’ If the employer fails to do so, ‘the court may then award damages to the employee, even though the result be only approximate.’”
Local 98 established at the District Court that the 42 groundmen and laborer employees in question performed lineman tasks when working under 6 different project “phase codes” that Farfield used for logging employee time. Farfield was then able to show that at least 1.5 hours per day that the employees worked under these phase codes were not spent performing lineman work. As such, the Court held under Mt. Clemens that Farfield was liable for the remainder of the time associated with those phase codes because Farfield was unable to show the time was not associated with lineman tasks. This resulted in the Special Master and District Court finding that Fairfield underpaid its employees in the total amount of $159,273.54. In accordance with the FCA, the Court trebled (or tripled) the damages for a total of $477,820.62 owed, exclusive of the FCA penalties and attorneys’ fees and costs.
Seventh, pursuant to Mt. Clemens and its progeny, Local 98’s evidence of employee misclassification was “sufficiently representative” where 6 workers who were classified as groundmen and laborers testified about 22 of the 42 misclassified groundmen and laborers. Collecting caselaw, the Court held that this 52 percent sample was “quantitatively representative.” And because Farfield presented no evidence that the experience of the testifying workers was “so unique that it was unreasonable to conclude that they devoted approximately the same amount of time as the other affected workers to lineman work,” the Court found that their testimony was also “qualitatively representative.”
Eighth, the number of false certified payrolls Farfield submitted to SEPTA was the proper measure for the number of FCA civil penalties to be imposed on Farfield because, among other reasons, “nothing in the FCA requires the court to impose penalties based on the number of false claims under § 3729(a)(1)(A), instead of the number of false statements under § 3729(a)(1)(B).” In this case, the Court found it appropriate to impose a penalty of $5,500 for each of Farfield’s 105 falsely certified payrolls, totaling a penalty of $577,500.
Ninth, with regard to an issue that has potentially little practical importance in the future, the Court held that the 2009 amendments to the False Claims Act were retroactive and applied to the facts of this case, which all took place prior to 2009. The Court also held that application of the FCA amendments to Farfield did not violate the Ex Post Facto Clause of the U.S. Constitution.
The Court’s opinion affirmatively establishes that a False Claims Act case may successfully be brought in federal court when a contractor engages in reckless Davis-Bacon violations.
James Goodley and Ryan McCarthy formed Goodley McCarthy in significant part to represent unions and workers in prevailing wage disputes. If you or your labor union is interested in pursuing such claims against federal contractors who do not pay their employees in accordance with prevailing wage laws, please do not hesitate to contact the firm.
*Note that similar results are not guaranteed, and each case should be evaluated based on its own facts and legal authority.