Prevailing Rates for Private Work in 2022: Contractors Beware!

November 9, 2021

For years New York’s prevailing wage law has required contractors performing public construction work to pay their workers union scale wages and fringes. Beginning January 1, 2022, that requirement will extend to many private construction projects as well, including IDA-supported work, construction for non-profits, and affordable housing projects that the Department of Labor and the building trades have long coveted but been unable to reach. The law is so confusing that private developers and their contractors will often have to guess whether their project is covered. And the risk of guessing wrong will fall mostly on the contractors.

The general intent of New Labor Law § 224-A is clear enough. Starting in January it will define “covered projects” to include any construction project exceeding $5 million for which “public funding” exceeds 30% of “total construction project costs.” “Public funds” is expansively defined to include virtually any financial benefit provided by a state or municipal entity, including an industrial development agency or local development corporation. In particular “public funds” include:

  • Grants,
  • Below-market loan interest, fees, insurance or other costs,
  • Tax credits, tax abatements, tax exemptions and the like,
  • Forgivable loans, or loans for which credits other than payment are applied.

On its face this definition includes not only grants to universities and museums, but also to tax exemptions and low interest loans provided by IDAs, and tax credits offered by the New York State Housing Finance Agency. But how the law will be applied is muddled by various exclusions and exemptions.

For example, “public funds” do not include: (1) brownfield remediation tax credits, (2) funds to incentivize (but not to construct) comprehensive sewage systems, (3) certain property tax exemptions for New York City affordable housing, (4) certain payments to New York City charter schools and, most notably, (5) “tax benefits provided for projects the length or value of which are not able to be calculated at the time the work is to be performed.” More on this last exclusion below.

Further, some projects are exempted from the law altogether, including (1) owner occupied one- or two-family dwellings, (2) construction for private not-for-profit corporations that gross less than $5 million per year, (3) multi-family housing that’s at least 25% “affordable,” or 35% “supportive” for “vulnerable” populations, (4) work on affordable mobile home parks, (5) certain historic renovation work, (6) small renewable energy systems and (7) particular projects supported by the New York City IDA, the New York City Economic Development Corporation or the New York City School Construction Authority.

Finally, an owner or developer can obtain a complete exemption from prevailing wage requirements by agreeing “that only contractors and subcontractors who sign a pre-negotiated agreement with [a bona fide] labor organization can perform work on such a project.” This is an exemption that any project owner or developer can obtain if it’s willing to take on the added expense that often attends a union-only project.

All this still leaves most IDA and non-profit projects, and many affordable housing projects, subject to prevailing wage requirements, if the value of non-exempt public support exceeds 30% of “total construction project costs.”

In this regard, every “public entity” that provides any “public funds” as defined above is supposed to identify “the nature and dollar value of such funds” and “whether any such funds are excluded” from consideration by the statute. But public entities suffer no penalty for failing to correctly do so, nor are contractors protected from underpayment liability if the public entity fails to properly identify a project as “covered.” Similarly, project owners and developers must certify whether their project is “covered” by the new law “within five days of commencement of construction.” But besides coming too late to influence a contractor’s bid, a certification of non-coverage will likely not excuse contractors and their subs from underpayment liability if a Labor Department wage investigator later disagrees.

Thus, the prudent contractor will bid any publicly-supported project at prevailing rates, unless it can be certain that the 30% threshold will not be met. But absent an advance ruling from the Public Subsidy Board (discussed below) such certainty is nearly impossible.

In the first place, contractors and subcontractors — on whom the obligation to pay prevailing rates fall — are not typically privy to the project owner’s complete financing arrangements with “public entities” that may be supporting the project, nor are they typically privy to the owner’s “total construction project costs.” In the second place, the statute is unclear as to whether certain future tax benefits, like property tax exemptions, are countable as “public funds.” One part of the statute specifically says that they are, but another part says they are exempt if the “length or value [of such benefits] are not able to be calculated at the time the work is to be performed.” But the value of any real property tax exemption is a function of future property assessments and future tax rates, neither of which may lawfully be fixed in advance. So, the value of such a future exemption cannot be known when construction occurs, even if it can be estimated on the basis of reasonable assumptions.

Furthermore, even if the value of future tax exemptions could be calculated, that value should logically be reduced by the value of future payments-in-lieu-of-taxes that are universally required in PILOT agreements. But the statute doesn’t say so, and a contractor cannot be sure that Labor Department wage investigators, who are charged with enforcing the statute, will agree that such an offset is required.

Moreover, determining whether a project is “paid for in whole or in part with [non-excluded] public funds” is only half the battle. The other half is to figure out if those funds comprise at least 30% of the developer’s “total construction project costs” (as well as whether such “total construction project costs” exceed the law’s $5 million threshold). But the law doesn’t explain what “total construction project costs” means. This requires private owners, developers, contractors and subcontractors to speculate as to whether they include, for example, the expenses of site acquisition, project design, project financing, furniture and equipment, and off-site improvements (like sewer extensions or turning lanes) required in connection with state or municipal approvals of a project. Obviously, the inclusion — or not — of such costs may affect whether the project exceeds the statute’s $5 million threshold, and if so whether the value of public support received comprises at least 30% of the total.

Amid all this uncertainty, the new law seems to offer some hope, by empowering a newly created Public Subsidy Board to make binding decisions as to whether or not a particular project is covered under the new law, and those decisions may not be second-guessed later by the Labor Department.

However, with the law set to go into effect in less than two months, that Public Subsidy Board has not even been appointed by the Governor, from the several constituencies required to be represented. Furthermore, once appointed each board member is required to serve without compensation, and at the pleasure of the constituency it represents. It thus remains questionable just how accessible the new Board will be to the many developers (and their contractors) who will want certainty about the status of their projects under the new law. Meanwhile, the Department of Labor has announced that it intends to begin enforcing the new law on January 1, whether there’s a Public Subsidy Board by then or not.

The new law also imposes obligations on private developers to assure that appropriate notices are given and certified payrolls are filed. It may also subject “covered projects” to “stop work” orders where the Labor Department suspects that prevailing wages and supplements aren’t being paid when required. It’s even possible, though uncertain under the new statute, that owners and developers will be held jointly and severally liable for any prevailing wage underpayments by their contractors.

But, as with public work, the brunt of the expanded prevailing wage requirements, and the risks of even innocent underpayments, will likely fall on the contractors and subcontractors who perform the work.

In the face of such substantial uncertainty, the prudent contractor or subcontractor will assume in its bid, for any publicly aided project that may exceed $5 million in total project costs, wages and fringes at prevailing rates. Even an agreement by the owner to defend and indemnify against liability for underpayment claims will be of limited value if the owner is a single-asset entity that has mortgaged its property to a construction lender. And contractors should require the same of their subs, along with certified payrolls and written acknowledgements that prevailing rate schedules have been received.

At the same time, owners and developers of potentially “covered” projects may wish to either (a) include prevailing wages and fringes in their budgets, (b) suspend their planning until the rules are clarified for determining whether a project is “covered,” or (c) proceed without IDA or LDC support. The only other alternative is to build the case that their project isn’t “covered” and hope that they can persuade their contractors and the Department of Labor that they are right.

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