Prosecuting Prevailing Wage Violations: Shapiro Targets Construction Industry

By: Christopher D. Carusone and Brionna L. Denby

During his first term, Pennsylvania Attorney General Josh Shapiro announced the creation of the first-ever Fair Labor Section of the Office of Attorney General to combat what he described as wage theft, tip stealing, misclassification and similar unlawful actions/discriminatory practices in the workplace. Since then, Shapiro has chosen to use his new section’s most powerful tool against Pennsylvania’s $34.3 billion construction industry, criminally prosecuting construction firms or their owners for allegedly misclassifying employees as independent contractors and intentionally failing to pay them a prevailing wage. The latest subject of the Attorney General’s fair labor initiative is construction mainstay Glenn O. Hawbaker, Inc. (Hawbaker), one of the Pennsylvania Department of Transportation’s (PennDOT) largest highway contractors, for allegedly diverting approximately $20 million in fringe benefits owed to its prevailing wage employees for use by the company as a whole. While Shapiro’s latest prosecution raises the possibility of several legal defenses discussed below, construction firms dependent on public works projects should endeavor to stiffen their compliance with prevailing wage laws or face the increasing likelihood of criminal prosecution.

By way of background, the Pennsylvania Prevailing Wage Act requires contractors working on “any project of public work” to pay “prevailing minimum wage rates” to the “workmen upon such project.” See, 43 P.S. Section 165-4. “Public work” projects are generally defined as construction projects that exceed $25,000. 43 P.S. Section 165-2(5). The term “workmen” includes a “laborer, mechanic, skilled and semi-skilled laborer and apprentices.” Prevailing wage rates are determined and posted by the Secretary of Labor and Industry, 43 P.S. Section 165-9, and include “the amount of contributions for employee benefits.” See, 34 Pa.Code  Section 9.102.

The act contains no criminal penalties, except for submission of false statements under oath. Instead, the act punishes intentional violations by imposing a three-year bar on public works contracts and liquidated damages recoverable by the Attorney General. However, as demonstrated by the 2019 prosecution of Goodco Mechanical and its owner Scott Good, who recently entered pleas of guilty, that does not necessarily make substantive violations of the act immune from prosecution under theft theories, 18 Pa.C.S. Ch. 39, or Deceptive or Fraudulent Business Practices, 18 Pa.C.S. Section 4107.

Since the Goodco prosecution, the Attorney General has refined its prosecutorial approach to prevailing wage prosecutions, charging Hawbaker only with four counts of theft by failure to make required disposition of funds received (one count for each year from 2015-2018), all graded as felonies of the first degree. This criminal statute provides that a “person who obtains property upon agreement, or subject to a known legal obligation, to make specified payments or other disposition, whether from such property or its proceeds or from his own property to be reserved in equivalent amount, is guilty of theft if he intentionally deals with the property obtained as his own and fails to make the required payment or disposition.”

The Attorney General alleges that Hawbaker obtained public funds as a contractor on various public works contracts awarded by PennDOT “upon agreement, or subject to a known legal obligation” imposed by the Pennsylvania Prevailing Wage Act to pay its workers a prevailing wage, and “intentionally dealt with the property obtained as [its] own” by:

• Using money intended only for its prevailing wage workers’ retirement funds to contribute to the retirement accounts for all Hawbaker employees, including its owners and executives;

• Using funds intended for its prevailing wage workers’ health and welfare benefits to subsidize the cost of the self-funded health insurance plan covering all employees; and

• Inflating the company’s health and welfare hourly credit by including the total amount of medical claims considered (rather than what it actually paid out under its self-insured health care plan), the cost of the company’s employees involved in benefit administration, and the company’s 401(k) match funds paid to its employees.

The Attorney General’s prosecution of Hawbaker raises three possible legal issues should the company have the wherewithal to litigate them.

Are the Pennsylvania Prevailing Wage Act and its accompanying regulations, which were written primarily with civil/administrative proceedings in mind, precise enough to support the Attorney General’s theories of prosecution?

Unlike civil/administrative proceedings, penal statutes must be strictly construed. See, 1 Pa.C.S. Section 1928(b)(1). Criminal proceedings also involve the rule of lenity, which requires ambiguities be construed against the government. See, Commonwealth v. Lehman, 243 A.3d 7, 17 (Pa. 2020). Moreover, due process considerations prohibiting vagueness in the drafting of statutes are particularly exacting when used in a criminal prosecution, prohibiting a prosecution predicated upon a statute that either “fails to provide the kind of notice that will enable ordinary people to understand what conduct it prohibits” or “authorizes or encourages arbitrary and discriminatory enforcement.” See, Commonwealth v. Mohamud, 15 A.3d 80, 85 (Pa.Super. 2010) (internal citation and quotation omitted). The Hawbaker case involves narrow theories about the calculation/payment of employee benefits, and only time will tell whether the rules governing these matters are precise enough to support a criminal prosecution.

Is the evidence sufficient to support a corporate criminal prosecution of Hawbaker?

The Pennsylvania Crimes Code sets forth three situations in which a corporation may be convicted of the commission of a criminal offense. In the Hawbaker case, the only situation that is applicable requires the commonwealth to establish that the “commission of the offense was authorized, requested, commanded, performed or recklessly tolerated by the board of directors or by a high managerial agent acting in behalf of the corporation within the scope of his office or employment.” The criminal complaint against Hawbaker does not address the requirements of this section, making it a possible issue.

Does the Attorney General have jurisdiction to prosecute prevailing wage violations in general, and Hawbaker in particular?

The Attorney General’s office is not an office of general prosecutorial jurisdiction. Rather, the kinds of criminal cases it can prosecute are limited to those set forth in the commonwealth Attorneys Act, specifically 71 P.S. Section 732-205. The criminal complaint against Hawbaker does not establish the Attorney General’s jurisdiction, unlike the Goodco prosecution, where it was clear that the grand jury had issued a presentment. While the most likely source of jurisdiction in the Hawbaker case is Section 205(a)(6)—which allows the Attorney General to prosecute criminal charges “investigated by and referred to him by a commonwealth agency arising out of enforcement provisions of the statute charging the agency with a duty to enforce its provision”—it is unclear whether the Department of Labor and Industry investigated and referred the case to the Attorney General, and if it did, whether the department’s authority to “enforce” the Pennsylvania Prevailing Wage Act is broad enough to permit such a referral, given that its primary role is more legislative (establish prevailing wage rates/regulations) and adjudicative (creation of an appeals board) than traditional enforcement.

It seems clear that Shapiro will continue the office’s focus on these kinds of wage and labor-related prosecutions, particularly if the courts grant him the leeway to continue doing so. As a result, corporate and individual liability (including prosecution and debarment) are now very real problems for contractors who violate these laws. Companies working on public works projects in Pennsylvania would be wise to consider performing a self-audit (preferably with counsel) to ensure that they are complying with labor laws, particularly those governing classification of workers and the payment of prevailing wages. General contractors are also advised to monitor their subcontractors to ensure compliance, particularly since government attorneys often seek to impose criminal and civil liability as high up the ladder as the facts and law will allow. Finally, open shop contractors (nonunion) should be especially careful with fringe benefit calculations and avoid getting creative in this new environment.

Reprinted with permission from the April 27, 2021 edition of “The Legal Intelligencer” © 2021 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, reprints@alm.com or visit www.almreprints.com.