Articles Posted in Construction Generally

On January 17, 2014, the California Contractors State License Board issued Industry Bulletin – 1/17/2014 clarifying that the new law effective January 1, 2014 (Senate Bill 407) requiring replacement of plumbing fixtures with water-conserving models is not triggered by property “maintenance” or “repairs.” The new law requires anyone applying for a building permit for work that will “alter” or “improve” a single-family residence built in 1994 or earlier to replace all plumbing fixtures with water-conserving models. Replacement of the fixtures is a condition of receiving final permit approval from the local building department. Contractors are encouraged to verify requirements with their local building department before taking any action to maintain, repair, alter or improve a single-family residence. (The new law also requires, by 2019, water-conserving plumbing fixtures in multi-family dwellings and commercial properties when specific renovations are made.)

Although not binding legal authority, the California Building Officials (CALBO) group has interpreted the terms “alterations” and “improvements” to mean “any construction to an existing structure that enhances or improves the structure. Construction that is related to repairs or maintenance of the structure is not considered to be an alteration or improvement.” CALBO consider the following to be “repairs” or “maintenance” that do not trigger the requirements of the new law:

* electrical service change out * HVAC change out * sewer line replacement * siding or stucco * site work: retaining wall, fences, walkways, etc.
* water heater replacement * window replacement * other repairs, as determined by the state Building Code
Additional Sources: Contractors State License Board; CALBO’s Legislative Analysis; Tri-Chapter Uniform Code Committee Guidelines

Photo: Jesus Rodriguez, Taken Oct. 3, 2012 – Creative Commons

A recent report by the California Department of Industrial Relations (DIR) that the State of California does not collect between $800 million and $1.2 billion as a result of the “underground economy” could be a catalyst to the State increasing its efforts to combat what is commonly referred to as the underground economy and, in turn, to increase revenues payable to the State. The term “underground economy” refers to those individuals and businesses that deal in cash and/or use other schemes to conceal their activities and their tax liability from government, licensing, regulatory, and taxing agencies. This includes employers paying workers in cash, under-reporting wages paid to employees, failing to pay into the workers’ compensation fund, reporting employees as independent contractors, and underpaying taxes, tax evasion or engaging in tax fraud. It is also commonly referred to in slang terms as cash pay, tax gap, payment under-the-table and payment off-the-books.

The State of California Employment Development Department (EDD) has a charge to investigate businesses that avoid paying payroll taxes. The EDD’s Underground Economy Operations (UEO) organization was established in 1993 to implement and administer the activities of the Joint Enforcement Strike Force. The mission of UEO is to reduce unfair business competition to protect the rights of workers. It does so by (1) coordinating the joint enforcement of tax, labor, and licensing laws, (2) detecting and deterring tax violations, (3) conducting research on strategies to increase compliance with payroll tax laws, and (4) educating customers to increase compliance with payroll laws. Three of UEO’s program focus areas are the Employment Enforcement Task Force, Department of Industrial Relations, and Contractors State Licensing Board.

Additional Source: Sacramento Business Journal; State of California Employment Development Department ; CA Employment Development Depart Now Authorized To Share New Employee Information

Photo: Simon Cunningham, Taken on Dec. 18, 2013 – Creative Commons

Employers often would prefer an arbitral forum for employee-related disputes because they are perceived as a venue that typically delivers a fair, efficient and cost-effective resolution for such disputes. Employment agreements that require arbitration of claims on an individual basis, including Fair Labor Standards Act (FLSA) claims, have been subject to numerous challenges, including that such provisions violate the National Labor Relations Act. On January 1, 2014, the U.S. District Court for the Northern District of Texas, in Pacheco v. PCM Constr. Servs., LLC, N.D. Tex., No. 3:12-cv-04057, held that the seven disgruntled construction workers’ FLSA claims against their employer for unpaid overtime must be arbitrated. Including such a provision, including a waiver of the right to pursue claims as a class representative, in your employee contracts certainly is worth considering in light of the courts’ recent willingness to enforce such clauses.

The FLSA establishes, among other things, overtime pay standards affecting employees in the private sector as well as federal, state and local government employees. The construction workers claimed that there was a company-wide practice of not paying overtime in violation of the FLSA, and that there are 40 to 50 similarly situated employees. These workers had each signed employment agreements which required them “to submit any dispute between employee and the company, or any of the company’s employees, representatives, or agents, to mandatory, binding arbitration.” The construction workers argued that the arbitration provision was unenforceable because it restricted class arbitration, it was unconscionable and it didn’t permit an award of liquidated damages, as available under the FLSA, and that their employer had waived the right to compel arbitration. Judge Sam A. Lindsay rejected their arguments, compelling arbitration and dismissing the civil action with prejudice.

Note, however, that the Ninth Circuit Court of Appeals in Wal-Mart Wage & Hour Empl. Practices Litig. v. Class Counsel & Party to Arbitration, recently held that a non-appealability clause in an arbitration agreement that eliminates all federal court review of arbitration awards, including review under § 10 of the Federal Arbitration Act, is not enforceable.

Additional Sources: U.S. Department of Labor; National Labor Relations Board; US Supreme Court Gives Green Light To Class Action Waivers In Consumer Contracts; Rials v. Apex Bulk Commodities Inc., Los Angeles Superior Court Case No. BC527219 (Judge Johnson’s tentative ruling confirmed that she was going to enforce the arbitration agreement, leaving it to the arbitrator to decide if the plaintiffs’ claims could proceed as a class arbitration or as individual arbitrations because the contract contains no language on the matter)

Photo: Sam Greenhalgh, Taken on Sep. 8, 2007 – Creative Commons

On January 16, 2014, Pillsbury attorney John E. Jensen  published his alert titled Affiliates of Indicted Contractor May Face Longer Suspension, which discusses the U.S. Court of Appeals for the Eleventh Circuit decision in Agility Defense & Government Services, Inc. v. United States Department of Defense, No. 13-10757, 2013 WL 6850891 (11th Cir. Dec. 31, 2013). Among other things, the Court of Appeals confirmed that the Government has the ability to suspend “affiliates” of a suspended contractor, even though there is no allegation that the affiliates themselves had done anything wrong. This decision reversed the holding of an Alabama federal district court, which had held the affiliates’ suspension past 18 months impermissible.

Photo: Martin Bowling, Taken on November 16, 2011 – Creative Commons

On January 8, 2014, Pillsbury attorneys Jeffrey A. Knight and Alina J. Fortson, and Joseph Ferranti, Environmental Division Director of InDepth Corporation, published their alert titled Be Careful What You Look For: EPA Updates “All Appropriate Inquiries” Environmental Diligence Standard. The alert discusses the EPA’s recent amendment of its “All Appropriate Inquiries” rule. This rule sets out the standard for environmental due diligence in commercial and industrial property transactions in order to qualify for certain defenses to liability under the federal “Superfund” law.

Photo: TexasGOPVote.com, Taken on Feb. 14, 2011 – Creative Commons

The U.S. Supreme Court recently showed strong support for enforcing forum-selection clauses in Atlantic Marine Construction Co., Inc. v. United States District Court for the Western District of Texas, 571 U.S. ___ (2013). The Court’s decision discusses forum-selection clauses in contracts generally, but lays the foundation and support for enforcing a forum-selection clause in a construction contract. The Court concluded that “a proper application of [28 U.S.C.] §1404(a) requires that a forum-selection clause be ‘given controlling weight in all but the most exceptional cases.'” Absent extraordinary circumstances, a forum-selection clause is to be enforced by the courts under the Supreme Court’s modified balancing-of-interest standard. Accordingly, a forum selection clause is not a boilerplate provision to be ignored or disregarded.

The Underlying Action

Atlantic Marine Construction Co., Inc. involves a subcontract dispute between Atlantic Marine Construction, Co., Inc., a Virginia corporation (“Atlantic Marine”), and J-Crew Management, Inc., a Texas corporation (“J-Crew”). The subcontract included a forum-selection clause confirming that all disputes between the parties would be litigated in the Circuit Court for the City of Norfolk, Virginia, or the U.S. District Court for the Eastern District of Virginia, Norfolk Division. When a dispute arose under the subcontract, however, J-Crew filed suit in the Western District of Texas. Atlantic Marine moved to dismiss the case under 28 U.S.C. §1406(a) for “wrong” venue and Federal Rule of Civil Procedure 12(b)(3) for “improper” venue. In the alternative, Atlantic Marine moved to transfer the case under Section 1404(a), which allows a district court to transfer a civil action to any other district or division for the convenience of the parties and witnesses or to any other district or division where all the parties have consented.

The District Court denied both motions. The court held that §1404(a) is the exclusive mechanism for enforcing a forum-selection clause that points to another federal forum; that Atlantic Marine bore the burden of establishing that a transfer would be appropriate; and that the court would consider a list of public and private interest factors, of which the forum-selection clause was only one factor. The District Court held that Atlantic Marine failed to carry its burden. The Court of Appeal agreed with the District Court’s decision that §1404(a) is the exclusive mechanism for enforcing a forum-selection clause that points to another federal forum. The Court of Appeal, however, held that Rule 12(b)(3) would be the correct mechanism to enforce a forum-selection clause that points to a nonfederal forum. The Court of Appeal denied Atlantic Marine’s petition, holding that the District Court did not abuse its discretion in refusing to transfer the case after conducting the balance-of-interests analysis required by §1404(a).

The U.S. Supreme Court’s Ruling

The U.S. Supreme Court agreed with the Court of Appeal that Section 1404(a) is an appropriate provision to enforce a forum-selection clause referencing a federal forum. The Court, however, rejected the Court of Appeal’s findings that a forum-selection clause pointing to a state or foreign forum can be enforced through Rule 12(b)(3). The Court instead held that these provisions should be enforced through the doctrine of forum non conveniens, the doctrine codified by Section 1404(a) that permits transfer to a more convenient forum. Because both Section 1404(a) and the doctrine of forum non conveniens use the same balancing-of-interests standard, the Court held that courts should evaluate a forum-selection clause pointing to a nonfederal forum in the same way that they evaluate a forum-selection clause pointing to a federal forum.

Although the Court held that Section 1404(a) is the relevant statute, the Court rejected the Court of Appeal’s analysis of Section 1404(a) motions in cases involving a forum-selection clause. The Court held that a valid forum-selection clause requires courts to adjust their usual Section 1404(a) analysis in three ways. First, when a valid forum-selection clause exists, the plaintiff’s choice of forum has no weight. As the party defying the forum-selection clause, the plaintiff has the burden of establishing that transfer to the forum that the parties bargained for in the contract is unwarranted.

Second, a court evaluating a Section 1404(a) motion to transfer based on a forum-selection clause should not consider the parties’ private interests. When the parties agreed to the forum-selection clause, they waived the right to challenge the preselected forum as inconvenient or less convenient for themselves, their witnesses, etc. Thus, a court may only consider public interest factors. Public interest factors, however, will rarely defeat a motion to transfer unless extraordinary circumstances exist.

Third, a Section 1404(a) transfer will not carry with it the original venue’s choice-of-law rules. There is a Section 1404(a) exception to the general rule that requires a federal court to follow the choice-of-law rules of the state in which it sits. The Section 1404(a) exception allows the transfer court to apply the state law of the original court. The Court, however, held that this exception does not apply to cases where the motion is based on the enforcement of a forum-selection clause and the plaintiff has inappropriately filed a suit contrary to the forum contractually selected by the parties.

Finding that the District Court’s application of the Section 1404(a) did not comport with these principles, the Court reversed and remanded the case. The Court’s ruling, however, left open the possibility that forum-selection clauses could be enforced under Federal Rule of Civil Procedure Rule 12(b)(6), again, signaling the Court’s strong support for forum-selection clauses.

Whether the forum-selection clause points to a federal or non-federal venue, the Court’s ruling offers two mechanisms to enforce forum-selection clauses.

UPDATE: CSLB, CSLB to Get Tough on RMO Abuses (Summer 2014)

Starting on January 1, 2014, amended Section 7068.1 of California’s Contractors State License Law, Bus. & Prof. Code §§ 7200 et seq., requires licensees’ qualifiers to exercise direct supervision and control over the licensees’ operations to ensure compliance with California’s Contractors State License Law. The amended law contemplates active involvement by the qualifier, and makes a violation of Section 7068.1 grounds for disciplinary action and a misdemeanor punishable by imprisonment in a county jail and/or a fine.

Section 7068 requires every license to have a qualifier, which may be a Sole Owner, Qualified Partner, Responsible Managing Officer (RMO), Responsible Managing Employee (RME), Responsible Managing Manager or Responsible Managing Member. The qualifier is the person who is listed in the Contractor State License Boards’ (CSLB) personnel of record, has demonstrated his/her knowledge and experience though the CSLB’s licensing process, and holds one or more license classifications.

The CSLB’s regulations, Cal. Admin. Code tit. 16, § 823, further define bona fide employee and direct supervision and control. “Bona fide employee” means “an employee that is permanently employed by the applicant and is actively involved in the operation of the applicant’s contracting business for at least 32 hours or 80% of the total hours per week such business is in operation, whichever is less.” Cal. Admin. Code tit. 16, § 823(a). “Direct supervision and control” “includes any one or any combination of the following activities: supervising construction, managing construction activities by making technical and administrative decisions, checking jobs for proper workmanship, or direct supervision on construction job sites.” Cal. Admin. Code tit. 16, § 823(b).

Contractor license applicants will also now be required to submit detailed information regarding the qualifier’s duties and responsibilities for supervision of the applicant’s construction operations.

Additional Resources: California Senate Bill 262; California Legislative History Online; CSLB Industry Bulletin – 12/31/2013; CSLB Winter 2012 Newsletter

For most in the construction industry (and, for that matter, virtually all industries), the number one resolution is to be more profitable in the new year. We polled our Construction Counseling & Dispute Resolution and Real Estate teams for tips to help you keep this resolution. This is what they shared:

1. Take stock of what you did well in 2013 and why, and incorporate those principles and lessons learned into your 2014 business plan. (In turn, identify what you did not do well and why, and incorporate lessons learned into your 2014 business plan.) This should include, for example:
A. Bidding;
B. Contracting;
C. Collections;
D. Disputes and dispute resolutions;
E. Employees;
F. Training;
G. Safety.

2. Identify who you worked well with in 2013 and determine whether there are or may be opportunities to work with them on other projects in 2014.

3. Consider industry growth trends and determine how your business model can meets the needs of the key players (e.g., renewable energy).

4. Look beyond your core business model to identify opportunities that you are not taking advantage of as part of your current business model (e.g., public projects, joint venture opportunities, additional scopes of work that are complimentary to your core business, etc.).

5. Consider federal and state financial incentives that may be available ( e.g., renewable energy).

6. Review your company’s own talent pool and pursue opportunities leveraging their strengths.

7. Recognize what your top competitors did well with in 2013 and determine whether there are or may be opportunities for you to do the same in 2014.

8. Don’t ignore that there may have been regulatory or legislative changes that are effective in 2014 that will require you to incorporate policies and procedures to address these changes in your 2014 business plan (e.g., recently, in California, the mechanic’s lien law was amended to require actual notice of the lien to the owner and to contemplate forfeiture of the contractor’s lien rights if notice is not given).

9. Consider emerging risk scenarios and incorporate policies and procedures to manage these risks in your 2014 business plan (e.g., recent trend to shift non-traditional risk to contractors).

Photo: Jiya Aggarwal, Taken Dec. 7, 2013 – Creative Commons

UPDATE: CSLB Message From the Board Chair: “… I am troubled by the increasing number of complaints CSLB is receiving about predatory C-20 Warm-Air Heating, Ventilating and Air-Conditioning (HVAC) contractors who are targeting vulnerable consumers after being called out for simple repairs or routine maintenance….” (Summer 2014)

In its 2013 California Licensed Contractor newsletter, the California Contractors State License Board (CSLB) announced that it and the Santa Clara County District Attorney’s office “will conduct a 2014 pilot program to identify HVAC contractors who are out of compliance with permitting and worker’s compliance insurance regulations.” It reported that the California Energy Commision will assist with the pilot program “by providing CalCERTS inspectors who will report non-compliance issues.” Contractors will be held accountable for code compliance on their own dime. This effort is in response to the CSLB finding that “the majority” of HVAC installations being performed are without the required permit; “an estimated 400,000 units were sold in California in 2012 and only 10 percent of those received building department permits.”

The CSLB further commented that it “will not accept illegal or unethical business practices” by HVAC contractors, referring to service and repair companies’ advertising low prices but up-selling or making unnecessary repairs. Its enforcement record includes convicting scammers on 71 felony counts, freezing scammers’ assets, and pursuing restitution for victims.

Additional Resource: Contractors State License Board

UPDATE: CSLB industry Bulletin No. 14-02, Compliance Dates Delayed For Some Energy-Related Regulations in CA Building Standards Codes (Feb. 10, 2014) — New Effective Date Jul. 1, 2014
UPDATE: California Energy Commission, Blueprint (Jan. 23, 2014) – The California Energy Commission has established an “early adopter” program for compliance with the new energy efficiency standards.

On December 11, the California Energy Commission revised the effective date for the 2013 California Building Energy Efficiency Standards for residential and non-residential buildings from January 1, 2014 to July 1, 2013. The Standards are updated on an approximately three-year cycle. The Standards are located at Title 24, Part 1, Chapter 10 and Part 6 of the California Code of Regulations.

Additional Resource: California Energy Commission