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May 24, 2011
Out-of-State Contractor Challenges Prevailing Wage Requirements for Apprentices

Under its apprenticeship program, a Pennsylvania-based electrical contracting company assigned apprentices to work on a job in Delaware that was being funded, in part, with Delaware state funds. The apprentices were paid reduced rates, as outlined in Delaware’s Prevailing Wage Law (PWL). However, the Delaware Department of Labor (DDOL) said the contracting company was not entitled to pay the apprentices at the lower rates, because the company was an out-of-state contractor.

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What Happened

For certain public works projects that are at least partially funded by the state of Delaware, the PWL stipulates that mechanics and laborers must be paid a prevailing wage set by the DDOL.

The implementing regulations for the PWL outline a detailed schedule of the “minimum wage progression” for registered apprentices, provide that apprentices must be paid a fraction of the wages paid to mechanics, and explain that the rate paid to a specific apprentice depends on the length of the project and the apprentice’s progression.

The regulations also state that the lower apprentice wage rate may only be paid to apprentices who work for contractors with a registered apprenticeship program in Delaware. In addition, the regulations specify that such contractors must maintain a permanent place of business in Delaware and that site trailers do not qualify as a permanent place of business.

As a result, out-of-state contractors must set up and maintain a permanent office location in Delaware to sponsor an apprenticeship program there—and, in turn, to pay reduced apprentice wages. Those who do not comply may be fined or barred from bidding on public construction projects in Delaware for 3 years.

Tri-M Group, LLC, a Pennsylvania-based electrical contracting company, successfully bid on a sub-contract for electrical and building automation work at the Delaware State Veterans Home in Milford, Delaware. The company started work on the project in August 2005.

Tri-M employed both Pennsylvania-registered apprentices and fully-trained mechanic professionals to work on the site. All were paid according to the wage rates described in the PWL.

After an on-site inspection of the project site on March 26, 2009, a DDOL labor law enforcement officer informed Tri-M that the agency had opened a case to verify the company’s compliance with the PWL.

The company was later informed that it was in violation of the PWL and its implementing regulations, because the company had been paying its Pennsylvania-registered apprentices the rate for Delaware-registered apprentices—instead of the higher mechanic’s prevailing wage rate.

After being required to conduct a self-audit, Tri-M timely reimbursed the six Pennsylvania-registered apprentices for the rate differences.

Then, Tri-M challenged the constitutionality of Delaware’s regulatory scheme for the training and compensation of apprentices on construction projects. Tri-M alleged that the DDOL discriminated against out-of-state contractors by refusing to recognize their out-of-state registered apprentices for the purposes of the PWL and its implementing regulations.

The district court ruled in favor of Tri-M, stating that Delaware’s refusal to recognize out-of-state registered apprentices facially discriminated against out-of-state contractors without advancing a legitimate state interest. The case proceeded to the U.S. Court of Appeals for the 3rd Circuit, which covers Pennsylvania, New Jersey, Delaware, and the Virgin Islands.

What the Court Said

The appeals court agreed with the district court’s reasoning and affirmed the decision, saying that the DDOL acted as a “market regulator” rather than a “market participant” because it promulgated “expansive labor regulations that control apprenticeship training and wage scales for all apprenticeship program sponsors, regardless of the State’s direct participation in the market.”

DDOL contended that its regulatory regime was not discriminatory, because it applied to all apprenticeship program sponsors—in-state and out-of-state. However, the appeals court noted that, unless an out-of-state contractor establishes an in-state presence, it cannot become a registered sponsor of Delaware-registered apprentices and must use the higher mechanic’s rate to compensate its apprentices.

“This statutory scheme forces out-of-state contractors such as Tri-M to ‘surrender whatever competitive advantages they may possess’ by burdening them with expenditures for a new local operation, or with the payment of increased wages on their contracts, thereby increasing their costs and decreasing their ability to submit competitive bids for projects,” the appeals court explained.

Although states are allowed to regulate apprenticeship standards, the court said the DDOL did not establish that federal law expressly authorizes states “to enact apprenticeship regulations that discriminate against out-of-state interests ….”

“… [C]ourts will find congressional authorization to discriminate against interstate commerce only where such behavior is clearly and affirmatively contemplated by Congress, and expressly authorized in the statutory language,” the appeals court explained.

Tri-M Group, LLC v. Sharp, et al. (No. 10-2365) (U.S. Court of Appeals, 3rd Cir., 3/21/11)

In Brief

Prevailing wages are the rate of pay and fringe benefits determined by federal authorities to be the norm for each classification of laborers and mechanics in particular geographic areas for particular types of projects. Federal law requires that employers with federal contracts pay the prevailing wage to their employees. Apprentices and trainees may be paid a rate lower than the prevailing rate if they are employed under a federally sanctioned apprenticeship or training program.

Employers also need to be aware of how state prevailing wage laws impact their pay practices.

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