Lujan, CA Labor Commissioner v. G & G Fire Sprinklers, Inc. (04/17/2001)

By: Stephanie Hoops, Medill News Service

Questions presented

Whether California state law, which authorizes the states labor commissioner to withhold money and impose penalties for a subcontractor's failure to comply with prevailing wage requirements, without notice or hearing, violates the subcontractors constitutional right to due process.

Brief

G & G Fire Sprinklers, Inc., a fire protection company that installs fire sprinkler systems, was engaged in a number of subcontracting jobs in California when the state's Division of Labor Standards Enforcement (DLSE) withheld payment on the projects upon finding that G & G had violated California's prevailing wage law.

According to California law, the state is authorized to withhold an amount equal to the total amount that all the workers have been underpaid, as well as up to $50 per day, per worker in fines for each instance in which the contractor fails to pay the prevailing wage.

The DLSE also found that the company failed to provide the state with the certified payroll records required by law.

""They werent paying the proper rates,"" said Thomas Kerrigan, attorney for the California Department of Industrial Relations. ""It happens all the time. There are often cost overruns so theres an incentive for people to claim a workers in a lower classification. For instance, someone may be a `skilled laborer and the contractor will pay them as an `unskilled laborer. We have lots of litigation against G & G. If they can get away with it, the contractor can save lots of money because their costs are dramatically reduced.""

After the investigation, the DLSE issued notices to withhold payments to the prime contractors and they, in turn, withheld their payments to G & G. Though the notice to withhold is a standard procedure of the DLSE, no notice or hearing is required prior to its issuance.

The exclusive remedy after withholding is a suit by the prime contractor, or the subcontractor if assigned by the contractor, for recovery of the money withheld, with the burden on the contractor or subcontractor to show that there was no violation. If a suit is not filed within 90 days, the money is distributed to the underpaid workers; if suit is filed, the money is to be held in escrow until the suit is resolved.

G & G filed suit in federal court to enjoin the state from enforcing the law, arguing that California violated the Due Process Clause of the 14th Amendment when it issued notices to withhold payments without a prior hearing, depriving it of its property rights.

The district court agreed, declaring the California Labor Code and the state's practices unconstitutional and enjoining the state from enforcing the sections against G & G.

""G & G didnt even deny they didnt pay [its workers] correctly,"" Kerrigan said. They just said they werent given a hearing.

The DLSEs decision to withhold money and assess penalties is made in what G & G attorney Stephen Seideman says amounts to a ""secret proceeding.""

""No matter how frivolous the DLSEs decision is to assess penalties, they can do it without any prior notice or hearing,"" Seideman said. ""The contractor can file a lawsuit and if the contractor prevails, he can get the money back -- but that process could take years and it could force a person out of business.""

On Feb. 3, 1998, a divided 9th Circuit Court of Appeals panel affirmed, though it concluded that the district court's injunction was overbroad in that it ""created a remedy beyond what was required to address the constitutional violation -- the state's failure to provide subcontractors like G & G a pre- or post-deprivation hearing as required by the Due Process Clause."" The court the case with an order to ""enjoin the state from enforcing the withholding provisions against G & G unless within a reasonable period it chooses to adopt procedures that afford G & G and others either a pre- or post-deprivation hearing.""

In dissent, Judge Alex Kozinski criticized the majority for ""adding [a] heavy layer of red tape"" on a government that is too unwieldy already. He wrote that is ""very bad policy"" to confuse the state's commercial activity with a government's regulatory powers.

""If the contractor or subcontractor doesn't like the term [namely that contractors and subcontractors pay a prevailing wage to their employees], he can refuse to do business with the state,"" Kozinski wrote.

On April 10, 1999, the U.S. Supreme Court granted the states petition for a writ of certiorari, summarily vacating the 9th Circuits judgment and remanding the case back for further consideration in light of American Manufacturers Mutual Insurance Co. v. Sullivan, 119 S. Ct. 977 (1999).

On Feb. 23, 2000 the same 9th Circuit Court of Appeals panel of Judges Stephen Reinhardt, Michael Daly Hawkins and Alex Kozinski reinstated its judgment and order, ""[h]aving determined that Sullivan is fully consistent with our analysis.""

The brief majority opinion interpreted the Supreme Court in Sullivan to hold that although the plaintiffs there ""did not possess a property interest in the immediate, unconditional payment for all medical treatment under the Pennsylvania statute [at issue there],"" the Court ""went out of its way to make clear that its holding did not upset previous Supreme Court precedent"" supporting the conclusion that the plaintiffs had a property interest in their claims for payment of reasonable medical costs.

""G & G's due process rights were violated, we held, not because it was denied immediate payment,"" the 2-1 majority stated emphatically, ""but because the California statutory scheme afforded no hearing at all when state officials directed that payments be withheld.""

Judge Kozinski dissented again. This time he criticized the majority for waving ""a magic wand"" by asserting that '[t]he withholding here was specifically directed by state officials in an environment where the withholding party has no discretion at all.'

""This would be true had the prime contractor been ordered, under penalty of law, to withhold funds from G & G,"" Kozinski wrote. ""It was not.""

On Oct. 10, 2000, the U.S. Supreme Court granted certiorari, and allowed the Port of Oakland, et al. to file an amicus brief in the case.

On April 17, 2001, a unanimous Court reversed, holding that the California statutory scheme does not violate due process because subcontractors may recover fees by filing a breach of contract suit against the state.

Recognizing that although ""lawsuits are not known for expeditiously resolving claims,"" they still do not rising due a deprivation of due process, wrote Chief Justice William Rehnquist.