DLSE will enforce third party beneficiary prevailing-wage claims

STATE OF CALIFORNIA GRAY DAVIS, Governor

DEPARTMENT OF INDUSTRIAL RELATIONS
DIVISION OF LABOR STANDARDS ENFORCEMENT
LEGAL SECTION
455 Golden Gate Avenue, 9th Floor
San Francisco, CA 94102
(415) 703-4863

MILES E. LOCKER, Chief Counsel

May 17, 1999

Rich Clark
R.W. Clark Investigators
862 Sir Francis Drake Blvd., Suite 246
San Anselmo, CA 94960-1914

Re: Third Party Beneficiary Claims

Dear Mr. Clark:

This is in response to your April 5, 1999 letter to Labor Commissioner Marcy Saunders, wherein
you ask us to reevaluate the issue of whether the Division of Labor Standards Enforcement
("DLSE") will accept unpaid wage claims of employees who are third party beneficiaries to
contracts which require the payment of prevailing wages. Such contracts include both public
works contracts and private construction contracts under which the contractor and subcontractors
are contractually obligated to pay prevailing wages to workers employed in the performance of the
project.

Prior DLSE policy in this area was set out in a letter, dated January 5, 1998, from former chief
counsel H. Thomas Cadell, Jr., to John J. Davis, Jr. The question posed by that letter was: "must
the Division of Labor Standards Enforcement enforce an action for breach of contract based on a
third party beneficiary theory?" While acknowledging that DLSE has the legal authority and thus,
may process such wage claims,¹ that letter concluded that DLSE has the discretion to decline to process
third party beneficiary claims, and that as a general matter, DLSE would not enforce such claims.
That conclusion rested upon certain enforcement policy considerations that we now reassess. For
the reasons set forth below, we again conclude that there are no legal grounds which would
preclude DLSE from accepting and enforcing third party beneficiary prevailing wage claims. We now
modify our enforcement policy, however, so that henceforth, absent unusual and compelling
reasons, DLSE will exercise jurisdiction over such claims.

Third party beneficiary contract claims are, of course, somewhat different than the typical
contract claims that are enforced by DLSE. In a typical contract claim, the employee alleges that
his or her employer failed to pay certain wages that are owed pursuant to the oral or written
agreement between the employee and employer. In contrast, a typical third party beneficiary
contract claim against a general contractor is not founded upon the agreement between the
employer and employee, but rather, on the agreement between the public or private entity that
awarded the job to the general contractor, under which employees working on the job (whether
employed by the general contractor or a subcontractor) must be paid a fixed or specified and
readily ascertainable wage (such as, for example, the prevailing wage as determined by DLSR for
the applicable craft and locality). Alternatively, a third party beneficiary claim against a
subcontractor would be founded upon an agreement between the general contractor and the
subcontractor, under which the subcontractor agreed to pay its employees a fixed or specified
wage.

In Tippett v. Terich (1995) 37 Cal.App.4th 1517, the court held that a third party beneficiary
claim is a proper means of enforcing an employee's contractual obligation to pay prevailing
wages. The court reasoned:

An employee asserting a third party beneficiary claim for payment of the prevailing wage may
never have been promised payment of the prevailing wage by his or her employer, and thus, is
unable to bring an direct contract action against his or her employer. But if the contract
between the awarding body and the general contractor specifies payment of the prevailing wage for
employees performing the contract, these wages can be pursued by means of a third party
beneficiary contract claim against the general contractor (whether the employee works for the
general or a sub). Likewise, if the employee works for a subcontractor, and that subcontractor
entered into an oral or written agreement with the general contractor to pay its employees the
prevailing wage, those wages can be pursued by means of a third party beneficiary action against
the subcontractor. Ibid., 31 Cal.App.4th at 1533.

A third party beneficiary contract claim cannot be maintained in the absence of an oral or
written agreement (either between the awarding body and the general contractor, or between the
general contractor and the subcontractor) to pay a fixed or specified wage.² The statute of
limitations on a third party beneficiary contract claim is determined by whether the agreement
which the claimant seeks to enforce is oral or written. For a written agreement, there is a four
year statute of limitations, while for an oral agreement, the limitations period is two years.
(Code of Civil Procedure §§ 337, 339) The right to file a claim accrues when the contractual
obligation is breached, and thus, a claim is timely if filed within two or four years, respectively
under an oral or written contract, from the date the unpaid wages initially became due.³

Having set out the legal basis for third party beneficiary claims, we now address the various
enforcement policy considerations that were discussed in Mr. Cadell's letter of January 5, 1998.
According to that letter, "there is no statutory duty . . . which would require DLSE to accept
third party beneficiary claims." In fact, Labor Code §96 provides that the Labor Commissioner
"shall, upon the filing of a claim therefor by an employee . . . take assignments" of various
types of claims, including "wage claims." The statute does not distinguish between wage claims
founded upon a contract between an employee and his or her employer and those founded upon a
third party beneficiary theory. Both are wage claims, and both squarely fall within the
parameters of section 96.

Another point made in the earlier letter is that DLSE is under no duty to investigate or take
action on every complaint filed with the Division. See Painting & Drywall Work Preservation Fund
v. Aubry (1988) 206 Cal.App.3d 682. This is unquestionably true; as a labor law enforcement
agency, DLSE must have the discretion to define its priorities and direct its investigatory and
legal resources in the manner it believes most appropriate. This discretion is expressly provided
by Labor Code §98:

The Labor Commissioner shall have the authority to investigate employee complaints. The Labor
Commissioner may provide for a hearing in any action to recover wages, penalties, and other
demands for compensation properly before the Labor Commissioner . . . . Within 30 days of filing
the complaint, the Labor Commissioner shall notify the parties as to whether a hearing will be
held, or whether action will be taken in accordance with Section 98.3 or whether no further action
will be taken on the complaint.

Thus, under Labor Code §98, DLSE may either 1) proceed with the wage claim through the
administrative hearing process, with an adjudicatory hearing in which evidence is presented
followed by the issuance of an order, decision or award as provided by Labor Code §98.1, or 2)
forward the wage claim to DLSE's legal section for the filing of a civil action pursuant to Labor
Code §98.3(b), under which "the Labor Commissioner may prosecute any action for the collection of
wages and other moneys payable to employees . . . arising out of an employment relationship," or
3) decline to take any action on the claim, thereby forcing the claimant to either abandon his or
her claim or bear the costs of filing a court action to recover the unpaid wages.

DLSE's former non-enforcement policy with respect to third party beneficiary claims was thus
founded upon this discretion to decline to adjudicate or enforce claims. But the underlying
rationale for this policy is illogical and unsupportable. According to the January 5, 1998 letter,
the use of third party beneficiary claims in enforcing prevailing wages "appears to be
inconsistent with the [Division's] enforcement mandate." This purported inconsistency was
identified as the conflict between the 90 day limitations period found at Labor Code §1775 (now
180 days under an amended statute) under which DLSE may file a lawsuit on a statutory claim
against a contractor to recover unpaid prevailing wages and the significantly longer limitations
period for filing a breach of contract action. Of course, there is nothing whatsoever inconsistent
about these separate causes of action, and the different limitations periods for each. In the
words of the California Supreme Court, "... the legislative history of the statutory scheme
strongly favors the conclusion that the Legislature intended the contractor's obligation to pay
prevailing wages to be both statutory and contractual." Lusardi Construction Co. v. Aubry, supra,
1 Cal.4th at 988, n 3.

Another reason for the non-enforcement policy articulated in the January 5, 1998 letter was that
"the determination of the rights of parties in third party beneficiary situations requires
application of unique rules of contract law and discovery which are not usually utilized by the
Division." In fact, the issues posed by a third party beneficiary claim are no more complex than
the issues posed by any breach of contract wage claim. The focus of inquiry simply shifts from the
contractual agreement between the employee and his or her employer to the contractual agreement
between the awarding body and the general contractor, or between the general contractor and the
subcontractor. Evidence needed to support a third party beneficiary claim would include copies of
the contract or contracts which establish the obligation to pay a fixed or specified wage to the
employees (or, if no written contract is involved, testimony concerning the oral agreement), and
if the promised wage rates are not fixed as a set dollar amount in the contract(s), copies of
other documents (such as relevant prevailing wage determinations issued by DLSR) or testimony
concerning the methodology used in determining the dollar amount of the specified wage rate.⁴

Finally, according to the January 5, 1998 letter, enforcement of third party beneficiary claims
"would severely strain the limited resources available to the Division," and would thereby
"impact on our mandated enforcement of minimum labor standards." There are three points that we
now raise in response to this contention. First, with respect to employees employed on public
works projects, we disavow any distinction between the enforcement of prevailing wage claims
(including those brought under a third party beneficiary theory) and the enforcement of minimum
labor standards.⁵ Second,
with respect to employees employed on private construction projects, minimum standards are
implicated by minimum wage claims and overtime claims. Moreover, under Labor Code §1195.5, any
claims for wages which exceed the minimum wage shall be investigated and enforced by the
Division. Thus, the Division's duties extend to wage claims which exceed minimum labor standards.
And third, however limited DLSE's resources may be, an across the board non-enforcement policy
engenders employer non-compliance with the very minimum labor standards and other labor laws that
we are mandated to enforce. Compliance, and the resulting reduction in unpaid wage claims, is best
fostered by a policy that promotes enforcement. In short, our responsibilities as a labor law
enforcement agency do not permit us to maintain a policy that denies enforcement of an entire
category of unpaid wage claims.

Thus, absent unusual and compelling circumstances which may be unique to a specific case, DLSE
will henceforth process all third party beneficiary claims alleging a breach of contract to pay
prevailing wages (or some other fixed or specified wage) on public and private construction
projects. DLSE will exercise discretion on a case by case basis in determining whether any such
claim should proceed through the administrative hearing process set out at Labor Code §98, or
through the mechanism for filing a civil action set out at Labor Code §98.3. Employee claims
concerning non-payment of the prevailing wage on public works projects should not be processed
through the administrative hearing process if DLSE has already issued a notice to withhold or has
filed a timely lawsuit in connection with that project, so that all claims may be resolved in a
consistent manner in one proceeding through DLSE's enforcement action.

Thank you for your ongoing interest in California wage and hour law and DLSE enforcement
policies. Feel free to contact us if you have any other questions.

Sincerely,

Miles E. Locker
Chief Counsel

Marcy V. Saunders
State Labor Commissioner

cc: Jose Millan, Chief Deputy Labor Commissioner
Tom Grogan, Assistant Labor Commissioner
Greg Rupp, Assistant Labor Commissioner
Nance Steffen, Assistant Labor Commissioner
John Chiolero, Senior Deputy Labor Commissioner
Roger Miller, Senior Deputy Labor Commissioner
All DLSE Professional Staff