SB 61’s Modifications to Retention Rules

Under existing California law, parties contracting for private works of improvement are allowed to negotiate the percentage retention to be withheld. SB 61 offers greater financial protection to contractors and subcontractors by applying a five percent (5%) retention cap applicable to most private construction contracts. In particular, for contracts executed on or after January 1, 2026, owners, developers, direct contractors and subcontractors may withhold no more than five (5%) retention from progress payments, and the total amount of retention withheld may not exceed five (5%) of the total contract value. SB 61 also limits retention withheld from subcontractors by contractors and subcontractors to the same amount withheld from the contractor by the owner.

There are several notable exceptions built into SB 61.

• The law is prospective and does not apply to contracts executed before January 1, 2026.
• SB 61 does not apply to residential projects unless the project qualifies as “mixed-use” or is five stories or more. The law does not define “residential” or “mixed-use,” but given SB 61’s integration into mechanics lien law—which aims to protect contractors and subcontractors—it is likely that courts will interpret these terms broadly to fulfill the statute’s protective intent. Other statutes have defined “mixed-use” variously, such as projects where up to 50% of the square footage is for nonresidential use (Cal. Gov’t Code § 66200(f)) or where at least 75% is for residential use (Cal. Gov’t Code § 21159.28). In practice, courts may favor a broad definition of “mixed use”, i.e. a project combining residential and commercial/non-residential components. Because there is currently no statutory definition or dispositive case law, owners, general contractors, and subcontractors should exercise caution and treat any project that includes both residential and commercial/non-residential uses as mixed-use, and therefore subject to the five percent (5%) retention cap under SB 61.
• SB 61 does not apply where a direct contractor or subcontractor requires a subcontractor to provide payment and performance bonds and the subcontractor fails to provide a bond issued by an admitted insurer, provided notice of the bond requirement was given in writing to the subcontractor before or at the time of bidding.

Importantly, SB 61 reinforces existing prompt payment laws and mandates that courts award reasonable attorney’s fees to the prevailing party in enforcement actions. While SB 61 does not alter statutory payment deadlines, it works hand-in-hand with prompt payment statutes to encourage faster, more reliable disbursement of funds throughout private construction projects.

Compliance Implications

The implementation of SB 61 marks a significant shift in risk allocation and cash management for owners, developers, contractors, and subcontractors in California. Beginning January 1, 2026, parties entering new private works contracts should review and update their standard contract templates to incorporate the five percent (5%) cap and ensure compliance with SB 61’s requirements. Owners and contractors must develop strategies for compliance by aligning retention language and procedures across payment tiers and by ensuring that retention imposed down the subcontractor chain does not exceed contractual limits. Careful documentation is necessary for projects requiring performance and payment bonds, particularly if relying on the statute’s exceptions. As California joins over 20 other states with similar retention laws, owners and contractors should be aware of these changes and carefully assess how the new requirements may affect contract administration, payment practices, and project financial management within the construction industry.

Understanding how to navigate these challenges is key to protecting your projects from disputes with general contractors, subcontractors and suppliers.

In our recent webinar, “Construction Contracts: Bond and Mechanic’s Lien Primer for Energy Projects,” I was joined by my Sheppard Mullin colleagues Chris Kolosov and Emily Anderson to discuss navigating common contract pitfalls and negotiation strategies to protect your interests.

Here are our key takeaways.

1. Know Local Mechanic’s Lien Laws: Mechanic’s liens are statutory and vary significantly from state to state. It is critical to understand the local laws and regulations at play in your project’s jurisdiction.
2. Leverage Bonds for Security: Bonds provide a critical layer of security, ensuring that contractors meet their performance and payment obligations. Utilizing them effectively can provide significant protection for your projects.
3. Consider Modifying AIA Bond Forms or Using Different Bond Forms: The standard American Institute of America (AIA) Payment and Performance Bond forms have some problematic terms that are favorable to sureties and detrimental to obligees. Different forms of bonds should be considered or the AIA bond forms should be modified to provide more protection.
4. Seek Expert Guidance: The complexities of construction contracts in the energy sector often necessitate expert legal advice to navigate successfully.

To learn more, watch the recording of our webinar here and join us for part two of our webinar series, “Dispute Resolution Considerations in Construction Contracts”, on September 18^th. To join us, RSVP here.

The underlying cases are consolidated under the lead case, Jeanyne James, et al. v. PacifiCorp, et al., in the Circuit Court of the State of Oregon for the County of Multnomah, Case No. 20-CV-33885. The lawsuits allege that the National Weather Service issued weather warnings in Oregon for September 7, 2020, indicating hot, dry winds from the east would top 75 miles per hour, resulting in extreme fire conditions. The lawsuits further allege that despite this fire risk, PacifiCorp failed to shut off power to customers during a windstorm, and its energized powerlines subsequently fell, igniting surrounding vegetation in communities across Oregon. The plaintiffs claim that the downed power lines resulted in fires that killed nine people, burned more than 1,875 square miles, and damaged approximately 5,000 homes and other structures. Plaintiffs advanced causes of action for negligence, trespass, nuisance, and inverse condemnation, and sought $125,000,000 in damages. The 17 named plaintiffs included 15 individuals, a family trust, and Northwest River Guides, a rafting company outfitter.

PacifiCorp defended the claims, in part, by disputing causation, pointing to the weather, including lightning and a historic wind event, as the fires’ cause, rather than PacifiCorp’s power lines. PacifiCorp also argued that the plaintiffs could not establish “but for” causation, meaning that the fires would still have occurred despite PacifiCorp’s alleged conduct related to its power lines. PacifiCorp further contended that the plaintiffs could not establish that PacifiCorp’s actions caused the fires on a class-wide basis, resulting in damage to the properties of each and every class member. It is notable that no official cause of the fires has been determined.

The jury trial began on April 25, 2023 and lasted seven weeks. In the verdict, the jury awarded $67.5 million in noneconomic damages against PacifiCorp, including between $12,000 and $5 million for each of the 17 plaintiffs. In a 23-question verdict, the jury found that PacifiCorp’s negligence resulted in private and public nuisance and constituted trespass. The jury, however, found that PacifiCorp was not liable for inverse condemnation, or the intentional taking of property for public use.

On June 14, 2023, the jury also ordered PacifiCorp to pay $18 million in punitive damages to the 17 plaintiffs.[1] The jury determined the amount of punitive damages for any future trial proceedings should be one-quarter of whatever is eventually awarded for property damage and non-economic damages (e.g., pain and suffering).

Following the verdict, PacifiCorp issued a statement recognizing the losses that Oregonians suffered and citing lightning as the cause of the fires. PacifiCorp further stated that it intends to pursue appeals.

It is particularly notable that the jury did not find PacifiCorp liable for inverse condemnation, despite its other findings. In Oregon, the elements of an inverse condemnation claim are: “(1) a taking of private property (2) by an agency or subdivision of the state having the power of eminent domain, and (3) the property must be property that is subject to being taken for a public use.”[2] A claim of inverse condemnation requires “a showing that the governmental acts alleged to constitute a taking of private property were done with the intent to take the property for a public use.”[3] Thus, in the instant case, while the jury found PacifiCorp liable for reckless and willful conduct in its failure to de-energize its power lines, it did not find that PacifiCorp intentionally took private property for public use.

This intent standard for inverse condemnation claims in Oregon differs from those in other states. In California, for example, there is no intent element, and inverse condemnation claims are strict liability claims. To succeed on an inverse condemnation theory in California, a plaintiff must prove that: (1) a public improvement, as deliberately designed and constructed, (2) of a public entity, (3) proximately caused damage to a private property, and (4) that damage was in furtherance of a “public use.”[4] In both California and Oregon, a plaintiff who prevails on an inverse condemnation claim is entitled to recover reasonable costs and attorneys’ fees.[5]

The lack of any intent element in California for inverse condemnation claims has led to a rise in wildfire litigation against utilities and other entities alleged to have been involved in the cause of wildfires in California. However, as shown in the PacifiCorp case, even without the inclusion of strict liability claims, such wildfire cases can lead to large jury verdicts based in large part on noneconomic damages. If inverse condemnation applies, a mandatory award of reasonable attorneys’ fees and costs will accompany a damages award. Defendants faced with such lawsuits should take note of PacifiCorp and carefully assess the risk of such cases in light of available claims and defenses in their respective jurisdictions.

FOOTNOTES

[1] In Oregon, punitive damages cannot be awarded “unless it is proven by clear and convincing evidence that the party against whom punitive damages are sought has acted with malice or has shown a reckless and outrageous indifference to a highly unreasonable risk of harm and has acted with a conscious indifference to the health, safety and welfare of others.” ORS 31.730(1).

[2] City of Ashland v. Hoffarth, 84 Or. App. 265, 270, rev. den., 303 Or. 483 (1987).

[3] Vokoun v. City of Lake Oswego, 335 Or. 19, 27 (2002).

[4] Cal. Const., art. I, § 19; San Diego Gas Electric Co. v. Superior Court, 13 Cal. 4th 893, 939-40 (1996); Customer Co. v. City of Sacramento, 10 Cal. 4th 368, 376-77 (1995); City of Los Angeles v. Superior Court, 194 Cal. App. 4th 210, 221 (2011).

[5] Cal. Civ. Proc. Code § 1036; Or. Rev. Stat. Ann. § 20.085.

Texas Central has Statutory Authority to Take Land

The plaintiff in the matter, a farm owner with property south of Dallas along the proposed path of the bullet train, challenged the companies power to condemn land. The landowner’s declaratory judgment action challenged Texas Central’s eminent-domain authority. Under Texas law, condemnation power must be conferred by the legislature, either expressly or by necessary implication.[2]

Here, Texas Central was created for the purpose of constructing, acquiring, maintaining, or operating lines of electric railway between Texas municipalities. The Court found that Texas Central is engaged in activities to further that purpose. Therefore, the Court concluded, that although legislators did not contemplate high-speed railways at the time of drafting the Transportation Code, Texas Central nonetheless qualified as “interurban electric railway companies” under the statute.

The Texas Transportation Code grants eminent domain powers to corporations commissioned for the purpose of constructing, acquiring, maintaining, or operating lines of electric railway between municipalities in Texas for the transportation of freight, passengers, or both. The Court further held that Texas Central does not have to demonstrate a “reasonable probability that the railway will be successfully completed.”[3]

Impact on Texans and Industries

Approximately 24,300 people travel daily between Dallas and Houston by air or personal vehicle.[4] Thus, the demand for easy travel between the two major cities exists. The proposed railway system cuts the nearly four-hour drive to approximately 90 minutes. Now that Texas Central has eminent domain authority, investors will likely emerge to back the high-speed rail project.

Beyond the shorter commute, the project will impact many communities and industries. For example, Texas Central will need to commence the eminent domain process on effected lands along the railway path. The land taking process in Texas involves a hearing on the just and adequate compensation of the property. This affects landowners in the high-speed rail pathway. Further, Texas Central will need to construct the railway, which will involve a substantial construction project leading to bids, and later the project management and monitoring of the railway construction.

FOOTNOTES

[1] Miles v. Tex. Cent. R.R. & Infrastructure, Inc., 647 S.W.3d 613 (Tex. 2022)

[2] See Tex. Const. art. 1, § 17.

[3] Miles, 647 S.W.3d at 627.

[4] https://www.bizjournals.com/dallas/news/2020/04/15/texas-central-high-speed-rail.html#:~:text=Between%20personal%20vehicles%20and%20air,Dallas%20and%20Houston%20every%20day

Brief History Lesson

The Davis-Bacon Act was enacted in 1931 and requires the payment of locally prevailing wages and fringe benefits on federal construction contracts. The law applies to workers on contracts in excess of $2,000 entered into by federal agencies and the District of Columbia for the construction, alteration, or repair of public buildings or public works.[2]

From the 1930s to the early 1980s, the DOL used the following three-step process to define  prevailing wage:

1. Any wage rate paid to a majority of workers.
2. If there was no wage rate paid to a majority of workers, then the wage rate paid to the greatest number of workers, provided it was paid to at least 30 percent of workers (i.e., the “30 percent rule”).
3. If the 30 percent rule was not met, the weighted average rate.

In 1983, the DOL set the process of determining prevailing wage as:

1. Any wage rate paid to a majority of workers (i.e., more than 50 percent).
2. The weighted average rate.

This two-step process effectively removed the 30 percent rule from the equation. At the time, the DOL cited concerns that the 30 percent rule contributed to inflation.[3]

Returning to the Three-Step Process?

Now, the DOL has proposed returning to the three-step process in place prior to 1983.[4] The DOL proclaims this proposal “is necessary to ensure employers on federally funded or assisted construction projects pay fair wages to the workers who build our roads, bridges, federal buildings and energy infrastructure.”[5]

Additional proposed revisions include:

• Creating several efficiencies in the prevailing wage update system and ensuring prevailing wage rates keep up with actual wages, which over time would mean higher wages for workers.
• Periodically updating prevailing wage rates to address out-of-date wage determinations.
• Providing broader authority to adopt state or local wage determinations when certain criteria is met.
• Issuing supplemental rates for key job classifications when no survey data exists.
• Updating the regulatory language to better reflect modern construction practices.
• Strengthening worker protections and enforcement, including debarment and anti-retaliation.[6]

Still No Private Right of Action Under DOL’s Proposal

The DOL proposal includes language that the labor standards contract clauses and appropriate wage determinations are effective ‘‘by operation of law’’ in circumstances where they have been wrongly omitted from a covered contract. This proposed language would assure that, in all cases, “a mechanism exists to enforce Congress’s mandate that workers on covered contracts receive prevailing wages.”[7] However, the DOL stated that the proposal does not “risk creating an end-run around the administrative procedures” currently required. Instead, the operation-of-law provision “should not affect one way or another whether any implied private right of action exists under the statute.”[8]

60-Day Comment Period

The Wage and Hour Division of the DOL is currently soliciting comments, which may be submitted online. The comment period closes on May 17, 2022.

Prevailing Wage and Renewable Energy

The Build Back Better Act, which passed the House of Representatives in late 2021 and is currently stalled in the Senate, proposes expanded tax credits for green energy projects. Notably, it adopts a prevailing wage mandate like that of the Davis-Bacon Act. Renewable energy projects under the Build Back Better Act (if enacted into law) will likely involve work that is cutting edge and innovative. These types of projects are expected to make determining the proper, and perhaps new, classifications of work for prevailing wage rate even more complicated. Add in another layer of complexity with the DOL’s current proposals, and contractors would be not only at risk of exposure to wage underpayments, but also at risk of credit-eligibility challenges by the IRS.

Similar concerns are being raised in response to the recent introduction of the Clean Energy for America Act. This bill provides tax incentives for investments in clean electricity, clean transportation, energy efficiency, and the termination of certain provisions relating to oil, gas, and other fossil fuels.[9] To qualify for the tax credits for these projects, the bill requires contractors and subcontractors to pay prevailing wages at the local rate and utilize registered apprenticeship programs. Critics of the bill argue that prevailing wage regulations should not apply to clean energy tax credit projects. Removing prevailing wage requirements on these types of projects would allow qualified contractors and their skilled workforces to compete to build the clean energy economy and would provide taxpayers additional value for investments in clean energy and public works projects.

While both the Build Back Better and the Clean Energy for America Acts have yet to become law, both pieces of proposed legislation stand to create additional complexities in prevailing wage determinations and compliance.

Other Recent Proposed Reforms to Davis-Bacon

Representative Abby Finkenauer of Iowa introduced the Stop Swaps, Protect Local Jobs Act in June 2020.[10] The Stop Swaps, Protect Local Jobs Act would prevent local workers from having their wages undercut by fund swapping, a practice in which city and county governments move federal dollars out of a roadway project in exchange for state funds. By swapping these dollars, projects using only local and state funding do not have to comply with the Davis-Bacon Act requirement that workers are paid no less than the local prevailing wage. The bill died in committee. However, Representative Cindy Axne, also of Iowa, re-introduced the bill in May 2021.[11] It is currently under review by the House Committee on Transportation and Infrastructure.

The Davis-Bacon Repeal Act was introduced to the House in March 2021 by Senator Mike Lee of Utah.[12] The bill lives up to its name and  seeks to (1) repeal the Davis-Bacon Act and (2) void “references in any law to a requirement under the Davis-Bacon Act.” The bill has been referred to the Committee on Health, Education, Labor, and Pensions.

Takeaways

Between the proposed changes to the definition of the prevailing wage under Davis-Bacon, the large amount of conditional cash-flow stemming from federal infrastructure and proposed renewable energy legislation^[13], and the DOL’s recent announcement that it will be hiring at least 100 new wage and hour investigators^[14], chances are employers will see an increase in costs on federally funded projects as well as increased DOL enforcement efforts.

We will continue to monitor developments in this area and provide updates.

[1] https://www.dol.gov/newsroom/releases/whd/whd20220311

[2] https://www.dol.gov/agencies/whd/laws-and-regulations/laws/dbra

[3] https://www.govinfo.gov/content/pkg/FR-2022-03-18/pdf/2022-05346.pdf

[4] It is worth noting that California’s prevailing wage requirements already implements a three-step process similar to the process the DOL is now proposing.

[5] https://www.dol.gov/newsroom/releases/whd/whd20220311

[6] https://www.dol.gov/newsroom/releases/whd/whd20220311

[7] https://www.govinfo.gov/content/pkg/FR-2022-03-18/pdf/2022-05346.pdf

[8] https://www.govinfo.gov/content/pkg/FR-2022-03-18/pdf/2022-05346.pdf

[9] https://www.congress.gov/bill/117th-congress/senate-bill/1298?q=%7B%22search%22%3A%5B%22Clean+Energy+for+America+Act%22%5D%7D&s=1&r=1#:~:text=This%20bill%20provides%20tax%20incentives,requirements%20for%20the%20energy%20sector.

[10] https://www.congress.gov/bill/116th-congress/house-bill/7097?r=6&s=1

[11] https://www.congress.gov/bill/117th-congress/house-bill/3559

[12] https://www.congress.gov/bill/117th-congress/senate-bill/805/text

[13] https://www.congress.gov/bill/117th-congress/house-bill/3684/text

[14] https://www.dol.gov/newsroom/releases/whd/whd20220201-2

Scabby’s Prior History at the Board

At issue in this case is Section 8(b)(4)(ii)(B) of the Act, which makes it “‘an unfair labor practice for a labor organization … to threaten, coerce, or restrain’ a person not party to a labor dispute ‘where … an object thereof is … forcing or requiring [him] to … cease doing business with any other person.’”  For decades, unions have displayed “Scabby the Rat,” an oversized inflatable rat with red eyes, in close proximity to businesses to protest alleged unfair labor practices by employers and to persuade workers not to work for or patronize an employer whose labor practices are being challenged.  Employers have long detested Scabby’s presence near their property.  During the Obama administration, the NLRB issued a pair of decisions relating to secondary picketing, finding that:

• Stationary bannering in front of a neutral employer was not unlawful picketing because it did not block the entrance to a neutral business nor did it involve the carrying of picket signs or persistent patrolling.
• Large, inflatable rat balloons can be permissible when they are set up a sufficient distance from the business’s front door, finding them neither picketing nor coercive.

Under the Trump administration, the NLRB’s General Counsel’s Office publicly crusaded against Scabby, highlighting the inherently coercive nature of his presence near a business.  In 2019, the General Counsel’s Division of Advice published an advice memo arguing that a union’s use of Scabby the Rat (and his occasional friend “Fat Cat”) was unlawful secondary picketing.  In connection with a prior proceeding, the Division also recommended that the NLRB issue a complaint against a union, pressing the NLRB to overturn its Obama-era precedents.  However, that case was settled before a decision was reached so the NLRB did not have a chance to act.

Majority of NLRB Refuses to Change Obama-Era Precedent

This most recent case, International Union of Operating Engineers, Local Union No. 150, National Labor Relations Board, No. 25-CC-228342, arose out of a union’s display of a 12-foot-tall inflatable Scabby the Rat as well as two 8-by-3.75-foot banners near the entrance to a trade show hosted by a neutral business who used components manufactured by the business with whom the union had a labor dispute.

A bipartisan majority agreed that the case should be dismissed.  Chair Lauren McFerran, the lone Democrat on the Board, wrote that this outcome was mandated by the board’s Obama-era precedents.  Two Republican members John Ring and Marvin Kaplan agreed the case should be dismissed on constitutional grounds, but opined that the Board’s precedents improperly narrowed the NLRA’s protections of neutral businesses against coercion.  Republican William Emanuel was the sole dissent.  Emanuel wrote that the Board’s precedent was incorrect, finding that the presence of Scabby “plainly created a symbolic confrontation” and should not be permitted under the Act secondary picketing provisions.  Importantly, Emanuel’s term expires in August.

Key Takeaways

As we wrote previously, employers should expect continued volatility from the NLRB.  The Board’s prosecutorial priorities and guidance have significantly changed under the Biden administration.  Employers can likely expect that change to progress further once two new Democratic Board Members are confirmed, thereby shifting the balance of power on the Board.  Unfortunately for employers, that means Scabby will likely continue to patrol non-union businesses.

We will continue to monitor developments in this area and provide updates when relevant.

*Myles Moran is a law clerk in the firm’s New York office.

Known as the “gerrymandered zoning lot,” the developer of 200 Amsterdam included portions of neighboring tax lots in its zoning lot in order to transfer air rights from those portions of tax lots to be utilized in 200 Amsterdam’s 55-story development.  The inclusion of partial tax lots in a zoning lot is not expressly discussed in the NYC Zoning Resolution, but was permitted by a 1978 Department of Buildings memo. While challenges to 200 Amsterdam started in 2017, the developer moved forward with the construction of its development under lawfully issued building permits.

After losing at the lower court almost a year ago, the developer argued in its appeal that the case was moot because the building was substantially complete. The Appellate Court unanimously overturned the lower court’s decision, in part, saying that because the challengers did not seek injunctive relief at every opportunity, they essentially allowed the developer to continue to construct their building. In fact, the developer spent an additional $50 million during the time of the challenge to substantially complete the building.  The Court found that the developer’s “work [] could not be readily undone without undue hardship” – citing from Matter of Weeks Woodland Assn., Inc. v. Dormitory Auth. Of the State of N.Y., 95 AD3d at 747, where the Court held that the challengers’ case was moot when the developer had substantially completed its building with a legally issued building permit, despite an incorrect interpretation of the Zoning Resolution.

Unlike Weeks Woodlands, the Court in 200 Amsterdam found that the developer and the City correctly applied the zoning regulations and that the developer was permitted to include portions of a tax lot in its zoning lot. Yet, as the Court underscored, there is no chance of this situation repeating for developers in the future since the Department of Buildings issued an updated memo prohibiting the practice of allowing portions of tax lots to be included in neighboring zoning lots.

An appeal to the highest court in New York, the Court of Appeals, is not as-of-right where the Appellate Division issued a unanimous decision.  The challengers must seek leave to appeal, which is unlikely to be granted.

FOOTNOTES

[1]  Matter of Committee for Sound Development et al. v. Amsterdam Avenue Development Associates et al., (Index No. 157273/19 Appeal No. 12658 Case No. 2020/01872).

But arguably the worst ramification of not being property licensed is that established in Business & Professions Code Section 7031(b), which provides that any person who uses the services of an unlicensed contractor may bring an action for the return of all compensation paid for the performance of the work, commonly known as “disgorgement.”  This remedy is particularly harsh (often described as “draconian”) because it makes no allowance for the fact that an unlicensed contractor will likely have already paid out the bulk of its compensation to its subcontractors, suppliers and vendors, but nevertheless can be ordered to disgorge all compensation.

Given the complexity of California’s contractor license law, the disgorgement penalty threatens not just contractors who willfully evade licensing, but also those who inadvertently fail to keep their license current, those who are improperly licensed for the specific work they are performing, and those who do not meet particular underlying licensing requirements, e.g., failure to maintain workers compensation insurance unless truly exempt, and (arguably) failure of the qualifying agent to have sufficient supervision and control of his or her employer’s or principal’s construction operations.  Project owners, in particular, have used disgorgement actions as both a sword and a shield in disputes with their general contractors.

In a new opinion addressing issues of “first impression” (i.e., never ruled on previously), Eisenberg Village of the Los Angeles Jewish Home for the Aging v. Suffolk Construction Company, Inc. (2d App. Dist, B297247), filed August 26, 2020, the Court makes two significant holdings.  The first is that the time in which a disgorgement action can be brought (known as the statute of limitations) is only one year.  The second is that this one-year statute of limitation starts to run (accrue) on the date contractor’s work ceases — not from the date when the license violation is discovered.  The basis for the first holding is that disgorgement is both a liability created by statute and a penalty, and therefore falls under Code of Civil Procedure Section 340(a), a one year statute of limitations.  The basis for the second holding is that the discovery rule of accrual is based in equity, whereas a disgorgement claim is not intended to compensate claimant for any injury, but to punish the unlicensed contractor, and therefore is not subject to equitable considerations.

This ruling is a huge win for contractors because it significantly limits the time during which they are exposed to possible disgorgement for non-licensure or for license violations that equate to non-licensure.  In contrast, it deprives unwary owners of the ability to assert a disgorgement claim unless they become aware of the licensing violation within one year of the project’s completion (though owners retain the ability to assert other causes of action for longer periods, e.g., two years for negligence, four years for breach of contract, etc.).

In light of Eisenberg, at the outset of a project, a prudent owner will ascertain who the license qualifier is for its general contractor and document his or her involvement in the project from beginning to end (since certain supervisorial requirements must be met by an employee qualifier in order for the license to be valid).  At the end of a project, a prudent owner will also review its contractor’s  license status from the date of the bid through final completion.  Not all owners will bring a disgorgement action against an unlicensed contractor who performed a project well.  But few will want to forfeit their right to bring such an action by waiting more than a year following final completion to ascertain whether they have the grounds to do so.

When it comes to determining whether work should be stopped on a particular project, there are three major considerations to address: (1) where is the project located, (2) what orders have been issued in that locality, and (3) what kind of project is it?

Whether and to what extent your construction project can continue will depend on where the project is located.  California’s list of “Essential Critical Infrastructure Workers”[1] exempts all construction work from the purview of California’s statewide “Stay at Home” Order.[2]  However, various California counties and cities have issued their own “Shelter in Place” or similar orders that only exempt certain types of construction – most commonly “essential infrastructure”, public works, healthcare and residential construction.

For example, San Francisco County’s Order[3] reads, in relevant part, as follows:

For purposes of this Order, individuals may leave their residence to provide any services or perform any work necessary to the operations and maintenance of “Essential Infrastructure,” including, but not limited to, public works construction, construction of housing (in particular affordable housing or housing for individuals experiencing homelessness), airport operations, water, sewer, gas, electrical, oil refining, roads and highways, public transportation, solid waste collection and removal, internet, and telecommunications systems (including the provision of essential global, national, and local infrastructure for computing services, business infrastructure, communications, and web-based services), provided that they carry out those services or that work in compliance with Social Distancing Requirements as defined this Section, to the extent possible.

A number of counties throughout the Bay Area have adopted identical or similar language in their orders.  As another example, the City of Los Angeles expressly allows “construction of commercial, office and institutional buildings.”[4]  Other localities, such as the County of Riverside, have not issued their own orders and instead are choosing to rely on the statewide order to impose restrictions.

In addition, several counties have also issued guidance, often in the form of Frequently Asked Questions, regarding what types of construction projects are allowed to continue.  For example, San Francisco’s explanation[5] of its Order advises that “[m]ost commercial construction projects are non-essential and must stop” and goes on to describe the types of “essential infrastructure projects” that can continue, including public works, residential construction, airports, utilities, oil refining, highways and roads, public transportation, waste removal and collection and internet and telecommunications systems.

Significant differences between California’s statewide order (allowing all construction) and local orders (allowing only certain types of construction projects) are raising questions about which order governs.

Several  counties and cities are taking the position that their more stringent local regulations must be followed notwithstanding California’s less restrictive Order.  While this is not a clear-cut or definitive conclusion, the least risky and most conservative approach is to proceed with your construction projects only if clearly exempted by California’s statewide Order and the local order(s) in the jurisdiction where your project is located. This is especially true given that the localities are the ones that issue permits, schedule inspections and sign-off on work.  We have also heard from various localities that they will continue enforcing their local bans on any construction that does not squarely fit within an exemption of the local order.

Even if your project is allowed to proceed under both the statewide and applicable local order(s), there are numerous practical and ethical issues to consider. At the forefront of these considerations is the wellbeing of your employees, project staff, and the general population at large, and the ability to maintain the safety of these individuals if construction of your project continues.  All recommendations issued by the Center for Disease Control, State of California and local jurisdictions in which your project are located should be followed.

The full impact of various construction restrictions on workplace safety is difficult to determine at this time. Sheppard Mullin will continue to monitor Covid-19 related measures and publish insight and provide guidance on issues that continue to arise with our clients. If you have any questions about a particular jurisdiction, project, or contract, our team is ready and able to assist in navigating this and other challenges.

Sheppard Mullin’s Coronavirus Task Force is continually updating our nationwide Coronavirus (Covid-19) Insights webpage.

As you are aware, things are changing quickly and there is no clear-cut authority or bright line rule.  The above is not an unequivocal statement of the law, but instead represents our best interpretation of where things currently stand.  This blog post does not address the potential impacts of the numerous other local, state and federal orders that have been issued in response to the Covid-19 pandemic.

*This alert is provided for information purposes only and does not constitute legal advice and is not intended to form an attorney client relationship.  Please contact your Sheppard Mullin attorney contact for additional information.*

FOOTNOTES

[1] https://covid19.ca.gov/img/EssentialCriticalInfrastructureWorkers.pdf
[2] https://www.gov.ca.gov/wp-content/uploads/2020/03/3.19.20-attested-EO-N-33-20-COVID-19-HEALTH-ORDER.pdf
[3] https://www.sfdph.org/dph/alerts/files/HealthOrderC19-07-%20Shelter-in-Place.pdf
[4] https://www.lamayor.org/sites/g/files/wph446/f/article/files/SAFER_AT_HOME_ORDER2020.03.19.pdf
https://www.lamayor.org/sites/g/files/wph446/f/article/files/SAFER_AT_HOME_ORDER2020.03.19.pdf
[5] https://sf.gov/stay-home-except-essential-needs