Wisconsin Determines that Developers Retaining Private Contractors to Construct Public Infrastructure in Private Developments May Be Subject to the “Prevailing Wage Statute”

March 5, 2009

On February 19, 2009, the Wisconsin Department of Workforce Development, Equal Rights Division (“Division”) issued a series of decisions in response to a prevailing wage inquiry involving several municipalities located throughout the state. These decisions directly affect virtually every local municipality in the State of Wisconsin.

Section 66.0903(3), Wis. Stats., provides that any local governmental unit, before making a contract by direct negotiation or soliciting bids on a contract, for the erection, construction, remodeling, repairing or demolition of any “project of public works” shall apply to the Division for determining the prevailing wage rate for each trade or occupation required in the work contemplated. Once the Division makes the determination as to the prevailing wage rate, then the general rule is that all of the employees who are working on the particular project must be paid the prevailing wage rate so determined; and may not be permitted to work a greater number of hours per day or per week then the prevailing hours of labor unless they are paid for all hours worked in excess of the prevailing hours of labor at a rate of 1.5 percent their hourly basic rate of pay.

The inquiry that was directed to the Division involved the following general fact circumstances. A municipality enters into a “Development Agreement” with a land developer. Agreements of this sort are authorized under § 236.13(1), Wis. Stats., which relates to the division of land within a municipality; and allows a municipality to impose obligations upon the developer to construct various public improvements. The Development Agreement required the developer to construct sewer and water facilities, stormwater drainage facilities, curb, gutter, sidewalk, etc. All facilities had to be constructed in accordance with municipal requirements and were subject to inspection and approval by the municipality. Upon completion of construction, the improvements were required to be dedicated to the municipality. Obviously, the foregoing is the typical Development Agreement that is entered into whenever land is developed.

In response to the inquiry, the Division held that the municipality was required to obtain a prevailing wage rate determination, even though the municipality itself was not engaged in nor contracted directly with the contractor for the construction of the actual public improvement. The Division determined that under the statute, the Development Agreement could be considered a contract for the construction of public works; and as such, the project must comply with the prevailing wage requirements.

A number of the municipalities who received this determination have appealed. As of this date, no final decision has been rendered in connection with any such appeal. Moreover, we have been advised that as part of the governor’s budget bill, the threshold for prevailing wage projects has been reduced to $2,000.00. The effect of such reduction is to expand the coverage of the statute to small projects. We have also been advised that a number of trade organizations are urging the state legislature to adopt legislation which will effectively overturn the decision of the Division. These trade associations generally represent developers, who believe that the decision of the Division simply will add cost to their projects.

As of this moment in time, the question for each local Wisconsin municipality is: what should be done? At the present time, the decision of the Division is not final. It has been appealed; and there are or will be legislative efforts to introduce legislation to overturn the result. One potential response by a municipality is to enact an ordinance that will require compliance with this statute for all types of development projects, both public and private. In lieu of an ordinance, this requirement could be inserted as part of a standard term or provision of the municipality’s Development Agreement. In lieu of such a provision in the Development Agreement requiring compliance, an alternative provision would be to require the developer to indemnify the municipality in the event it is subsequently determined that the project is subject to the prevailing wage requirements.

The selection of a particular response is the decision of the municipality in question. In light of the appeal and potential for legislative action, perhaps an ordinance modification is not the appropriate response at this time. It may be appropriate depending upon what ultimately transpires. As a result, perhaps the issues raised by the Division’s decision can be best addressed in the actual Development Agreement by requiring compliance; or alternatively, an indemnification from the developer in the event it is subsequently determined that the statute is applicable.