What’s Next for Union Contractors After Prevailing Wage Repeal?

Wisconsin has repealed its prevailing wage requirements for municipal construction projects. Recently, Governor Scott Walker proposed the repeal of prevailing wage requirements for state-funded projects as well. As a result, contractors that have collective bargaining agreements (CBAs) with trade unions may find it difficult to compete on public works projects. This article identifies some strategies contractors should consider in light of the repeal of the prevailing wage requirements and identifies some issues contractors and unions may yet face. 

Prevailing wage: a refresher 

Last month, we reported on Wisconsin’s repeal of the prevailing wage requirements for municipal construction projects (see “Changes to prevailing wage laws in Wisconsin effective January 1, 2017” on pg. 4 of our February 2017 issue). In the past, local government units, such as villages, towns, cities, school districts, and sewerage districts, had to apply for a prevailing wage determination and pay construction workers a prevailing wage for work on the municipal project. Because the local government unit was required to pay the prevailing wage, contractors couldn’t effectively compete on hourly labor costs in their bids for public construction.

Prevailing wage determinations typically reflected the wage rates contained in CBAs in the area. Those prevailing wages would then be incorporated into the contractor’s bid for public works construction. Because the municipality was required to pay the prevailing wage, all contractors would incorporate the higher wage into their bids.

The 2015-17 Budget Bill repealed Wisconsin’s prevailing wage law for local government units. The stated reasons for the repeal included the desire to increase competition on public works projects, make sure the wages accurately reflect the market rates, and provide local government units with savings and wage flexibility on public works contracts.

Although the 2015-17 Budget Bill requires the prevailing wage to be paid on state agency and state highway projects, Governor Walker recently proposed that the prevailing wage requirement be eliminated for those projects as well. In theory, the repeals should allow public owners to get more competitive bids, primarily from nonunion contractors that can compete on labor costs. (Public owners are counties, cities, villages, towns, school districts, sewerage districts, state agencies, and federal funders.)

While the prevailing wage repeal could be a tremendous opportunity for nonunion contractors, it may make it very difficult for union contractors, which are bound by their CBAs with trade unions, to compete on public works projects. Union contractors may have to implement new strategies in their CBAs and change their operations in order to compete on public construction jobs. However, those new strategies open up a whole series of issues that require thought and attention. Let’s look at some potential strategies union contractors can implement to stay competitive and the corresponding issues they create

Renegotiating CBAs

The most obvious strategy is for contractors and trade unions to renegotiate their CBAs to allow them to compete on public works projects. Here are some of the potential changes contractors may consider.

Set a flexible wage scale depending on project type. CBAs often set a single wage scale applicable to all types of work. An inflexible wage scale doesn’t take into account different project types. Federally funded projects and (for now) state agency and state highway projects still have prevailing wage requirements. Municipal government and private construction projects do not. Contractors and unions can create a flexible wage scale that allows union contractors to compete across all types of projects.

Revise subcontractor limitations. Many CBAs prohibit union contractors from working with nonunion subcontractors. Contractors and unions can compromise by creating a “preferred” subcontractor provision. For example, a contractor can seek labor bids from both the trade union and a nonunion subcontractor. The contractor will then be required to use the trade union’s workers as long as its labor bid is within 10 percent (or some other agreed-on percentage) of the nonunion contractor’s bid. This requirement forces wage rates to stay competitive.

Allow wage flexibility within a “most favored nation” clause. Multicontractor bargaining units typically build a “most favored nation” clause into the CBA, which requires a trade union to give all signatory contractors the same “best” terms it gives individual contractors. In other words, if a trade union agrees to charge lower wage or benefits rates to one contractor in a region, the other contractors can demand that the trade union give them the same terms. Most favored nation clauses create an incentive for trade unions to maintain steady wage rates and terms and discourage wage flexibility. Contractors should allow some flexibility in this clause to allow for variable wages and terms so they can make more competitive bids.

Renegotiating CBAs is a significant endeavor that requires buy in from individual contractors, multicontractor bargaining units, local and national trade unions, and trade associations. It takes time and resources to renegotiate. All stakeholders have an incentive to reach a consensus on how to handle public works construction after Wisconsin’s prevailing wage repeal. Right now, however, there may be little incentive for stakeholders to engage in renegotiations because there’s enough private work to keep contractors and trade unions busy.

Operational changes

If contractors cannot renegotiate their CBAs with trade unions, they may be forced to make operational changes in order to stay competitive on public construction projects. Here are some operational changes to consider.

Reimagine delivery models to create new profit centers. Many contractors have nonunion fabrication shops that are capable of designing and building component parts that are typically built in the field by union labor. Contractors may beef up their nonunion shops to prefabricate more building components at lower wage rates. Also, by adopting existing technologies, such as barcoding and radio frequency identification tags, contractors can simplify the project assembly process in the field and rely on workers with lower wage rates.

Self-perform less work and subcontract more. Depending on the subcontractor limitations in their existing CBAs, contractors may decide to become “paper GCs,” or general contractors that subcontract all their work and perform no work themselves. That reduces the contractor’s labor costs and allows it to use its brand name and project management skills to successfully deliver a project.

Create new companies to focus on nonprevailing wage work. Many contractors have attempted “double-breasting,” or opening union and nonunion divisions, in the past. However, this process creates potential liabilities with the National Labor Relations Board (NLRB) and the courts unless the union and nonunion divisions truly act as separate companies with separate employees. Perhaps the safest way to pursue this approach is to create a new nonunion company. It’s a difficult strategy to implement successfully, but one that could have significant benefits if the contractor can successfully compete on nonprevailing wage work through its spun-off company.

In addition to the transaction costs, operational changes may create an underfunded pension liability issue. It’s no secret that many multiemployer pension plans are underfunded, some critically so. Operational changes that continue the decline in construction industry union membership or reduce the amount of payments to pension plans could make the problem worse. Union contractors have to consider the potential effects of underfunded pensions on their operations, their company valuation, and their potential exit strategies.

Bottom line

The main thing contractors and trade unions have to recognize is that infrastructure and public works funding has changed dramatically. Public owners have fewer funds at their disposal with which to address our crumbling infrastructure. Prevailing wage repeal was touted as a way to ease the financial burden on public owners, but it is by no means the total solution.

We expect public owners to continue to experiment to address the lack of funds, through the use of public-private partnerships, innovative project financing, intergovernmental agreements, regional transportation authorities, and changing delivery models like design-build. The construction industry is changing quickly—prevailing wage repeal is just one indication of that.

The construction industry is all about controlling risk, and the riskiest thing contractors and trade unions can do is maintain the status quo. They have to think ahead about the changes they can make so they can continue to compete on public works projects now and in the future.

This article, slightly modified to note recent updates, was featured in the April 2017 issue of the Wisconsin Employment Law Letter, which is co-edited by Axley Brynelson Attorneys Saul Glazer and Michael Modl and published by BLR®—Business & Legal Resources. Reproduced here with the permission of BLR®—Business & Legal Resources.