Beware Of The New Davis-Bacon Act Regulations
October 31, 2023
It is perhaps fitting that on this Halloween edition of the Surety Today Blog we discuss a truly “frightening” new set of regulations for the Davis-Bacon Act (“DBA”) that became effective on October 23, 2023. The sweeping changes touch on many aspects of the DBA, including how prevailing wages are determined, scope and reporting requirements and enforcement. In this post, I will limit my discussion to some of the changes to the regulations that may impact sureties. There are too many changes to cover in just one post.
The new final regulations were published on August 23, 2023 (88 Fed. Reg. 57526-57747). The Department of Labor (DOL) stated that the new regulations seek to update and modernize the DBA as set forth at 29 CFR parts 1, 3, and 5. The last comprehensive revision of the regulations governing the DBA was in 1981. The DBA was originally enacted in 1931 and requires the payment of locally prevailing wages and fringe benefits on virtually all federal contracts for construction. See 40 U.S.C. 3142. The Act’s stated purpose is to protect local wage standards by preventing contractors from basing their bids on wages lower than those prevailing in the area. Univs. Research Ass’n, Inc. v. Coutu, 450 U.S. 754, 773 (1981). The DBA, and some 70 related acts, collectively apply to an estimated $217 billion in federal and federally assisted construction spending per year and provide minimum wage rates for an estimated 1.2 million U.S. construction workers.
The first area of concern, and source of many potential problems for sureties, can be found in the new definition of “contractor.” 29 CFR 5.2. The new regulations define “contractor” extremely broadly as “any individual or other legal entity that enters into or is awarded a contract . . . including any prime contract or subcontract of any tier under a covered prime contract.” Id. (emphasis added). In addition, the term contractor now “includes any surety that is completing performance for a defaulted contractor pursuant to a performance bond.” Id. (emphasis added). You read that right, the surety is now a contractor under the DBA! By including a performing surety in the definition of contractor, the takeover surety may now be bound to adhere to all of the regulations that refer to the “contractor” in the DBA and its regulations. This new definition may now require a performing surety to comply with all of the record keeping, reporting, compliance, withholding and enforcement provisions of the DBA. It may also expose the surety (now contractor) to the debarment, liquidated damages and False Claims Act provisions of the DBA. This is a real potential disaster and may rightly cause sureties to avoid the takeover option on DBA applicable contracts. If a surety does takeover and become a contractor under the DBA, it will need to ensure that it satisfies all compliance obligations under these new regulations.
Another new definition in the regulations that also presents a potential problem for sureties is the expanded definition of “prime contractor.” 29 CFR 5.2. Under the new regulations, prime contractor now includes “any person or entity that enters into a contract with an agency” . . . and “the controlling shareholders or members of any entity holding a prime contract, the joint venturers or partners in any joint venture or partnership holding a prime contract, and any contractor (e.g., a general contractor) that has been delegated the responsibility for overseeing all or substantially all of the construction anticipated by the prime contract.” Id. For the purposes of the DBA “any such related entities holding different prime contracts are considered to be the same prime contractor.” Id. In conjunction with this new definition, the regulations now allow the withholding of contract funds for DBA violations across agencies and for any contracts in which the expanded “prime contractor” is involved. See 29 CFR 5.5(a)(2)(i). The cross-withholding regulations greatly extends the reach of the DOL under the DBA. Now, imagine that a surety has a principal that is a prime contractor on a bonded job, and that same principal has other related entities that are the “prime contractor” on another project (or 5, 10 or 20 projects), through joint ventures or other affiliations, that are bonded by different sureties. The DOL then withholds funds on your bonded contract because of an alleged failure to pay on one or more of the other projects. This will create many issues between the surety and its principal and its affiliated entities and those other sureties, especially if your principal has gone 6 feet under (Halloween speak for out of business).
There is another aspect of the new regulations of the DBA that potentially turns the performing surety’s right of equitable subrogation into nothing more than an apparition (Halloween speak for ghost). The regulations now provide that the DOL “has priority to funds withheld or to be withheld . . . over claims to those funds by: (A) A contractor’s surety(ies), including without limitation performance bond sureties and payment bond sureties.” 29 CFR 5.5(a)(2)(ii). Thus, if a surety completes a project and tries to collect the contract balance (to which it is entitled by virtue of its performance, and over 100 years of surety law), and instead the DOL steps in and withholds some or all of those remaining funds because of an alleged DBA violation of the principal or a subcontractor on the bonded project, or, now, even another project because of a principal’s affiliated entity – the DOL will now have priority to the funds. There is no justification for this overreaching. Once the surety performs by completing, it steps into the shoes of the government by operation of equitable subrogation, and should not be subject to set off or other governmental claims. The Secretary of Labor has the responsibility to “prescribe reasonable regulations” for contractors and subcontractors to implement the DBA. However, I believe that these new regulations go well beyond the concept of reasonableness and exceed the purview of the DOL in implementing new regulations.
It must also be noted that the new DBA regulations make wage violations at any tier the responsibility of the higher tiers, thus rendering the Miller Act itself ethereal (more Halloween speak). 29 CFR 5.2 defines “subcontractor” as “any contractor that agrees to perform or be responsible for the performance of any part of a contract” and “includes subcontractors of any tier.” Id. Moreover, a person is considered to be employed under the new regulations if they perform “the duties of a laborer or mechanic in the construction, prosecution, completion, or repair of a public building or public work, or building . . . regardless of any contractual relationship alleged to exist between the contractor and such person.” Id. As we all know, a surety’s liability for payment bond claims under the Miller Act is limited to a certain level of contractual relationship. If the claimant does not fit within the scope of the Miller Act, it should have no claim. However, now under the DBA regulations, liability for wage violations at any tier may become the obligation of the surety, whether through the new definition of contractor, the expanded withholding powers or the coextensive nature of liability between a principal and its surety.
Generally, the new regulations apply only to new contracts that are entered into after the final rule’s October 23, 2023 effective date. Sureties will need to work with their consultants and outside counsel going forward to assess the risks posed by the new regulations and beware of the new DBA. These new regulations are truly spooky and frightening for sureties, so watch out (end of Halloween speak)!
If you have questions regarding the issues discussed in this post, please do not hesitate to contact Michael A. Stover, Esq. (email@example.com) or any member of the Surety and Fidelity Practice Group.
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