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Clemente Castillo et al v. Toll Bros.

July 28, 2011

CLEMENTE CASTILLO ET AL., PLAINTIFFS AND APPELLANTS,
v.
TOLL BROS., INC., DEFENDANT AND RESPONDENT. ROGELIO HERNANDEZ ET AL., PLAINTIFFS AND APPELLANTS,
v.
TOLL BROS., INC., DEFENDANT AND RESPONDENT.



Trial Court: Alameda County Superior Court Trial Judge: Hon. Steven A. Brick (Alameda County Super. Ct. No. RG06290188) (Alameda County Super. Ct. No. RG06302769)

The opinion of the court was delivered by: Margulies, J.

CERTIFIED FOR PUBLICATION

Defendant Toll Bros., Inc. (Toll Bros.), a home builder, was joined in two wage-and-hour class action lawsuits brought by employees of its subcontractors, Castillo v. Toll Bros., Inc. (Super. Ct. Alameda County, 2010, No. RG06290188) (hereafter Castillo) and Hernandez v. Toll Bros., Inc. (Super. Ct. Alameda County, 2010, No. RG06302769) (hereafter Hernandez). In addition to asserting common law claims, the plaintiffs in each action alleged a claim under Labor Code*fn1 section 2810 seeking, in effect, to hold Toll Bros. liable for the subcontractors' Labor Code violations. A relatively new statute, section 2810 authorizes the employees of a services contractor to sue the party hiring the contractor if the hiring party knowingly pays a contract price insufficient to permit the contractor to comply with the law in performing the contract. Toll Bros. moved for summary judgment, arguing, inter alia, that its subcontracts could not be found insufficient under section 2810 because they provided adequate funds to permit the subcontractors to pay their workers the minimum wage, as well as to comply with other applicable laws. Plaintiffs countered the contracts should be found insufficient unless they permitted payment of the locally prevailing wage for comparable work, rather than the legal minimum.

The trial court granted summary judgment for Toll Bros., agreeing the minimum wage was the appropriate measure under section 2810 and finding no triable issue of fact regarding the adequacy of the contracts under this standard. The trial court also found for Toll Bros. as a matter of law on plaintiffs' common law claims, but it rejected other legal defenses asserted by Toll Bros. under section 2810.

We agree with the trial court's legal rulings, including its application of the minimum wage as a standard under section 2810, but we conclude plaintiffs raised a triable issue of fact with respect to the sufficiency of two of the contracts challenged in the Castillo matter. Accordingly, we affirm the trial court's grant of summary judgment in the Hernandez action and its grant of summary adjudication of the common law claims in the Castillo matter, but we reverse summary adjudication and remand for further proceedings on the section 2810 claim asserted in Castillo.

I. BACKGROUND

These two putative class actions were filed in September and December 2006. The named plaintiffs in Castillo are employees of defendant Capaz Construction Corp. (Capaz), a subcontractor on several construction projects for which Toll Bros. acted as general contractor. Their third amended complaint alleged a series of wage-and-hour violations by Capaz in connection with its work for Toll Bros., including failure to pay overtime, failure to provide adequate meal breaks and rest periods, failure to provide accurate wage statements and keep accurate payroll records, failure to pay in a timely manner after cessation of work and on a biweekly schedule, and outright refusal to pay wages. The complaint asserted statutory causes of action to recover for these violations, as well as common law claims for unfair business practices, conversion, fraud, and other theories. The claims asserted against Toll Bros., which sought to hold Toll Bros. liable for the Capaz labor law violations, included negligence, unfair competition, and unjust enrichment.

In addition, Toll Bros. was sued under section 2810. Subdivision (a) of section 2810 (hereafter subdivision (a)) prohibits a party from entering into a contract for certain types of services, including construction services, if the party knows or should know the contract "does not include funds sufficient to allow the contractor to comply with all applicable local, state, and federal laws or regulations governing the labor or services to be provided."*fn2 Subdivision (g) of the statute establishes a cause of action in favor of employees "aggrieved" by a violation of subdivision (a).

The Hernandez action is a parallel lawsuit brought by employees of defendant Tim Shannon Construction, Inc. (Shannon), another Toll Bros. subcontractor. The fourth amended complaint in Hernandez asserted similar wage-and-hour violations and common law claims against Shannon and Toll Bros. The Hernandez plaintiffs also asserted a section 2810 claim against Toll Bros.

Toll Bros. moved for summary judgment in both actions in March 2009.*fn3 Although the motions were necessarily directed at all causes of action asserted against Toll Bros., their primary focus was the section 2810 claim. Because the trial court granted a series of postponements to permit additional discovery and the submission of supplemental briefing and evidence, the motions were not heard until nearly a year later. Both motions were ultimately granted in a single, detailed 37-page order issued in March 2010. The appeals have been consolidated.

In moving for summary judgment, Toll Bros. initially argued that plaintiff could not demonstrate the subcontractors' alleged violations of law were caused by insufficiency of the contract price and section 2810 was preempted by federal labor law. Toll Bros. also argued it had not violated section 2810 because it did not know, and had no reason to believe, the compensation provided in its contracts with Capaz and Shannon was insufficient to permit the subcontractors to comply with applicable laws.

According to the evidence submitted in support of the motion, Toll Bros. is a developer of large-scale residential projects. Capaz and Shannon are framing contractors, responsible for erecting the structural elements of the homes in several Toll Bros. projects. Most subcontracts for Toll Bros. projects, including the various contracts of Capaz and Shannon, are "lump sum" contracts awarded through competitive bidding. Under a lump sum contract, the subcontractor agrees to accept a set price for the performance of all work required by the contract. When awarding a subcontract through competitive bidding, Toll Bros. typically sends a bid package to five or six potential subcontractors. After the subcontractors submit their bids for the contract, a Toll Bros. employee reviews them, ensures the bid is complete, seeks clarification of any ambiguities from the bidders, confirms each bidder's licensing and workers' compensation insurance status, and seeks references to confirm the bidders' past job performance.

Toll Bros. relies on the competitive bidding process to arrive at an appropriate price for each subcontract. During the competitive bidding process, Toll Bros. is generally given very little information about the basis for the bids. The subcontractors may be asked to break down the cost components of a bid between materials, or subsets of materials, and labor, but there is little or no further detail provided. Even this information may be unreliable. Subcontractors have an incentive to minimize the labor cost allocation of the subcontract in favor of materials costs because the amount of the contract price retained by Toll Bros. to insure against incomplete or inadequate work is based on the labor allocation. Further, it is difficult for Toll Bros. to estimate in advance what any particular subcontractor's labor costs will be because there are many ways for a subcontractor to perform a particular job, using different mixes of skill and experience in laborers. With respect to the contracts at issue in Castillo and Hernandez, Toll Bros. was never informed and contended it had no reason to believe the contract prices were insufficient to permit the subcontractors to complete the work in compliance with the law.

A principal for Capaz submitted a declaration stating that when bidding subcontracts for Toll Bros., Capaz provided Toll Bros. with no information about the number of employees it would use to perform the subcontract or the terms of their employment. At the time of bidding, even Capaz itself could not be certain of the exact staffing for a particular subcontract or of the amount of overtime, if any, needed to complete it. Taking into account these uncertainties, the declarant believed the subcontracts Capaz signed with Toll Bros. had included sufficient funds to pay the workers in accordance with legal requirements. A principal for Shannon submitted a declaration stating similar facts with respect to Shannon and its Toll Bros. contracts.

In opposition, plaintiffs argued that Toll Bros.'s evidence did not prove the contract prices were sufficient to permit the subcontractors to satisfy applicable laws and submitted its own evidence suggesting, to the contrary, the prices were insufficient and Toll Bros. had reason to be aware of their insufficiency. Plaintiffs' evidence demonstrated Shannon and Capaz were frequently low bidders on contracts, allocated less to labor costs than the industry average, paid lower wages than the industry average, had serious financial problems while performing the Toll Bros. contracts, and had committed serious wage-and-hour violations.

Plaintiffs also submitted a declaration from an industry expert, Shelton Davis, who analyzed the requirements of the Capaz subcontracts for two of the projects at issue, known as Courtyards at Dublin Ranch Villages (Courtyards) and Terraces at Dublin Ranch Villages (Terraces).*fn4 Using techniques accepted as standard in the industry for estimating construction contract costs, Davis derived an estimate of the cost of materials and the number of man-hours necessary to complete the tasks required under the Courtyards and Terraces subcontracts. Applying a typical industry hourly labor cost of $60.35, he derived estimates for the cost of performing the two contracts that exceeded the Capaz bids by 45 to 50 percent, permitting an inference of gross underpricing. Suggesting Toll Bros. had reason to be aware of this underpricing, plaintiffs submitted evidence demonstrating Toll Bros. was interested primarily in obtaining the lowest bid price, did nothing to ensure the contract prices were sufficient to permit the subcontractors to comply with their legal obligations, pressured Capaz and Shannon to lower their bids further, knew of the subcontractors' financial difficulties, and turned a blind eye to their labor practices.

Hearing on the motion was postponed twice to permit the parties to submit further argument and evidence. In its supplemental briefing, Toll Bros. argued for the first time that insufficiency under section 2810 should be measured by the ability of the contractor to pay the minimum wage, contending the Davis declaration failed to show underfunding because, even assuming Davis's figures, Capaz had sufficient funds to pay its workers twice the minimum wage. Toll Bros. also submitted data demonstrating that, in fact, Capaz and Shannon consistently paid their workers wages higher than the minimum at their Toll Bros. worksites.

Plaintiffs argued, to the contrary, that sufficiency under section 2810 should be judged by "what a reasonable person with reasonable knowledge of the industry would use to determine underfunding," relying on subdivision (i) of the statute. They submitted evidence establishing the local average hourly carpenter wage in 2009 was $29.32, nearly four times the minimum hourly wage of $8. Because carpenters are skilled laborers, plaintiffs argued, they are unlikely to accept a job paying merely the minimum wage.

Plaintiffs also submitted another declaration from Davis (hereafter second Davis declaration). The second Davis declaration attached revised cost estimates for the same two projects considered in his earlier declaration. The revised figures included estimated costs for hardware and equipment, costs that had been omitted without explanation from the original declaration's estimates. By adding these costs, Davis was able to conclude that the cost of materials for the Courtyards project exceeded the contract price, leaving no money to pay wages. With respect to the Terraces project, the new cost estimates permitted Capaz to pay a labor cost of only $8.70 per hour. This was less than the minimum wage cost at the time.*fn5

The trial court granted both motions for summary judgment in an extensive written decision. In addressing section 2810, the court was working without guidance, since no published decision addresses the issues raised by the parties.*fn6 The order is a masterful synthesis of a sprawling factual record, reflecting the court's careful work with the parties over the course of several months. We recount the decision in some detail because it forms the foundation for our own ruling.

The court considered serially the various elements of a section 2810 claim. It began with the requirement under subdivision (g)(1) that a plaintiff be "aggrieved" by a violation of subdivision (a).*fn7 Characterizing this as a standing requirement, the court found that plaintiffs had presented evidence demonstrating standing to assert claims under only three of the eleven Capaz contracts performed during the class period and four of the nine Shannon contracts.*fn8 As to the remaining contracts, the court granted summary adjudication on this ground. In addition, the court found that two of the asserted Capaz contracts and five of the asserted Shannon contracts were entered into before the effective date of section 2810, January 1, 2004, and therefore were not covered by it. These rulings eliminated all but two of the Capaz contracts from section 2810 coverage, the Courtyards and Terraces contracts, evaluated by Davis in his expert declarations, and all but three of the Shannon contracts. Plaintiffs do not dispute these rulings.

The court next considered the meaning of "funds sufficient to allow the contractor to comply with all applicable . . . laws or regulations" under subdivision (a). As discussed above, Toll Bros. argued the contracts should be evaluated on the basis of the minimum wage, while plaintiffs argued the statute required a determination of whether funds were sufficient to permit compliance "with laws or regulations given the real world market price of labor." The court determined the statutory language to be ambiguous and adopted Toll Bros.'s position on the basis of a detailed examination of the legislative history, explaining the history "demonstrates that the Legislature was concerned primarily with ensuring that contracts would provide sufficient funds to permit contractors to pay the minimum wage" and otherwise comply with applicable laws.

Turning to evidence of the sufficiency of the Capaz contracts, the court found the declaration testimony of Capaz's principal to constitute evidence both that Toll Bros. did not know the contracts were underfunded and that, in fact, the contracts were not underfunded, thereby shifting the burden of production to plaintiffs on both issues. The court concluded plaintiffs' evidence showing Capaz was often the lowest bidder, paid relatively low wages, allocated less to labor than most contractors, and had safety and Labor Code violations did not raise a triable fact regarding Toll Bros.'s knowledge of underfunding and found Toll Bros.'s knowledge of Capaz's financial problems to be irrelevant because it was gained after the execution of the contracts.

The court then considered the Davis declarations, finding Davis's methodology sufficiently reliable to allow their admission. The centerpiece of the court's analysis was a pair of tables it created comparing Davis's estimates for the nonlabor cost items of the two contracts with the allocation for those same costs in the contracts themselves. The court assumed for purposes of its analysis that Toll Bros. should have known a contract consistent with Davis's cost estimates was "reasonable."

With respect to the Courtyards contract, the court found the contract's allocation for nonlabor costs was about 20 percent lower than the Davis estimate. Reasoning "[t]here is no indication that a 20% difference in materials costs would have triggered suspicion that the contract was underfunded" because "[Bureau of Labor Statistics] labor cost data . . . suggests that a variance of 20% in wages is not unusual," the court concluded the Davis declaration failed to raise a triable issue of fact whether Toll Bros. knew or should have known the Courtyards contract was underfunded. The court also noted the amount allocated to labor costs in the Courtyards contract would have permitted an hourly wage of $19.95, well above the minimum wage cost of $11.48 to $13.60 during the relevant period.

The same analysis led to somewhat different reasoning, although the same result, for the Terraces contract. The court found the contract's allocation of nonlabor costs was 27 percent less than Davis's estimate for the same costs. The court concluded this difference, combined with information contained in much higher bids for the same contract submitted by other contractors, "would have reasonably triggered suspicion that . . . the contract did not allocate sufficient funds for materials." Continuing its analysis, the court noted that, "[a]ssuming that [Terraces] required 111,834 hours as estimated by Mr. Davis and that Capaz was able to allocate $2,300,000 to labor after accounting for underestimating of materials costs, that would suggest an hourly rate of $20.56."*fn9 Based on this calculation, the court found there was no triable issue of fact "whether at the time of contracting Toll was on inquiry notice that Capaz was unable to comply with all applicable laws."

The Hernandez plaintiffs had not submitted an expert declaration regarding the Shannon contracts. As a result, the court found no evidence to rebut the declaration testimony of Shannon's principal that, in fact, the contracts were adequately funded. The court granted summary adjudication of the section 2810 claims in both lawsuits.

The court also addressed and rejected Toll Bros.'s two original arguments. Concluding any interference with collective bargaining by section 2810 would be "indirect" and "minimal," it found no preemption by the National Labor Relations Act (NLRA) (29 U.S.C. § 151 et seq.). The court also held section 2810 contains no causation requirement, finding the Legislature intended third parties to be liable for any Labor Code violations committed in the performance of an insufficient contract.

In its concluding sections, the trial court's order granted summary adjudication on plaintiffs' various common law theories of recovery and rejected the application of a one-year statute of limitations in favor of the three-year statute of Code of Civil Procedure section 338, subdivision (d).*fn10 Although it declined to rule on all of the parties' 326 objections, the court issued two other orders ruling on "focused" objections it had directed the parties to submit.

II. DISCUSSION

The principles governing review of a grant of summary judgment are familiar. " ' "A trial court properly grants a motion for summary judgment only if no issues of triable fact appear and the moving party is entitled to judgment as a matter of law. [Citations.] The moving party bears the burden of showing the court that the plaintiff 'has not established, and cannot reasonably expect to establish,' " the elements of his or her cause of action.' " (State of California v. Allstate Ins. Co. (2009) 45 Cal.4th 1008, 1017.) "To determine whether triable issues of fact do exist, we independently review the record that was before the trial court when it ruled on defendants' motion. [Citations.] In so doing, we view the evidence in the light most favorable to plaintiffs as the losing parties, resolving evidentiary doubts and ambiguities in their favor." (Martinez v. Combs (2010) 49 Cal.4th 35, 68.)

A. The Appropriate Wage Standard Under Section 2810

1. Background

Section 2810 prohibits a person from entering into a contract for certain types of services if the person knows or should know the contract price is insufficient to permit the other party to comply with applicable laws in the performance of the contract. (Id., subd. (a).) Persons entering into such contracts are liable to employees who are "aggrieved" by this insufficiency. (Id., subd. (g).) Although "aggrieved" is not defined, subdivision (g)(1) requires plaintiffs to plead and prove they were "injured as a result of a violation of a labor law or regulation in connection with the performance of the contract or agreement," as these plaintiffs have done.

For such plaintiffs, one of the fundamental interpretive uncertainties arising from section 2810 is the proper wage standard to be used in evaluating the sufficiency of a contract. The sole criterion for establishing liability in section 2810 is whether the contract provides "funds sufficient" to comply with applicable laws. (Id., subd. (a).) Even the most generously funded employer may commit labor law violations from greed, ignorance, or mismanagement, but the contracting party is not responsible for such violations so long as the contract price is sufficient.*fn11 The sufficiency of the contract price to allow legal compliance depends directly on the wage standard to be applied. An employer whose contract price does not provide enough funds even for payment of the minimum wage cost will necessarily commit labor law violations in executing the contract.*fn12 Yet an employer whose contract price is adequate to permit payment of the minimum wage cost can also find itself short of funds if it pays a wage higher than minimum, leading to ...


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