Court Decision Reinforces Public Agencies’ Right to Access Retention Funds

January 2015
Number 2

An appellate court has confirmed that a public agency can access retention funds held in escrow simply by declaring the contractor to be in default on the public works project. In Pittsburg Unified School District v. S.J. Amoroso Construction Co., Inc. (December 22, 2014) 2014 Cal.App. Lexis 1175, the contractor attempted to distinguish its case from other recent court decisions that allowed such access, but the court rejected its arguments.

Generally, if requested by a contractor on a public works project, the owner must put retention funds in an escrow account pursuant to an agreement signed by the owner, the contractor, and the bank. The escrow agreement language is generally required by statute (Public Contract Code § 22300), and it allows the owner to withdraw the retention funds after giving written notice to the bank of default by the contractor.

In upholding the right of the school district in this case to access the retention funds, the court rejected the contractor’s argument that the district had to await a favorable judicial ruling on the merits of the case. As stated by the court: “The rule [the contractor] urges us to adopt – that a public project owner must await judicial resolution of the underlying contract dispute before it can withdraw retention funds – would undermine the entire purpose of retention. It would deny an owner the funds to complete its project until long after the intended completion date for the project. [The contractor’s] position is unsupported by logic or law.”

The court also rejected the many other arguments raised by the contractor, concluding that the owner’s unilateral right to declare a default and take possession of the escrow funds did not violate either Civil Code section 1670, which requires that any dispute regarding one party’s unilateral decision under a public works contract be resolved by arbitration or litigation, or any alleged due process rights of the contractor. Also, the fact that the owner did not issue a “formal” declaration of default was found to be irrelevant – the owner clearly made a determination of default by terminating the contract and notifying the contractor of its breach. The court determined that Public Contract Code section 22300 “requires only a notice of default to the escrow agent and not a formal determination of fault by the governing board….” The court also rejected the contractor’s argument that the retention funds were held in trust for subcontractors.

This decision reinforces an owner’s right to determine a default, thus giving an owner significant flexibility when trying to close out a troubled project, including accessing retention funds that are held in escrow. Despite confirmation of this rule of law, owners must still proceed cautiously. If an owner is found to have wrongly determined that a default (breach of contract) has occurred, it could be found liable to the contractor in later litigation.

If this decision is not reheard by the appellate court, or reversed or depublished by the California Supreme Court, it will be binding precedent on trial courts across the state. If you have any questions regarding this case, or construction close-out disputes in general, please feel free to contact one of our eight offices located statewide. You can also visit our website, follow us on Facebook or Twitter, or download our Client News Brief App.

Written By

Harold M. Freiman
Partner
Walnut Creek Office
hfreiman@lozanosmith.com

Arne Sandberg
Senior Counsel
Walnut Creek Office
asandberg@lozanosmith.com

©2015 Lozano Smith

As the information contained herein is necessarily general, its application to a particular set of facts and circumstances may vary. For this reason, this News Brief does not constitute legal advice. We recommend that you consult with your counsel prior to acting on the information contained herein.

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Deadlines for Compliance with New Paid Sick Leave Law

January 2015
Number 1

On September 10, 2014, Governor Brown signed into law Assembly Bill (AB) 1522, the Healthy Workplaces, Healthy Families Act of 2014. AB 1522 provides that an employee who, on or after July 1, 2015, works in California for 30 or more days within a year from the beginning of employment, is entitled to paid sick leave at the rate of at least one hour of paid sick leave for every 30 hours worked. AB 1522 includes part-time, seasonal, and temporary employees within its scope of coverage. As discussed in an earlier Lozano Smith News Brief (See News Brief No. 59, September 2014), AB 1522 permits an employee to use sick leave for the diagnosis, care, and treatment of the employee or a family member, as well as for the employee’s needs related to domestic violence, sexual assault or stalking.

Although many requirements of AB 1522 do not take effect until July 1, 2015, there are a number of steps that employers should take now in order to ensure they are in timely compliance with the provisions of the new law. Those steps include the following:

Posting Requirement
Although AB 1522 does not expressly include a posting date, the Labor Commissioner has interpreted the law to require that, effective January 1, 2015, employers must display a poster created by the Labor Commissioner in a conspicuous location at each work site notifying employees of their rights under AB 1522. Copies of the posters are available here. Scroll down the page to the section entitled “Employers.”

Leave Tracking/Recordkeeping
Under AB 1522, accrual of sick leave begins on the first day of employment or July 1, 2015, whichever is later. Thus, the effective date for employers to start tracking earned sick leave through the payroll system is July 1, 2015. However, employers should begin updating their leave tracking systems in advance of the effective date. In addition, employers will need to retain records documenting hours worked and paid sick leave days consistent with AB 1522 and other applicable law.

Payroll/Notice to Employee
AB 1522 requires employers to provide employees with written notice of the amount of sick leave available or paid time off provided in lieu of sick leave on either the employee’s itemized wage statement or by separate written notice. While providing this Notice to Employee is not required until July 1, 2015, employers should prepare for implementation of this requirement.

AB 1522 also generally requires an employer to provide employees with an Initial Hire Notice that discloses, among other things, an employee’s right to paid sick leave under AB 1522. Please note that AB 1522 specifically excludes an employee of the state or any political subdivision thereof, including any city, county, city and county, or special district, from this Initial Hire Notice requirement.

Review and Revision of Board Policies
Although other changes may be necessary later in the event of clean-up legislation, employers should begin reviewing and revising their board policies to provide for the minimum requirements under the new law. Specifically, employers may establish limits for both the use and accrual of paid sick leave as follows:

  1. accrual of paid sick leave may be limited to 48 hours (six days) per year;
  2. an employee’s use of paid sick leave may be limited to 24 hours (three days) per year; and
  3. an employee may be required to use leave in reasonable minimum increments, not to exceed two hours.

Audit of Collective Bargaining Agreements
Employees covered under a valid collective bargaining agreement may be exempt from AB 1522 if the CBA expressly provides for:

  1. paid sick days or a paid leave or paid time off policy that permits the use of sick days;
  2. binding arbitration of disputes regarding the application of paid sick leave;
  3. premium wage rates for all overtime; and
  4. regular hourly pay of not less than 30% more than the state minimum wage.

Notably, AB 1522 allows for this exemption only if an employee is entitled to take paid sick days for all of the reasons guaranteed under AB 1522. Employers should review collective bargaining agreements to determine whether employees are already exempted from AB 1522, or whether CBAs should be updated accordingly.

AB 1522 is an untested law and questions are likely to emerge once implementation of the law begins. If you have questions about the effect of the AB 1522 on specific employee groups or classifications, please feel free to contact one of our eight offices located statewide. You can also visit our website, follow us on Facebook or Twitter, or download our Client News Brief App.

Written By

Darren C. Kameya
Partner
Los Angeles Office
dkameya@lozanosmith.com

Claudia P. Weaver
Senior Counsel
Monterey Office
cweaver@lozanosmith.com

©2015 Lozano Smith

As the information contained herein is necessarily general, its application to a particular set of facts and circumstances may vary. For this reason, this News Brief does not constitute legal advice. We recommend that you consult with your counsel prior to acting on the information contained herein.