Reckless Misclassification under Davis-Bacon Creates False Claims Act Liability

A US Court of Appeal has held that “reckless misclassification” of workers under Davis-Bacon can – due to amendments of the False Claims Act (FCA) in 2009 – can result in a contractor being liable under the FCA. And this liability could cover events that occurred prior to the FCA amendment, when a stricter intent standard was in effect.

FCA Amendment.

In 2009, Congress amended the FCA to remove the requirement of specific intent to defraud the government. The amendment stated that portions of the FCA were to take effect as of June 7, 2008 “and apply to all claims under the False Claims Act (31 U.S.C. 3729 et seq.) that are pending on or after that date.”

Worker Payments.

From 2002 to 2007, an open-shop contractor was performing track and signal improvement work in the Philadelphia area, partially funded by the federal government and thus subject to Davis-Bacon wage requirements. A Dept. of Labor audit discovered some relatively minor wage violations, and the contractor paid the workers the additional $811.52 that was due.

Qui Tam Lawsuit.

In 2009, IBEW Local 98 filed a FCA complaint under seal, alleging that the contractor had underpaid workers in violation of Davis-Bacon, and had thus committed FCA violations. The US Dept. of Justice subsequently elected not to intervene. The contractor sought to dismiss the complaint, arguing that the DOL had sole authority to determine worker misclassification cases, and so its actions could not be subject to an FCA claim. The federal District Court judge referred the case to the DOL in 2017, but the DOL declined to take the matter due to the passage of time and the effort required to investigate.

Trial Outcome.

The parties conducted a trial before a special master, who concluded that the contractor had underpaid workers, due to improper classifications, in the amount of $159,273.54. Trebling that amount under the FCA brought the total to $477,820.62. Also, each certified payroll constituted a violation. The special master applied the minimum civil penalty of $5.500 per violation, finding that the contractor “did not intend to make a false statement, but did so recklessly.” With 105 payroll periods, each a violation, the civil penalty came to $577,500. To the initial judgment of $1,055,320.62 were added attorneys’ fee and costs $1,433,154. Thus, wage misclassifications worth $159,273 resulted in a total judgment of $2,488,474.62.

Analysis.

A significant issue was whether the 2009 FCA amendment, removing specific intent to defraud the government, would apply to the payrolls submitted in the 2002-2007 timeframe. Since the 2009 amendment included language for application to a prior date, the court found that “Congress sought to apply the provision to some conduct predating its enactment.” (emphasis in original) This, in turn, required the court to construe use of the word “claims” in the context of the language of retroactivity.

The Court of Appeal noted that the word “claims” is both a defined term and a generic term. It could be used in the same paragraph with more than one meaning, and applying the definition each time the term was used would actually not make sense. Thus, the Court concluded that “claims” in the FCA amendment was intended to refer to cases. Since the case against the contractor arose after the effective date of the FCA amendment, the amended FCA language would apply. The result: “reckless misclassification” by the contractor, in the absence of any intent to defraud, would be subject to the FCA as amended even though the actions had taken place during the time period when a stricter intent standard had applied.

The case is United States ex rel. IBEW Local Union No. 98 v. Farfield Co., 2021 U.S. App. LEXIS 20658 (3^rd Cir., July 13, 2021).