Department Of Industrial Relations Discontinues Third Party Labor Compliance Program Approvals

Recently, the Department of Industrial Relations (“DIR”) announced that, effective September 1, 2011, it “discontinue[d] separate approval of third party LCPs.”  A third party LCP is a DIR-approved provider of labor compliance services that provides those services, by contract, to an awarding body.  DIR is, in their own words, “ending the existing approval of private [LCP] programs and grandfathering those approvals over to awarding bodies,” and will only be granting new approvals to awarding bodies going forward.  While DIR’s notice will have minimal impact on awarding bodies such as school and community college districts that maintain and enforce their own approved LCPs with their own personnel, the impact on awarding bodies that rely on third party LCPs is more significant.  How does this affect your district?

Districts that have had their own LCPs aren’t significantly affected by this change, unless they have contracted with a third party to administer the program.  Districts that have had their own LCPs, but have utilized third party LCP consultants or administrators will still have their LCPs, but their relationship with their third party LCP consultants may need to change. Districts that have used third party LCP providers running DIR-approved third party LCPs will see the biggest change, as those third party LCP providers no longer have approved LCPs.  However, DIR “grandfathered” third party approvals over to districts that had preexisting contracts with third party LCPs.  In other words, if your district was using a DIR-approved third party LCP before September 1, 2011, DIR should have transferred that approval, essentially ownership of the LCP, to your district.  Now, your district has its own approved LCP, which you can simply continue to operate as your own.

The fundamental decision for districts that have their own LCPs and have used third party assistance, whether it is an LCP they have been running with their own personnel or is one they just inherited from a former third party provider, is: abandon the LCP and pay the fee for DIR’s Compliance Monitoring Unit (“CMU”); have district staff administer the LCP; or continue using a third party is some capacity… which raises unsettled legal issues, because DIR has made this last option cloudy. If your district chooses to continue operating the LCP as your own, and to contract out for LCP services, the specific nature of those services – whether merely administrative or also encompassing management and discretionary direction of the LCP – will impact whether your district can secure a waiver of the DIR Compliance Monitoring Unit (“CMU”) fee or will have to pay that CMU fee in addition to the cost of running your LCP.  While final regulations have not been adopted, and the current draft regulations may change, the currently proposed regulations would allow a waiver of the CMU fee if your district contracts with a third party only for administrative tasks, but not if your district contracts for services involving any exercise of discretion.
The latest notice from DIR reflects its long held desire to eliminate third party LCP consultants.  DIR supports this position by noting that “the state has no distinct regulatory interest in approving private entities to carry out these responsibilities, since the responsibilities ultimately belong to awarding agencies as governmental agencies performing governmental tasks, and private entities cannot exercise such governmental authority independently.” It also notes that “DIR has never been given authority to oversee or regulate a private LCP marketplace or industry.”
All of this is noted in the context that, once enabling regulations under SBX2 9 are adopted and SBX2 9 comes into full force, LCPs will be required on all projects that use any state funds, except on certain small projects under limited circumstances.  With the ever-changing landscape surrounding LCPs, it is important for school districts to ensure that its projects are not at risk of losing State funding eligibility.  These latest statements and developments lead us to recommend that districts that rely on third party consultants to fulfill their LCP obligations, to any extent, must consider long-term impacts and alternatives in consultation with counsel to avoid the emerging pitfalls arising from use of third-parties for assistance with LCPs.
We have tracked the ongoing evolution of the Labor Compliance Program laws over the last couple of years through these Alerts:
New Amendments To Regulations Governing Labor Compliance Programs Approved
New Law Dramatically Changes Enforcement of Labor Compliance Programs by Public Agencies
Regulations Governing Labor Compliance Programs and Enforcement By the Department of Industrial Relations Are Finalized
Department of Industrial Relations Suspends Newly Adopted Regulations Governing Labor Compliance Programs

The recently enacted AB 436 is a clean up bill to SBX2 9, which was passed in February 2009 but has been difficult to implement.  We will post a note here when our detailed Alert on AB 436 is released in the near future.

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