A California Appeals Court has ruled that a real estate development company is not entitled to rely on “home rule”—which allows charter cities to exempt themselves from prevailing wage laws and pay workers less than is otherwise required on “municipal affairs” projects—simply because the local entity has heavily invested in the project and owns a portion of the property.
Article XI, §5(a) of the California Constitution allows Charter Cities to set their own rules regarding its municipal affairs. At issue in the case was a private development agreement in the City of Palm Springs. In 2002, Palm Springs enacted an ordinance which states that its public works projects are not subject to California’s prevailing wage laws.
The question before the Appeals Court was whether a construction project is a ‘municipal affair’ of a charter city pursuant to Section 5(a) if charter city contributes local funds for the construction of public improvements within a private development.
The Court ultimately ruled that where the Charter City contributes money to a private development project, that contribution does not necessarily transform the project into a “municipal affair.”
In 2010, Palm Springs entered into an agreement with a private developer allowing for the renovation of a blighted shopping center. Per the agreement, Palm Springs invested $51.4 million in City funds in the project, which included the purchase of land.
The developer attempted to step into the shoes of the City and argue that prevailing wages did not apply under Section 5(a). Specifically, the developer argued that because Palm Springs contributed tax dollars and retained control over how construction funds were spent, the project qualifies as a “municipal affair.”
The Appeals Court disagreed, ruling that although the City’s contribution of funds for the Project was sizable, the private developer contributed much more. The developer also selected the contractors, entered into the construction contracts for the Project and bore all risks associated with completion and cost overruns. The Court found that these facts supported an inference that the developer, and not the City, retained substantial control over how the money was spent. Therefore, Section 5(a) did not apply and the project could not be exempted from prevailing wages under Charter City rules by the private developer stepping into the shoes of the City.
The conclusion to be drawn from this opinion is that is very difficult in California to provide legally defensible positions to the non-payment of prevailing wages. This is especially true when the underlying construction project involves some form of public expenditure, whether it be dollars or land.
The case is Palm Springs Promenade LLC v. Department of Industrial Relations, 2025 S.O.S. 1664.
