The Construction Counselor

This is the third post in a series that explores the reasoning and practical impact of the recent federal court decision that blocked certain provisions in the U.S. Department of Labor’s (DOL) new Davis-Bacon Act (DBA) rule. In this post, I discuss the DOL’s attempt to significantly narrow the material supplier exemption, the reasoning behind the court’s decision to block that effort, and what the court decision means for contractors and subcontractors today.

Background

Last fall, I wrote a 3-part series on the DOL overhaul of DBA regulations. On November 7, 2023, two weeks after the Final DBA Rule went into effect, a group of plaintiffs led by Associated General Contractors of America (AGC) filed a lawsuit challenging three specific aspects of the Final DBA Rule (the AGC case).

On June 24, 2024, a federal court in Texas issued a nationwide preliminary injunction blocking three key provisions in the Final DBA Rule that expanded DBA coverage, including extension of DBA to (1) delivery truck drivers and (2) material suppliers, and (3) implementation of DBA requirements by “operation of law” (together the Blocked Rules). The court decision reverts DBA requirements related to the Blocked Rules back to the prior requirements — for now.

In my first post, I introduced five key things to understand about the recent decision. My second post explored the practical impacts for delivery truck drivers and my fourth post discusses the blocked operation of law provision.

Material Suppliers – Return to 20% Rule

DOL Proposed a Very Narrow Definition of “Material Supplier” – Severely Limiting Established Exemption

The new rule adopted a definition of “material supplier” and significantly narrowed the scope of the material supplier exception. Under the new rule, to qualify as a material supplier, an employer’s obligation for work on a contract had to be limited to supplying materials or equipment, which could include activities incidental to supplying the materials, such as delivery, pickup, drop off and waiting time. If a material supplier performed any construction work at the site, then they no longer fit the definition of “material supplier,” and they would be considered a subcontractor.

Court Blocked Material Supplier Definition as Unallowable Expansion of DBA

The DOL maintained that the new rule did not alter the current exemption, but the material supplier rule was widely criticized for narrowing the material supplier exemption to expand the reach of DBA and the court agreed.

The new rule expressly discarded the prior understanding that employees of material suppliers would not be covered by DBA if they spent less than 20% of their time in the workweek performing onsite work. The court agreed with AGC arguments that the material supplier definition improperly punished contractors that also have their own commercial material supplier operations by applying DBA to their operations, but not to other commercial delivery services — even though the work is the same.

The court was troubled by the DOL’s decision to subject bona fide material suppliers to DBA simply because of their connection to a covered contractor and noted that the DOL efforts to reclassify employees of bona fide material suppliers as “mechanics and laborers” was clearly contrary to DBA.

Current Requirement

By blocking the portion of the material supplier definition that eliminated the exemption for contractors that are also material suppliers, the preliminary injunction reinstates that long-standing bright line rule that material suppliers would not be DBA covered if their employees spent less than 20% of their time on DBA-covered work.

Specifically, even though you will still see it in the published DBA rules, the following language, located in section (2) of the definition of Material Supplier at 29 CFR 5.2, has been blocked for now:

(2) If an entity, in addition to being engaged in the activities specified in paragraph (1)(i) of this definition, also engages in other construction, prosecution, completion, or repair work at the site of the work, it is not a material supplier.

The following portions of the material supplier definition remain in place:

(1) A material supplier is an entity meeting all of the following criteria: 

(i) Its only obligations for work on the contract or project are the delivery of materials, articles, supplies, or equipment, which may include pickup of the same in addition to, but not exclusive of, delivery, and which may also include activities incidental to such delivery and pickup, such as loading, unloading, or waiting for materials to be loaded or unloaded; and

(ii) Its facility or facilities that manufactures the materials, articles, supplies, or equipment used for the contract or project:

(A) Is not located on, or does not itself constitute, the project or contract's primary construction site or secondary construction site as defined in this section; and

(B) Either was established before opening of bids on the contract or project, or is not dedicated exclusively, or nearly so, to the performance of the contract or project.

Conclusion

The Government Contracts & Grants Group and the Construction Law Group at Fredrikson is closely monitoring the DBA rules and guidance. We welcome the opportunity to help you understand the impact of the new DBA rules and court challenges on your business.

Our team regularly helps prime contractors, general contractors, subcontractors, and material suppliers pursue, negotiate, comply with, and resolve disputes related to government-funded infrastructure projects.