SB 740 Expands Prevailing Wage and Apprenticeship Obligations to Certain Industrial Facilities in the Private Sector

10.11.2023

Key Points:

SB 740 is a major expansion of SB 54, which in 2014 imposed prevailing wage and “skilled and trained workforce” requirements on private-sector oil and gas refineries.
SB 740 extends SB 54 to hydrogen manufacturing facilities, biofuels manufacturing facilities, carbon dioxide capture facilities, and to facilities manufacturing certain chemicals.
SB 740 is the latest step by the State of California to utilize so-called “health and safety” legislation to apply public-sector prevailing wage and apprenticeship requirements to businesses in the private sector.
Ten years ago, SB 54 ushered in a wave of unionization for the state Building and Construction Trades at California oil and gas refineries. A similar trend is likely to emerge at industrial facilities impacted by SB 740.

On September 30, 2023, Governor Newsom signed SB 740 into law. The law is effective on January 1, 2024, but SB 740’s requirements apply only to contracts “awarded, extended or renewed on or after January 1, 2024.” As such, facility owners and covered contractors may be able to delay compliance with SB 740 by renewing agreements before the end of the year.

SB 740 expands the Health and Safety Code to impose prevailing wage and apprenticeship requirements on a variety of manufacturing facilities, including facilities manufacturing hydrogen, biofuels, and carbon dioxide (CO2) capture and sequestration. SB 740 also applies to facilities manufacturing the chemicals of ammonia, chlorine, hydrogen fluoride, sulfur dioxide and hydrogen chloride, whether as intermediate or end products.

SB 740 is essentially an expansion of SB 54, which in 2014 controversially imposed prevailing wage and apprenticeship obligations on private-sector oil and gas refining facilities.

SB 740 utilizes perceived health and safety concerns at industrial facilities to impose strict pro-union working conditions at covered facilities. As was the case with SB 54 in 2014, SB 740 functionally requires covered facility owners to use contractors signed with the building trades unions to perform any scope of work covered by Building and Construction Trade labor agreements.

A Major Expansion of Prevailing Wage in the Private Sector

SB 740 represents the latest effort by California to apply prevailing wage and apprenticeship obligations to private industry. Traditionally, only public-sector construction activities have been subject to prevailing wage legal requirements. In 2014, in SB 54, California applied prevailing wage and apprenticeship requirements to private-sector oil and gas refineries. SB 54 was a “first in the nation” expansion of prevailing wage law to private sector activities. Because of this, SB 54 was, and remains, a highly controversial piece of legislation.

Under SB 740, covered employees must be paid at least the minimum prevailing hourly wage as determined by the Department of Industrial Relations (“DIR”) for the applicable scope of work. The DIR sets prevailing wages based on the wage and benefit rates provided for in the union labor agreement covering similar work. As such, the DIR’s prevailing wage rates are significantly higher than the non-union market rate for similar scopes of work.

Skilled and Trained Workforce Requirements

SB 740 imposes “skilled and trained workforce requirements” on covered contractors. To comply, a contractor’s workforce must consist entirely of either “skilled journeypersons” or registered apprentices. A skilled journeyperson is either a graduate of a registered apprenticeship program or an individual who has as many hours of on-the-job experience in the apprenticeable occupation that would be required to graduate from the apprenticeship program. However, SB 740 requires that, at a minimum, at least 60% of a contractor’s skilled journeypersons must be graduates of an approved apprenticeship program, meaning that a maximum of only 40% of the workforce may qualify as a “skilled journeyperson” through on-the-job experience.

Forcing a Workforce Shift to Unions Aligned with the Building Trades

Similar to SB 54, SB 740 is designed to pressure covered contractors to sign with unions that are members of the Building and Construction Trades. As is the case of public works, by forcing all contractors to pay prevailing wages (i.e., union scale), the law creates a market incentive for contractors to negotiate or sign to a labor agreement with the respective craft unions.

In addition, most state-approved apprenticeship programs are affiliated with construction unions that are members of the California Building and Construction Trades. In many cases, depending on the geography and the craft at issue, a contractor will only be able to comply with the skilled and trained workforce requirement by signing with a construction union, which will allow the contractor to access the union’s apprenticeship program. In the case of SB 54, many refinery contractors were able to negotiate arrangements with the construction unions allowing for enrollment of the contractor’s current employees in the union. As part of this, many contractors were able to negotiate for and access accelerated apprenticeship programs allowing the contractors to meet the requirement to employ a mandated ratio of graduated journeypersons.

As was also the case with SB 54, facility owners are likely to face pressure to enter into project labor agreements (“PLAs”) with the Building and Construction Trades requiring that all covered work be performed by contractors using only union craft labor under the PLA.

Exclusion of the Owner’s Own Employees

Notably, SB 740 does not apply to the owner’s own employees, as opposed to employees of any contractors hired by the owner. As such, SB 740 will encourage facility owners to “in-source” functions currently performed by contractors. After the passage of SB 54, many California refineries looked for opportunities to limit the impact of the law on their operations by selectively in-sourcing certain tasks previously assigned to contractors.

Conclusion

SB 740 is a long-predicted expansion of SB 54’s application of prevailing wage and skilled and trained workforce requirements in the private sector. Facility owners and contractors affected by SB 740 must build a strategy to succeed under onerous new labor requirements. For many years, our law firm has advised businesses on compliance with prevailing wage, and skilled and trained workforce requirements, and represented businesses in negotiations with the construction trades unions. If you have questions regarding the impact of SB 740 on your business, do not hesitate to contact our team to discuss your options.

If you have questions about new prevailing wage and apprenticeship obligations, contact the authors or your usual trusted counsel at AALRR.