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Parties Involved:
Robert B. Reich
Appellee
Tom Mistick & Sons, Inc.
Appellant

Document Text:

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued January 17, 1995 Decided June 9, 1995

No. 93-5376

TOM MISTICK & SONS, INC.,

APPELLANT

v.

ROBERT B. REICH,

APPELLEE

Appeal from the United States District Court

for the District of Columbia

(91cv01913)

Maurice Baskin argued the cause for the appellant.

Robert L. Shapiro, Assistant United States Attorney, argued the cause for the appellee. On brief

were Eric H. Holder, Jr., United States Attorney, and R. Craig Lawrence and John D. Bates,

Assistant United States Attorneys.

Before: EDWARDS, Chief Judge; WALD and HENDERSON, Circuit Judges.

Opinion for the court filed by Circuit Judge HENDERSON.

KAREN LECRAFT HENDERSON, Circuit Judge: Appellant Tom Mistick & Sons, Inc. (Mistick),

a Pennsylvania contractor, appeals from an order of the district court granting summary judgment

against it. The district court upheld the determination of the Department of Labor (Department) that

Mistick's employee fringe benefit plan was not a bona fide plan under the Davis-Bacon Act, as

amended, 40 U.S.C. §§ 276a etseq., because Mistick's contributionsto the planwere not "reasonably

related" to the costs of providing fringe benefits to its employees and because disbursements were

made from the plan for non-bona fide benefits. The district court also affirmed the Department's

disapproval of Mistick'stwo proposed plans, a medicalreimbursement plan and a working condition

fringe benefit plan, on the same grounds. Mistick appeals the decisions, seeking full credit under the

Davis-Bacon Act for its contributions to the fringe benefit plan as well as approval of its two

proposed plans.

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We conclude that the Department's application ofthe "reasonable relationship" test here does

not justify invalidation of the fringe benefit plan or disapproval of the medical reimbursement plan.

We affirm, however, the Department's determinations that fringe benefit plan funds were disbursed

for non-bona fide benefits and that the proposed working condition fringe benefit plan authorizes

disbursementsfor non-bona fide benefits. We therefore reverse in part, affirm in part and remand to

the Department of Labor for further proceedings as detailed below.

I. Background

Under the Davis-Bacon Act, a contractor on a federally funded project is required to pay its

laborers and mechanics wages that are not less than the "prevailing wage." The prevailing wage is

the wage and fringe benefits prevailing in the locality for similarly situated employees and is set out

in a wage determination schedule issued by the Secretary of the Department. 40 U.S.C. § 276a(a).

An employer's prevailing wage obligation may be satisfied either solely by cash wages to its

employees or by cash wages and irrevocable contributions to employee fringe benefit plans or

programs. 40 U.S.C. § 276a(b).

Mistick was a contractor on several federally funded construction projects in the Pittsburgh,

Pennsylvania area. To comply with its obligations under the Davis-Bacon Act, it established the

Davis-Bacon FringeBenefit Plan (FBP). Mistick made weekly contributions to the FBP for employee

work subject to the Davis-Bacon Act (Davis-Bacon work). It made no contributions to the FBP for

employee work not subject to the Davis-Bacon Act (private work). Mistick's contributions equalled

the difference between the prevailing wage and the cash wages it paid to its employees. Its

contributions to the FBP were irrevocable and were placed in individual employee interest-bearing

trust accounts managed by a neutral trustee. The costs of administering the FBP and of managing

the trust accounts were not deducted from the funds in the accounts. Only the trustee, acting only

at the employee's request, could make disbursements from the employee's trust account. At the end

of his Mistick employment, an employee could withdraw the balance in his trust account. Before

leaving Mistick's employ, however, an employee, whether performing Davis-Bacon work or private

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1The plan provided:

The Trustee shall disburse funds [owed to an employee] ... on account of medical

or hospital care, pensions on retirement or death, compensation for injuries or

illness resulting from occupational activity, or insurance to provide any of the

foregoing, for unemployment benefits, life insurance, disability or sickness

insurance, or accident insurance, for vacation and holiday pay, for defraying the

costs of apprenticeship or other similar programs, or for other bona fide fringe

benefits....

Joint Appendix (JA) 7. This provision tracks verbatim the disbursements permitted under the

Davis-Bacon Act. See 40 U.S.C. § 276a(b). 

work, could draw on histrust account only for purposes authorized by the FBP.1 The FBP expressly

prohibited disbursements from an employee trust account for any expenses or fringe benefits that

Mistick was required to provide or that it customarily provided to its employees. Nevertheless,

disbursements were made from the FBP for expenses that Mistick was required to provide. Joint

Appendix (JA) 84.

In 1988, the Administrator of the Wage and Hour Division of the Department investigated

Mistick's FBP and determined that it was not bona fide for two reasons. See Letters from Paula V.

Smith, Administrator, to Tom Mistick & Sons, Inc. (JA 81-87). First, Mistick's contributions to the

FBP were greater than and not "reasonably related" to the costs of providing benefits to its

employees. Second, disbursements had been made for expenses not recognized as fringe benefits

under the Davis-Bacon Act. The Administrator invalidated the FBP and prohibited Mistick from

receiving Davis-Bacon credit for future contributions to it. The Administrator did fully credit

Mistick's past contributions to the extent employees had withdrawn them for "personal reasons" (JA

84) or received them as payouts of their account balances when they left Mistick's employ. But she

gave Mistick no credit for amounts withdrawn by employees to cover work-related expenses,

expenses Mistick itself was required to cover. The Administrator awarded Mistick only partial

("annualized") credit for amounts withdrawn by employees for medical reimbursement and for sick

and vacation days because Mistick made contributions only for Davis-Bacon work performed by its

employees whereas employees could draw on their accounts whether they were performing DavisBacon or private work at the time of withdrawal. Annualization requires that the employer receive

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credit only at the effective annual rate of contribution, that is, the total contributions made by the

employer during the year divided by the total number of hours worked by its employees during the

year on both Davis-Bacon and private work. JA 83-84. Annualization is designed to ensure that an

employer does notreceiveDavis-Baconcredit for contributionsmade for Davis-Baconwork but used

to pay benefits received by employees while performing private work. Id.

While the Department wasinvestigating, Mistick developed three newfringe benefit plans and

requested the Administrator to review and approve them. The Administrator approved Mistick's

proposed profit sharing plan but disapproved its proposed medical reimbursement plan. According

to the Administrator, the medical reimbursement plan was not a bona fide plan under the DavisBacon Act because Mistick's contributions to it, calculated according to the difference between the

prevailing wage and the cash wages Mistick paid its employees, would not "reasonably relate" to the

costs of providing benefits to Mistick employees under it. Moreover, the Administrator explained

that if the proposed medical reimbursement plan were bona fide, Mistick could receive only

annualized credit for its contributions. JA 94.

TheAdministrator also disapprovedMistick's proposedworking conditionfringe benefit plan.

According to the Administrator, the plan was not bona fide because it allowed disbursements for

expenses not recognized as fringe benefits under the Davis-Bacon Act. The Administrator denied

Mistick's request that it be given Davis-Bacon credit for redirecting funds from its invalidated FBP

to its Administrator-approved profit sharing plan. She explained that because Mistick's past

contributionsto the FBP were not fullycreditable under the Davis-BaconAct, the covered employees

had not received the prevailing wage at the time of their Davis-Bacon work. She then ordered

Mistick to pay back wages to the covered employees. The Administrator's determinations were

upheld by the Department's Wage Appeals Board. JA 117-30. On review, the district court granted

summary judgment to the Department. JA 157-66.

II. Discussion

We review the district court's grant of summary judgment de novo. Tao v. Freeh, 27 F.3d

635, 638 (D.C. Cir. 1994). We will set aside the Wage Appeals Board's decision if it is arbitrary,

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2The holding in Miree Construction Corp. v. Dole, 930 F.2d 1536 (11th Cir. 1991), relied

upon by the Department, is based on critically different facts. In Miree, the employer sought

credit under the Davis-Bacon Act for all of its contributions to an apprenticeship program. Some

capricious, an abuse of discretion or otherwise not in accordance with law. 5 U.S.C. § 706(2)(A).

Applying thisstandard, we conclude that the Department's application of the "reasonable relationship"

test does not justify invalidation of the FBP or disapproval of Mistick's proposed medical

reimbursement plan. We also conclude that the Department incorrectly annualized Mistick's

contributionsto the FBP. We uphold the Department's determination that funds were disbursed from

the FBP for non-bona fide benefits. Similarly, we uphold the Department's disapproval of the

working conditionfringe benefit plan because it authorizes disbursements for expenses not recognized

as fringe benefits under the Davis-Bacon Act.

A. Reasonable Relationship Test and Annualization

The Administrator held that Mistick's FBP was not bona fide because it failed the "reasonable

relationship" test. The Department requires that "the amount contributed by an employer must bear

a reasonable relationship to the actual rate of costs or contributions required to provide benefits for

the employee in question." JA 83 (emphasis original). According to the Department, the FBP was

not bona fide because Mistick's contributions were not calculated according to its actual costs of

providing benefits to covered employees but instead equalled the difference between the prevailing

wage and the wage it paid its employees. We disagree and find the Administrator's contrary

conclusion unsupported in light of the actual operation of the FBP.

As described by its counsel at oral argument, Mistick's contributions were irrevocably placed

in a separate interest-bearing trust account for each employee who performed Davis-Bacon work.

While the employee worked for Mistick, he could draw monies from his trust account to pay for any

of the benefits enumerated in the FBP. Once his Mistick employment ended, he could withdraw the

balance in histrust account in cash. We find, therefore, that Mistick's contributions on an employee's

behalf did not exceed but equalled the benefits received by him. Each employee received the full

value of each dollar contributed by Mistick, either as an enumerated benefit purchased with FBP

funds or in cash at the end of his employment.

2 The one-to-one ratio between employer contributions

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contributions were not expended for employee tuition in connection with the program and the

employee thus did not benefit from the contributions. The court denied Davis-Bacon credit for

contributions in excess of amounts that actually paid for employee participation in the

apprenticeship program. 

3The Administrator herself explained that "[a]mounts contributed by an employer over and

above the actual cost of providing bona fide benefits would not be creditable for Davis-Bacon

purposes unless the excess amounts are paid to the employees in cash." JA 83 (emphasis added). 

Under the FBP, the excess amountsthose monies in an employee's trust account not spent by

him during his employment at Mistickare paid to the employee in cash when he leaves Mistick's

employ. 

on behalf of an employee and value received by the employee cannot be deemed unreasonable.3

The Department now arguesthat it isinsufficient that an employee eventually receivesthe full

value of the employer's contributions. According to it, the Davis-Bacon Act entitles an employee to

the prevailing wage at the time of his Davis-Bacon work. At oral argument, the Department claimed

that the "best plan" under the Davis-Bacon Act is "cashfull Davis-Bacon wagesgiven at the time

of the Davis-Bacon work." But the statute expressly allows irrevocable contributions to a "fund,

plan, or program," 40 U.S.C. § 276a(b)(2)(A), and thus necessarily permits an arrangement bywhich

an employee does not receive every dollar he earns for Davis-Bacon work at the time he earns it.

The Department also maintained at oral argument that an employer should receive DavisBacon credit only for contributions to a "traditional fringe benefit plan." It did not identify the

statutory basis for the limitation nor did it explain what a "traditional" fringe benefit or plan is.

Instead, it objected to the fact that Mistick's contributions were placed in individual employee trust

accounts and did not directly pay for the fringe benefits. Again we note that the Davis-Bacon Act

expressly permits a pension plan. 40 U.S.C. § 276a(b)(2). Mistick's FBP was a pension plan with

added benefits in that it authorized disbursements before retirement to finance conventional fringe

benefitssuch as medical care, life and disability insurance and vacation and holiday pay. In our view,

if the FBP was not "traditional," it is because it was more generous to covered employees than such

plans ordinarily are.

The Department's final argument, discussed in its brief but not made at oral argument, is that

under Mistick's plan employees did not receive the prevailing wage because their Davis-Bacon work

subsidized fringe benefits received during private work periods. According to the Department,

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because Mistick's contributions were not linked to the actual cost of the enumerated fringe benefits,

Mistick could reduce the cash wages it paid its employees for Davis-Bacon work by increasing its

contributions to the FBP. Employees could draw from their trust accounts to pay for fringe benefits

covered by the FBP even if they were then performing private work. Consequently, Mistick need not

have made additional contributions to finance fringe benefits used by employees during periods of

private work. Because part of the employees' compensation for Davis-Bacon work paid for fringe

benefits used by them during periods of private work, the Department concludes that they did not

receive the prevailing wage for their Davis-Bacon work. We reject this argument.

The Department acknowledged at oral argument that Mistick made separate contributionsto

a non-Davis-Bacon plan for its employees' private work. The Department has not established that

Mistick's contributions to the FBP for Davis-Bacon work either reduced its contributions to its

separate fringe benefit plan for private work or lowered the level of fringe benefits provided to

employees for private work. We are not willing to so assume. We therefore cannot find on the

record before us that employees did not receive the prevailing wage for their Davis-Bacon work

because that work subsidized their private work.

Moreover, we find that by allowing employees to draw on their individual trust accounts

during periods of private work, the FBP benefits the employees. An employee may prefer to use

fundsin histrust account to cover vacation days,sick days or other expenses he incurs during private

work periods. Equally important, an employee may use those funds for expenses not covered by

Mistick's non-Davis-Bacon plan, such as, according to Mistick's counsel at oral argument, insurance

deductibles. If we uphold the invalidation of a plan because employer contributions to it could

finance fringe benefits used during private work, employers would then have to limit employees' use

of their Davis-Bacon trust accounts to only those fringe benefits used during Davis-Bacon work.

Such a result would disadvantage employees. We decline, therefore, to uphold the Department's

denial of Davis-Bacon credit for Mistick's contributions to the FBP merely because they could

underwrite fringe benefits used by an employee during private work periods.

We reject annualization of Mistick's contributions for the same reasons. Mistick made

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4The court in Miree explained that "[i]f an employer chooses to provide a year-long fringe

benefit, rather than cash or some other fringe benefit, the annualization principle simply ensures

that a disproportionate amount of that benefit is not paid for out of wages earned on Davis-Bacon

work." 930 F.2d at 1546. The Department emphasized that annualization "prevents [an employer

from] using the Davis-Bacon work as the disproportionate or exclusive source of funding for

benefits that are in fact continuous in nature and compensation for all the employee's work, both

Davis-Bacon and private." Appellee's Brief at 17. It has not established, however, that the fringe

benefits used by Mistick's employees during periods of private work were financed primarily by

Davis-Bacon contributions. The rationale for annualizing an employer's contributions therefore

does not apply.

5We might well reach a different conclusion if the employee trust accounts did not earn interest

because the employees would not then receive the full value of Mistick's contributions. Although

the Department chose not to, we accept Mistick's counsel's assertion at oral argument that the

trust accounts earned interest. 

contributionsto the FBP only for the Davis-Baconwork performed byits employees whereas Mistick

employees could draw on the funds in their trust accounts whether they were performing DavisBacon work or private work. The Administrator concluded that even if Mistick's FBP were bona

fide, Mistick would receive only annualized credit. As noted earlier, annualized credit for employer

contributions to a Davis-Bacon fringe benefit plan is computed by dividing total employer

contributions for the year by the total number of hours worked by the employee during the year on

both Davis-Bacon and private work. The Administrator explained that annualization ensures that an

employer does not receive Davis-Bacon credit for contributions made for Davis-Bacon work but

which pay for benefits used by an employee while performing private work. But the Administrator

has not shown that Mistick's contributions to its FBP for Davis-Bacon work financed benefits which

were used by employees during private work periods and which would have been funded by a

separate fringe benefit plan for private work but for the FBP. It was therefore unreasonable for the

Administrator to annualize Mistick's contributions to its FBP.4

We conclude that theDepartment's applicationofthe "reasonable relationship" test in this case

does not justify invalidation ofMistick's FBP.5 Likewise, in disapproving Mistick's proposed medical

reimbursement plan, the Department incorrectly applied the "reasonable relationship" test. Moreover,

the Department incorrectly mandated annualization of Mistick's contributions to the FBP and to its

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6Because we conclude that Mistick's contributions should not be annualized, or given only

partial credit, we need not address the issue raised by Mistick regarding whether the alleged

overpayments to the FBP must be refunded to the affected employees as back wages or whether

Mistick should be allowed to redirect the overpayments from its FBP to its

Administrator-approved profit sharing plan. 

proposed medical reimbursement plan.6 We do not hold, however, that Mistick's FBP is a bona fide

plan or that Mistick's contributions to it must be fully credited. The Department identified a second

ground for invalidating the FBP, a ground with more substance.

B. Disbursements for Non-Bona Fide Benefits

The Administrator offered an additional reason for finding that Mistick's FBP was not bona

fide. She found that disbursements were made from the plan for expenses not recognized as fringe

benefits under the Davis-Bacon Act. JA 84. We affirm the finding but remand for the Department

to determine whether this ground is itself sufficient to invalidate Mistick's FBP.

The Davis-Bacon Act credits employer contributions to an employee fringe benefit plan that

finances specified fringe benefits and "other bona fide fringe benefits." 40 U.S.C. § 276a(b)(2).

Congress has not defined "other bona fide fringe benefits." Accordingly, we must defer to the

Department's interpretation of this phrase if it is reasonable. Chevron, U.S.A., Inc. v. Natural

Resources Defense Council, Inc., 467 U.S. 837, 842-43 (1984).

The Department'sregulationsinterpret the phrase as an "open end" provision that enablesthe

Labor Secretary to recognize new fringe benefits "as they become prevailing." 29 C.F.R. § 5.29(c).

The Secretary has determined that work-related tool, equipment and vehicle expenses are business

expenses of the employer which may not be charged to the employee. He does not recognize these

work-related expenses as bona fide fringe benefits under the Davis-Bacon Act because,

notwithstanding the expenses were common in the construction industry when Congress enacted the

statute, the statute did not include them in the list of then-current bona fide benefits. We find the

Department's interpretation of the relevant statutory language reasonable and therefore entitled to

Chevron deference.

Disbursements were made from the FBP for work-related tool, equipment and vehicle

expenses. JA 84. We therefore uphold the Department's determination that disbursements were

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made from the FBP for non-bona fide benefits. Mistick may not receive Davis-Bacon credit for

contributions that paid for these disbursements. Instead, as the Department ordered, Mistick must

pay back wages to the affected employees to the extent of these contributions. We also affirm the

Department's disapproval of Mistick's proposed working condition fringe benefit plan because it

authorizes disbursement for any "working condition fringe" as defined bythe InternalRevenue Code,

26 U.S.C. § 132(d), regardless whether the expense isrecognized as a bona fide fringe benefit under

the Davis-Bacon Act.

III. Conclusion

We reject the Department's disapproval of Mistick's proposed medical reimbursement plan

and affirmthe Department's disapproval ofMistick's proposed working condition fringe benefit plan.

We do not decide whether Mistick'sfringe benefit plan was a bona fide plan to which Mistick'sfuture

contributionsmust be credited under the Davis-BaconAct. The Administrator identified two grounds

for invalidating the FBP, that is, for determining that it was not bona fide and for denying Mistick

credit for future contributions to it. We reject the first ground, the alleged lack of a reasonable

relationship betweenthe employer's contributions and the costs ofproviding benefitsto its employees,

but endorse the second ground, that is, disbursements for non-bona fide benefits. It is unclear,

however, whether the Administrator would invalidate Mistick's FBP on the second ground alone.

We therefore reverse in part, affirm in part and remand to the district court with instructions to

remand to the Department. On remand, the Department should determine whether the fact of

disbursements for non-bona fide benefits alone warrants invalidation of Mistick's fringe benefit plan

and should re-calculate, consistent with this opinion, any back wages owed by Mistick to its

employees.

So ordered.

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