A recent New Jersey appeals court decision has stoked the fires of the union versus nonunion debate, which continues to grow across the U.S. as unions are reportedly losing their grip on critical markets. While the case began with simply a contract that Jersey City, NJ, requires when a developer takes advantage of real estate tax breaks, it could be the first step in dealing organized labor a serious blow in the Garden State and beyond.

Inside the controversial Jersey City law 

In 2007, as the country was feeling a kick in the teeth from the recession, Jersey City enacted a law under which developers, using private funds, would receive short-term (five years) and long-term (20 years) tax abatements for building $25 million-plus projects there, according to attorney Russell McEwan with employment and labor law firm Littler Mendelson. In exchange, those developers had to sign a Project Labor Agreement (PLA) obligating them to use union-only labor on their projects. In order to qualify for the Jersey City tax break, contractor-developer PLAs must include:

• A guarantee against "strikes, lockouts, or other similar actions"
• Procedures to resolve labor disputes during the course of the project
• Verbiage that binds all contractors and subcontractors on the project to the PLA
• Training provisions for Jersey City construction apprentices
• Provisions for a federally registered apprenticeship program with Jersey City apprentices performing 20% of the labor hours required (unless there are not enough Jersey City apprentices available)

Instead of paying real estate taxes, developers are required to pay replacement PILOTs (Payment in Lieu of Taxes), according to McEwan, who represents the plaintiffs in the case. This alternative can provide even more net tax money to the city, as it isn't shared by the school board or other agencies that would normally take a piece of the real estate tax pie. In addition, McEwan said developers typically welcome the opportunity to pay a fixed-cost tax rather than a standard real estate tax that has periodic fluctuations. "It works for the developer, and it works for city," McEwan said.

Why industry groups filed the lawsuit

Eventually, the nonunion workforce was frustrated with being excluded from lucrative projects, so the Associated Builders and Contractors, New Jersey Chapter, along with some of its members, sued Jersey City in District Court maintaining that the Jersey City tax abatement PLA violated federal labor laws, including the Employee Retirement Income Security Act of 1974 and the National Labor Relations Act.

Stephen Scaturro, vice president of Alpine Painting & Sandblasting, which is a party to the ABC's lawsuit, said, "Private development on private property should not be forced to build that job with union-only labor."

This angle, however, assumed that the court would interpret Jersey City's role in all of this as a "regulator" not a "market participant." In other words, the ABC argued that Jersey City had no proprietary interest in these projects because all of the developments in question were 100% privately funded. The District Court disagreed with the ABC's argument.

"If a public body like Jersey City is acting like a market participant, then it's allowed to impose conditions including union-only labor," McEwan said. "If Jersey City is spending money, then it has 'skin in the game' and can make those demands." However, he said, if the city is acting as a regulator, as the 3rd U.S. Circuit Court of Appeals court found to be true in the appeal, then it is subject to federal preemption analysis — or whether the ordinance that requires the PLA is in conflict with federal law.

While the appeals court ruled that Jersey City's tax abatement program did not give Jersey City a financial interest that rises to the level of an investor or owner, it did not rule on whether or not federal law should preempt the ordinance. Instead, it sent the case back to the District Court for a decision. The parties are due back in court in late October.

A broader impact of the ruling?

Rulings like this one may be chipping away at union control in New Jersey, but they have no effect in New York, according to Louis Coletti, president and CEO of the Building Trades Employers' Association in New York.

"We have a number of public sector PLAs, and none of them are tied to tax incentive programs," he said. "Under New York state law, you can't preclude a nonunion contractor from competing for work." Coletti said the closest thing New York City has seen in the way of a union-tax incentive debate is the recent battle over 421-a tax credit prevailing wages, but even that did not involve the kinds of issues that exist in the Jersey City case.

McEwan said he's confident that the District Court will strike down the PLA ordinance. "It fits into this trend of there being more opportunity for construction workers," he said. McEwan added that it's a very small percentage of the workforce that has been blocking nonunion labor from taking part in these projects.

"It's a really big deal that this decision came down like this," said Dominick Mondi, president of the ABC-NJ. "All this private development will now be able to be bid by everybody," he said. 

Despite rulings like these, Scaturro said unions aren't on the way out, especially in "holdouts" like New York City and Los Angeles. He added, however, that companies like Gilbane Building Co., which hire based on a more open-shop approach rather than labor affiliation, are a big help for the nonunion cause. But Coletti said unions draw the line at wage reductions.

"Wage reductions are out of the question," Coletti said, "but there could be room for possible benefit work rules adjustments. The owners in New York have always said if we can get the cost differential down to 10% to 15%, they would hire union every time."

Nevertheless, under the Jersey City ordinance, McEwan said there have been at least 20 projects to which the unions have had exclusive rights. "The local nonunion contractor missed out. Now he has a shot," he said. "They've had years of building with exclusivity, and this just opens it up more."