Jersey City’s Municipal Code offers real estate developers generous tax exemptions that are designed to spur the City’s economic growth, but the tax incentives have strings attached. Specifically, to receive a tax exemption, even on a privately funded project, the developer must agree to use the City-approved project labor agreement (“PLA”), which is a pre-hire agreement that favors unionized contractors and subcontractors. On September 12, 2016, the Third Circuit Court of Appeals reinstated claims against Jersey City that its tax exemption ordinance mandating PLAs is preempted by the National Labor Relations Act and the Employee Retirement Income Security Act, and violates the dormant Commerce Clause of the U.S. Constitution. Now the case returns to the District Court for a determination whether Jersey City’s PLA requirement is unlawful. The Court was careful to explain that its ruling has nothing to do with public construction projects, and is limited to the City’s attempted regulation of privately funded projects. Associated Builders and Contractors v. City of Jersey City, No. 15-3166 (3^rd Cir. Sept. 12, 2016).

By imposing the PLA requirement on privately funded projects that sought tax abatements, the Third Circuit found that Jersey City “require[d] that an employer negotiate with a labor union and that all employees be represented by that labor union as part of the negotiations— even if the developers, contractors, and subcontractors do not ordinarily employ unionized labor and the employees are not union members.” In addition, the City’s standard PLA requires that employers and unions agree not to strike or lock-out during construction, and agree to sponsor or participate in apprenticeship programs.

The Court of Appeals found that the three laws allegedly violated by Jersey City’s ordinance — the NLRA, ERISA and the Commerce Clause — “share the same threshold requirement before their constraints are triggered: that the allegedly unlawful act by the state or local government be regulatory in nature,” as opposed to action by a market participant. The Court determined that Jersey City is not a market participant because the City “is not selling or providing any goods or services with respect to Tax Abated Projects, nor acting as an investor, owner, or financier with respect to those projects.” Invoking Supreme Court precedent, the Court rejected the City’s claim that offering tax abatements gives the City a proprietary interest in the project. The Court found that the City acted instead as a market regulator and since the ordinance strips employers and employees of the economic weapons of strikes and lockouts, and relates to employee benefit plans, the City’s ordinance may indeed be preempted by the NLRA and by ERISA. Finally, by enacting “regulatory measures designed to benefit in-state economic interests by burdening out of state competitors,” the ordinance arguably violates the dormant Commerce Clause.

Absent a request for rehearing or a petition for rehearing en banc, this case will return to the District Court for a determination whether the PLA requirements in the City’s tax exemption ordinance are enforceable. The larger questions are whether PLAs now in place on privately funded projects in Jersey City will remain in effect and, if not, whether this affects developers’ tax exemptions. Also an open question is whether the Third Circuit’s decision affects similar tax exemption ordinances in other municipalities that impose PLA requirements.