Welcome to the wonderful world of performing construction work on state funded projects. The state mandated “prevailing wage” reflects the amount a contractor must pay to an employee performing a task on a construction site. This amount depends on the job classification as well as the physical location of the job site. Overly simplified there are three parts to any given prevailing wage classification.
If you are interested in finding prevailing wage rates for your state, please reference the U.S. Department of Labor website by clicking here. The site contains links to each state’s respective department handling prevailing wage contributions (e.g. California’s Department of Industrial Relations).
Base amount – guaranteed to the employee on his or her check. There are two basic ways this amount can be invaded. The first is a court ordered child support order instructing the employer to send money to an entity on behalf of an employee’s dependent. The second way is an employee making a voluntary contribution to an employer sponsored retirement plan.
Training contribution – This amount must be submitted to a state approved training program or directly to the California Apprenticeship Council. Including this amount on the employee’s paycheck as compensation will not satisfy the employer’s obligation.
The Fringe allocation – This amount generally consist of medical insurance, vacation pay, pension and “other”. The EMPLOYER determines how the employee receives this money. There are two basic ways an employer can satisfy this requirement. The first is including the total remaining amount on the employee’s paycheck as compensation. The second way is to use the fringe allocation to provide employee benefits.
An employer should weigh this decision carefully as it has a direct effect on their ability to successfully bid a project. If an employer decides to include the fringe allocation on the employees check as compensation the money is now considered payroll and is subject to payroll taxes as well as workers compensation premiums. This, depending on an employer’s MOD rate for workers compensation generally adds $2 to $3.50 per hour, per employee to the employers labor burden. An employer with 20 employees could realize an increased labor cost of $8,400 A MONTH! (20 employees X $2.80 X 150 hours) This extra cost usually is reflected in a less competitive bid, as it must be addressed in the labor cost for the project. An employer with an employee benefit plan specifically tailored to comply with state regulations can use the fringe monies to fund their benefit programs. Employer contributions to employee benefit programs are generally NOT subject to payroll taxes or workers compensation premiums. This savings can be the difference between getting the job or being number 2, again!
Facts about Prevailing Wage Benefits, Prevailing Wage Contributions, Fringe Benefits, Bacon-Davis and Publicly Funded Projects
- In 1868, the first federal prevailing wage law was passed by Congress and enforced by President Ulysses Grant. In 1931, President Herbert Hoover signed into law the current federal prevailing wage law known as the Davis Bacon Act.
- Prevailing wage laws apply to all public improvements financed in whole or in part by State public funds for new construction or for reconstruction, enlargement, alteration, repair, remodeling, renovation, or painting, etc.
- The Davis-Bacon Act requires any contractor bidding on a government construction project in excess of $2,000 to pay workers at a prevailing union wage, even if the employer did not employ union members.
- Prevailing wage compensation has two components – the prevailing hourly wage and the prevailing hourly fringe benefit amount.
The basic hourly rate paid or being paid subsequent to the most recent wage determination to the majority of laborers, workmen, and mechanics employed in each classification of construction upon reasonably comparable construction in the locality where the work is to be performed.
- An additional Prevailing Wage Contribution per hour equal to the hourly rate of contribution made by an employer on behalf of employees within each classification of construction to a trustee or to a third person pursuant to an enforceable commitment to carry out a financially responsible plan or program, which was communicated in writing to the employees affected, for the following fringe benefits. (a) medical or hospital care; (b) pensions on retirement; (c) death compensation for injuries or illness resulting from occupational activity; (d) life insurance; (e) defraying costs of apprenticeship or other similar programs; (f) cash; the employer may pay an additional amount per hour to the employee in cash or partly in cash and partly by contributions. (subject to payroll taxes) Fringe does not include costs associated with programs or taxes required by federal state or local law such as workers’ compensation or unemployment insurance tax. Accidental, disability or sickness insurance may be considered a fringe if paid under the conditions as stated above. Fringe does not include costs associated with vacation and holiday unless paid in the form of cash as indicated by item (f) above.
(With the exception of a SUB Plan, approved by the Department of Labor and the IRS as a bona fide fringe benefit, and offered nationally.)
More about SUB Plans
- An employer with an employee benefit plan specifically tailored to comply with state regulations can use the fringe monies to fund their benefit programs. Employer prevailing wage contributions to employee benefit programs are generally NOT subject to payroll taxes or workers compensation premiums. This savings can be the difference between getting the job or being number 2, again.
- There are certain plan features that coordinate better with the prevailing wage contribution guidelines. In general, the Davis-Bacon portion of a retirement plan must provide for immediate eligibility and full and immediate vesting. Absent immediate eligibility, the Davis-Bacon fringe would need to be paid as compensation until such time as the individual becomes eligible.