Published date: 11/21/2024
Prevailing wages and fringe benefits are two key components of the Davis-Bacon Act. But what exactly does “prevailing wage” mean, and how is it determined? Contrary to the idea of minimum wage, a prevailing wage represents the minimum acceptable compensation in a specific trade and region for public works projects. It includes two key parts: the wage rate and the fringe benefit. These rates are specific to the geographic location as well as the craft and classification of the worker, published through a wage determination process managed by the U.S. Department of Labor (USDOL).
How Are These Rates Determined?
The USDOL conducts annual wage surveys to assess the current wage data from various regions. Based on these surveys, the prevailing wage rates are updated (typically on an annual basis) and published via an All-Agency Memorandum. When a project is awarded, the most recently published rates at the time of the bid advertisement date would apply, and they would remain fixed for the entire project duration, even if a project spans multiple years. Any new projects awarded in the future, however, would of course, adhere to the latest rates published at those respective times.
Defining Wages and Fringes
• Wages: Regular payments to employees.
• Fringe Benefits: Supplementary perks that increase an employee’s total compensation package. These benefits can include health insurance, pension plans, or vacation time but are not applied to overtime wages. States may have additional requirements beyond federal standards. The USDOL allows certain fringe benefits, such as health insurance, pension contributions, and vacation. However, contributions like Social Security and workers’ compensation are not counted as fringe benefits under Davis-Bacon.
How Are Fringes Paid?
Contractors can manage fringe benefits through three main types of plans:
Example: A contractor using this plan could calculate an employee’s yearly health insurance cost, divide it by total hours worked (both covered and non-covered work), and contribute based on this calculation.
Funded Plans: Contributions made to a third party, like health insurance, paid at least quarterly.
Example: A contractor might pay $4.00 per hour worked into a health insurance fund for their employees.
Unfunded Plans: Direct benefits to employees (such as holiday or sick pay) must be approved by USDOL’s Wage & Hour Division (WHD) and legally enforceable.
Example: A contractor might offer vacation pay by setting aside $2.50 per hour worked, tracked in a separate account for each employee.
Annualization Plans: These are more complex, calculating the annual contribution across all hours worked by the employee.
Defining Wages and Fringes
• Wages: Regular payments to employees.
• Fringe Benefits: Supplementary perks that increase an employee’s total compensation package. These benefits can include health insurance, pension plans, or vacation time but are not applied to overtime wages. States may have additional requirements beyond federal standards. The USDOL allows certain fringe benefits, such as health insurance, pension contributions, and vacation. However, contributions like Social Security and workers’ compensation are not counted as fringe benefits under Davis-Bacon.
Options for Contractors
•To meet their fringe obligations, contractors have three choices:
- Pay the full fringe benefit as cash alongside wages.
- Example: A contractor might pay an additional $7.00 per hour worked as part of the employee’s paycheck.
- Pay wages in cash and the fringe into a bona fide plan.
- Example: $30.00 per hour in wages and $7.00 per hour into a pension fund.
- Combine the two, paying part of the fringe in cash and part into a fund.
- Example: $30.00 per hour in wages, $3.00 per hour in cash fringes, and $4.00 per hour into a health plan.
By understanding these options and the components of the prevailing wage, contractors can better navigate their obligations on public works projects.
Determining Wage Rates
Navigating prevailing wage rates can be less straightforward when multiple jurisdictions are involved (i.e. multiple funding sources). Certain states, for example, have their own set of prevailing wage laws and publish their own rates. Some projects may therefore have to meet two or more wage determinations. In those instances, the stricter laws (i.e. the higher rates) between each wage determination must be met.
We’ve created a common example to illustrate how to compare and determine a wage rate that should be used when this occurs, with this specific scenario complying with both the Davis-Bacon Act and the California Department of Industrial Relations (DIR) prevailing wage requirements.
Problem: The Davis-Bacon prevailing wage rate is $50.10 with $28.40 in fringes, but the CA DIR prevailing wage rate after the 7/1/24 increase is $53.75 with $29.60 in fringes, what is the wage rate that should be paid?
Solution: To determine the correct wage rate, it’s necessary to compare both the base hourly wage and fringe benefit components of the Davis-Bacon rate and the (DIR) prevailing wage rate. The higher rate, which includes base pay and fringes, is typically used to maintain compliance with both standards.
1. Davis-Bacon Rate Breakdown:
o Base wage: $50.10 – $28.40 (fringes) = $21.70 base wage
o Total wage (base + fringes): $50.10
2. CA DIR Rate Breakdown:
o Base wage: $53.75 – $29.60 (fringes) = $24.15 base wage
o Total wage (base + fringes): $53.75
3. Comparison and Conclusion: Since the CA DIR rate of $53.75 (including $24.15 in base wage and $29.60 in fringes) is higher than the Davis-Bacon rate, you should pay $53.75 per hour to meet the higher requirement.
If you are looking to take an even deeper dive to learn the ‘ins’ and ‘outs’ of Davis-Bacon and prevailing wage compliance, check out our online courses at https://lcptracker.com/academy/.
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