Published date: 06/17/2022
Let’s talk about the fundamental building blocks of Davis-Bacon: wages and fringes.
First of all, what does the “prevailing” in prevailing wage even mean? And how are the rates determined? For many, the word “prevailing” here might seem synonymous with “minimum”. As in minimum wage. And although it’s not way off the mark – because a prevailing wage is, in fact, deemed the minimum acceptable compensation for a given trade – it doesn’t really explain the “why” and “how” behind it.
So let’s break it down… A prevailing wage is composed of two main components (both mentioned above): the wage rate and the fringe benefit. The appropriate rates for each of these can be found on a project’s wage determination and they are specific to each craft and classification as well as geographical location. The process of determining this is a process managed by the United States Department of Labor (USDOL); they are responsible for creating the guidelines that govern what the wage and fringe rates will be.
So how does the USDOL come up with these rates?
The answer: surveys. Every year the USDOL creates a list of States and Counties that need their wage determinations updated, and they publish it via an All Agency Memorandum. They then send out survey requests to those identified to collect wage data from different geographical areas, analyze it, and publish the current “prevailing” rates. Wage determinations are modified anytime substantial information is submitted to them, which results in the “modifications” we see when reading a wage determination. It should be noted, though, that these federal wage rates and fringes are locked-in for the life of a project. Whereas one project that lasts multiple years may continue to use an older determination, a new project that goes out for bid will have to use the latest published rates.
The Basics of Wages and Fringes
A wage, as defined, is a fixed, regular payment, made by an employer to an employee. A fringe benefit is an extra benefit that supplements an employee’s total compensation package; however, they are not paid during overtime. It’s important to add that individual states may have their own fringe requirements.
According to the USDOL, fringes can cover:
- Health Insurance
- Life Insurance
- Sick Leave
The above USDOL approved fringes can be paid directly to the employee or paid into a plan. There are some fringes, however, that are not permissible by the USDOL, and contractors should take note. Some of them include:
- Social Security contributions
- Unemployment compensation
- Workers’ compensation
How are Fringes Paid?
Fringes can be rolled into a specific payment plan that makes it easier to track the payments. The USDOL allows for three types of plans:
- Funded plans
- Unfunded plans
- Annualization plans
The first option is a fund, plan, or program that does not need USDOL approval. The amount of the contribution would be paid to a trustee or third party, such as paying for an employee’s health insurance. These contributions must be paid irrevocably and at least once a quarter.
Unfunded plans are when the contractor supplies the benefit to the employee directly and the contributions must be set aside in a separate account. Typically, this would be used for a holiday plan, sick plan, or vacation plan. It’s important to note that unfunded plans require contractors to get permission from the USDOL’s Wage & Hour Division (WHD). Contractors must then provide benefits as described under the Davis-Bacon Act (DBA). They must also represent a commitment that can be legally enforced. While the USDOL mandates that these payments must be carried out under a financially responsible plan, these plans must be put in writing to the affected workers.
And then there are annualization plans. These must also get permission from the WHD. This method is generally considered more complex, which often encourages contractors to use the traditional funded or unfunded fringe benefit plans. With annualization, DBA credit is based on the annual rate of contributions for all hours the employee worked (both DBA and non-DBA work). Employers would use the average employer contribution instead of the employee’s total hours of work in a year.
How Can Contractors Meet Their Fringe Benefit Obligation?
Contractors have three options for paying their employees fringe benefits. They can:
- Pay both hourly wage and hourly fringe in “cash”
- Pay the wage in cash, and pay the fringe benefit into a bona fide program, plan, or fund
- Pay a combination of the first two options above
If you’d like to learn more about wages, fringes, and other components of prevailing wage compliance, check out: https://lcptracker.com/academy/.
These materials are being issued with the understanding that LCPtracker is not engaged in rendering legal or other professional services and is providing these for informational purposes only. If legal, accounting, or tax expert assistance is required, the services of a competent legal, accounting or tax professional should be sought.