December 29, 2016

Avoiding Compliance Pitfalls of Prevailing Wage Laws


This article originally appeared in the November 28, 2016, edition of the Daily Journal of Commerce

Prevailing wage laws require construction workers employed by private contractors or subcontractors on public projects be paid wages and benefits at least equal to the "prevailing" wage for similar work in the locality in which the project is located. Prevailing wage laws exist at the federal, state, and local levels.

The federal prevailing wage law, the Davis-Bacon Act, requires private contractors and subcontractors to pay workers the prevailing wage/benefit package on all construction contracts exceeding $2,000 for construction, alteration, or repair of federal public buildings or public works. Oregon’s equivalent, its “Little Davis-Bacon Act,” requires private contractors and subcontractors to pay workers the prevailing wage/benefit package on "public works" projects with a contract price greater than $50,000.

A contractor or subcontractor found to have violated prevailing wage laws can face contract termination, debarment from future projects, and the withholding of contract payments to satisfy any unpaid wage, in addition to fines, penalties, liquidated damages, and an award of attorneys’ fees. Therefore, it is important for contractors and subcontractors to keep themselves up-to-date on all recent changes to the federal, state, and local prevailing wage rates.

Prevailing Wage Jobs

The first step to maintaining compliance with prevailing wage laws is to determine whether and which prevailing wage laws apply. Which prevailing wage law applies is based on the source of the project’s funding: federal, state, or local. Contractors should be aware, however, that a construction project may have various funding sources. For example, under federal regulations, the Davis-Bacon Act applies when work is performed using funds in excess of $2,000, regardless of whether a federal agency is the owner of the project. In other words, if there is federal money providing even part of the funding on a project, it may be subject to the Davis-Bacon Act and require payment of prevailing wages and fringe benefits. In cases of multiple funding sources, the contractor or subcontractor should comply with the prevailing wage laws resulting in the highest wage/benefit package.

Establishing Proper Prevailing Wage Rates

The next step to maintaining compliance with prevailing wage laws is to properly calculate the wage/benefit package. The prevailing wage rate is made up of two components: (1) an hourly base rate and (2) an hourly fringe benefit rate. A contractor or subcontractor can pay the prevailing wage in a number of different ways. First, the contractor or subcontractor may pay the total prevailing wage rate, including the fringe benefit amount, as cash wages. Alternatively, the contractor or subcontractor may credit toward the hourly fringe benefit rate the cost the contractor or subcontractor incurred for paying a “bona fide” fringe benefit (e.g., health/life/disability insurance, vacation, holiday pay, etc.). Last, the contractor or subcontractor may use a combination of cash wages and “bona fide” fringe benefits to meet the required prevailing wage.

The fringe benefit portion of the prevailing wage rate is complicated and often misapplied by contractors. For example, Executive Order 13706, signed on September 7, 2015, requires federal contractors to provide paid sick leave, which may not be credited against the fringe benefit rate under the Davis-Bacon Act for any paid sick leave actually provided. In other words, paid sick leave would traditionally be considered a “bona fide” fringe benefit but for Executive Order 13706. Whether Executive Order 13706 will remain in effect when the new administration takes office in 2017 is unknown. Further, certain benefits are not considered “bona fide” (e.g., use of a company truck, tools, travel expenses, and cellular phone), so these benefits may not be used to calculate the prevailing wage rate.

Since construction projects can span months or even years, it is important to note that the prevailing wage rates in place at the time the bid is solicited by the agency controls. The prevailing wage rates at the time of bid solicitation will control throughout the entire life of the project, even if the project spans years and the prevailing wage rates have been adjusted, up or down.

Correct Labor Classification

The prevailing wage rate that applies to a particular worker depends on the labor classification of the work being performed by that worker. Since labor classification is based on the actual work being performed, it is very common for a single worker to be classified in different ways in a single workday if the worker performs different types of work throughout the same day. Unfortunately, not all work performed on a given project falls neatly into the pre-established classifications. One option to stay compliant is to classify the worker at the higher pay rate. This, however, may not be economically feasible. Another option is to identify the tasks that do not fit neatly into any classification at the beginning of the project and agree in advance on the appropriate classification for that specific task. Correlating the specific tasks performed by the worker to the applicable prevailing wage will greatly assist contractors and subcontractors in staying compliant with prevailing wage laws.

Proper Bookkeeping

The prevailing wage laws require contractors and subcontractors to maintain certain records. For example, the Davis-Bacon Act requires contractors and subcontractors to maintain records that include: (1) name, address, and social security number of each employee; (2) each employee’s labor classification(s); (3) hourly rates of pay (including rates of contributions or costs anticipated for fringe benefits); (4) daily and weekly numbers of hours worked; (5) deductions made; and (6) actual wages paid. Contractors and subcontractors must maintain these records through the course of the project and for a period of three years afterwards. In addition, contractors and subcontractors must submit certified payroll records. Failure to maintain proper books and records exposes the contractor or subcontractor to penalties and fines and even withholding of contract payment when the inevitable audit rolls around at the end of the project.

When it comes to prevailing wage compliance, the old adage is true: an ounce of prevention is worth a pound of cure. When facing a prevailing wage issue, a contractor or subcontractor should immediately seek out experienced counsel to help guide them through the compliance pitfalls.

For more information on this topic, please contact or call (888) 598-7070.


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