Prevailing Wage Fringe Benefits
When a contractor relies on federal government, state, municipal and education entities, there’s a lot of laws and regulations that they need to comply with. One of these legal requirements includes the mandatory wage and fringe benefit payments or more commonly known as “prevailing wage regulations”.
What are prevailing wage fringe benefits? These benefits come in two parts. First, there’s the basic rate of money that must be paid to the employee. Second, there’s the fringe benefits, which are a combination of items such as healthcare, vacation, pension and others that are provided by the employer. However, these fringe benefits can be given in two different ways. The employer can either provide those benefits directly to their employees, or pay them the cash equivalent of what these benefits would cost.
It might sound simple enough, but the fringe benefits segment of the prevailing wage regulations is complex and is normally not fully utilized by contractors. Why are these benefits constantly misinterpreted, and how does it affect the construction process?
Prevailing Wage Fringe Benefits Confusion
If there’s a lack of knowledge about prevailing wage fringe benefits, it can usually affect the outcome of a few things:
- Construction companies lose the opportunity to offer the most competitive bid
- Sub-standard employee benefit programs associated with competitive trade unions
- Non-compliance issues that can lead to major financial penalties, loss of the contract, and elimination from future project revenue.
This confusion may begin when a construction company has to choose between providing the prevailing fringe benefit rate as additional cash wages or as legitimate benefits. The cost of paying the fringe rate as cash wages can be expensive since wages are subject to payroll taxes and insurance premiums.
These costs are typically referred to as the “Labor Burden” and can range between 14% – 41% of payroll. However, if the employer provides legitimate benefits, and not cash, then these benefits are not subject to these tax costs or premiums, meaning contractors can take advantage of these large tax savings for more competitive bids.
Savings on Overtime Pay
There are some states in which you will not be required to increase the fringe benefit rate for overtime work. There are also two different acts you can utilize for fringe benefit rates. They are the Davis-Bacon Act and the McNamara-O’Hara Service Contract Act. So what are these two acts?
In essence, the Davis-Bacon and Related Acts, or DBA, applies to contractors and subcontractors performing on federally funded construction, alteration, or repair of public works. DBA contractors must pay their laborers and mechanics employed under the contract no less than the locally prevailing wages and fringe benefits for corresponding work on similar projects in the area. Contractors will only need to provide a certain amount of prevailing wages and benefits for the current project that is being performed.
As for the McNamara-O’Hara Service Contract Act (SCA), this requires contractors and subcontractors performing services on prime contracts in excess of $2,500 to pay service employees in various classes no less than the wage rates and fringe benefits found prevailing in the locality. The Department of Labor issues wage determinations on a contract-by-contract basis in response to specific requests from contracting agencies, which are then incorporated into the contract.
Competing Against Labor Unions?
Not having the proper fringe benefit plan means that workers are more likely to utilize union benefit plans. This could result in less workers and incomplete projects, which will only hurt your business in the future.
How it works is that a union benefit plan acts like a collective pool and provides funding for those currently working or retired. Union retirement plans are typically more defined and guarantee a predetermined benefit at a certain age, but are not linked to the amount that an individual worker actually contributes. These retirement plans generally have extended waiting and vesting periods before benefits begin, which can be punitive to employees.
This is where utilizing prevailing wage fringe benefits comes in handy. If used properly, these benefits will mean your contributions to fund employee welfare and pension programs can make open shop contractors more appealing for active and potential new hires. If the fringe benefit program is appropriately structured then it can radically exceed those offered by labor unions.
An open shop contractor has immense flexibility in the design and implementation of its fringe benefit programs. Correct fringe benefit planning can assist in the retaining of valuable employees and also attract high-caliber prospects since the fringe benefits are linked to an individual worker and not a collective pool.
How to Minimize the Cost of Benefits
As a construction company, you may elect to pay prevailing wage benefits in the form of cash wages, and also provide certain legitimate fringe benefits. This, however, means that you are essentially paying for the fringe benefits twice. This is fairly common with construction companies when they provide retirement programs such as 401(k) or other qualified plans.
With strategic planning, contracts that match employee contributions to a 401(k) plan can receive credit for that financial investment against their prevailing wage fringe benefit obligations. This means that you can reduce the “Labor Burden” in the future bid process and create a more attractive balance sheet which will increase your surety bond line of credit.
Types of Fringe Benefit Plans
All contractors fringe benefit plans fall into either of two categories: “funded” or “unfunded”.
Funded fringe benefit plans are those where the construction company’s fringe benefit contributions are made to designated trustee or TPA (Third Party Administrator) on a regular basis. These contributions cannot be reverted back to the contractor, and can be credited towards meeting the prevailing fringe benefit requirement without prior DOL (Department of Labor) approval.
Unfunded fringe benefit plans are set up where the contractor funds certain fringe benefits from the company’s general assets, rather than by payments to a third party. Unfunded fringe benefits commonly include things like vacation and holiday pay.
When a contractor provides these legitimate fringe benefits under such a plan, they can be creditable towards meeting the Davis-Bacon Act obligations if certain requirements are met. These can include:
- Justifiably expected to provide legitimate fringe benefits as described in the Davis-Bacon Act
- The fringe benefit program has been communicated in writing to all employees
- It is carried out under a financially responsible plan or program
- It portrays a fidelity on the contractors part that can be legally enforced
As you can see, prevailing wage fringe benefits can be a complex process to remember and fully understand. However, with the right know-how, you can utilize them to your full advantage. Depending on your needs, we can assist you in retaining a Tier-1 full-service fringe employee benefits company. So be sure to check us out for all your construction needs and questions.