As the economy continues to struggle, many contractors are adding public works projects to their repertoires just to stay profitable. Public projects can be a lucrative source of new work, but they’re also subject to complex federal and state requirements fraught with traps for the uninitiated. Prevailing wage laws are among the most treacherous.
Most federal projects are subject to the Davis-Bacon Act, which requires federal contractors to pay a “prevailing wage.” That is, Davis-Bacon — along with its state counterparts — requires you to pay wages on a public project that are comparable to wages for similar work in the same geographic area.
What’s more, a majority of states impose similar requirements on state-funded projects. If a project is financed by both federal and state funds, the higher wage usually applies.
How are wages determined?
On federal projects, the U.S. Department of Labor (DOL) sets prevailing wage rates. On state projects, the equivalent state agency sets the rates. One of the biggest challenges for contractors bidding on public projects is worker classification. Prevailing wages may vary among different classifications, so it’s critical to get them right.
Complicating matters further, the DOL and state agencies may restrict the types of work that can be performed by workers in certain classifications. For example, a worker classified as a laborer may not be permitted to perform tasks traditionally associated with members of a particular trade or craft, such as plumbers or electricians.
Cash or fringe benefits?
Generally, prevailing wage rates consist of a base rate paid in cash and a fringe benefit amount. Contractors have the option of paying fringe benefits in cash or applying fringe benefit credits for contributions to “bona fide” benefit plans, such as health and life insurance, long-term disability plans, retirement plans, and vacation days or other paid time off.
Computing fringe benefit credits is complex, so you might be tempted to simply pay the fringe benefit amount in cash. But satisfying the fringe benefit obligation using bona fide benefit plans can be more cost-effective. Moreover, cash wages are subject to Social Security, Medicare and other payroll taxes, while contributions to benefit plans are generally exempt from these taxes.
Your advisors can help you determine which approach would be better for your bottom line in light of your existing compensation and benefit programs.
What record-keeping is needed?
Compliance with prevailing wage laws demands timely, accurate record-keeping. You’ll need to submit certified payroll reports periodically and keep accurate internal payroll records on file. It’s particularly important that you document the classification of workers and the tasks they perform.
In addition, general contractors and upper-tier subcontractors are responsible for prevailing wage violations by lower-tier subcontractors. So it’s important to gather records from these subcontractors to ensure they’re in compliance.
What are the penalties for noncompliance?
The penalties for prevailing wage violations can be severe. Under the Davis-Bacon Act, for example, they may include fines, contract termination or even “debarment” from future federal contracts for up to three years. And that’s not all — contract payments may be withheld to cover the violator’s liabilities for unpaid wages and certain other damages.
Contractors or subcontractors that falsify payroll records or demand kickbacks of wages are subject to civil and even criminal prosecution.
Plan before you bid
Compliance with prevailing wage laws is complex, so be sure you understand your obligations before you bid on a public works project. Because miscalculations can quickly wipe out any expected profits on a job, seek professional advice before you venture into this territory.
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