Prevailing wage was established under federal law by the Davis-Bacon Act of 1931. The act mandates that contractors and subcontractors pay their workers an hourly prevailing wage when working on any federally funded construction project over $2,000. The U.S. Department of Labor determines the prevailing wage for any project. The prevailing wage is typically based on the wages paid to workers on similar projects in the area. The act was intended to avoid situations where contractors would low-ball their proposed costs on a project at the expense of their workers’ wages. There are several states that have their own prevailing wage laws, known as “little Davis-Bacon” acts, for any state-funded construction projects and do, in some cases, extend to projects at the local and municipalities level as well.
So prevailing wage is basically a worker’s hourly wage?
Yes and no. Prevailing wage comprises two parts: The first is the basic hourly rate paid to each worker. The second is what is known as the “fringe benefits” amount. Fringe benefits include a separate per-hour dollar amount paid out as part of a worker’s wages or used to fund a “bona fide” benefits plan, such as a 401(k), life and health insurance, vacation, and holiday pay, or even apprenticeship training programs.
Simply put, if a worker’s base pay on a project was $30 an hour and the fringe benefits amount was $10 an hour, the contractor can pay out the $10 in fringe benefits as wages, essentially increasing the worker’s hourly pay to $40, or they can elect to put that $10 into a benefits plan for their employee.
So, which is better — cash or a bona fide benefits plan?
Many contractors pay out the mandatory fringe benefit as wages because it’s the easiest way to comply with the law. While that may be true, it’s also much more costly to the contractor. And the reason is pretty simple: all wages paid to employees are subject to payroll taxes, such as social security taxes, federal and state unemployment taxes, workers’ compensation insurance, and general liability insurance. The rate varies, but it is estimated that the additional cost to the contractor for these payroll taxes is roughly 25 cents for every dollar paid in wages.
On the other hand, if a contractor uses those fringe dollars to fund a “bona fide” benefits plan for their employees, that money would be exempt from all payroll taxes. Thus saving the contractor tens of thousands, maybe even hundreds of thousands, of dollars a year.
Don’t believe me? Here’s an example:
Let’s say Contractor A has 25 employees working on a prevailing wage job that will last six months. Each employee works approximately 500 hours during this time, and the fringe amount is roughly $10 an hour.
25 (employees) x 500 hours = 12,500 hours
12,500 (hours) x $10 fringe benefit dollars = $125,000 fringe benefit dollars
If Contractor A decides to pay out that $125,000 fringe benefit as wages to their employees, they will be hit with a 25% payroll tax on every single one of those dollars.
$125,000 x 25% in payroll taxes = $31,250 in additional payroll taxes
If Contractor A elects to put those fringe benefit dollars into a “bona fide” benefits plan for her employees, such as a 401(k) retirement account, not a single dollar would be subject to payroll taxes. That means $31,250 in savings, which can be used later to make more competitive bids for future projects.
Using these fringe dollars properly also allows a contractor to implement or improve their existing benefit programs in a few ways:
- For those employers who offer a 401(k), paying the fringes as cash means funding the benefits in duplicity, as these payments are paid out of the operational account of the business. Using these fringe dollars to an employer and employee’s advantage can reduce that extra expense considerably.
- In today’s tight labor market, employees look at total compensation packages, including benefits like a 401(k). These fringe dollars can assist companies with bolstering their current programs by offering better benefit coverages or adding additional benefit options for their employees.
- Employers can improve their 401(k) plan by using fringe dollars to offset or meet matching requirements they may choose to include. This includes discretionary employer match, safe harbor, or profit-sharing contributions to the plan. Contractors often hesitate to include matching contributions to their retirement plan due to the costs. Utilizing the prevailing wage dollars to meet a portion of these contributions allows you to offer more retirement benefits to all your employees at a reduced cost to the company.
Required annual compliance testing for all 401(k) plans can be extremely complicated and are put into place to ensure that all participants benefit equally from the plan. When working with a plan administrator specializing in designing retirement plans for prevailing wage contractors, you can be confident that you are staying compliant and offering the best solution for all your employees and the company owners.
In the end, when utilized correctly, prevailing wage — comprised of a per-hour cash wage and a per-hour benefits wage – is a significant benefit to both the laborers and contractors working on publicly-funded construction projects.
Prevailing wage benefits isn’t easy business. For over 35 years, Beneco has focused exclusively on serving the unique needs of contractors through retirement plans, health care benefits, compliance services, and HR solutions and has a level of expertise in prevailing wage that few can offer.