Avoid the Pitfalls of Prevailing Wages

Taking on government contracts can be a smart way to grow a construction business — especially with the proposed American Jobs Plan that seeks to invest billions of dollars into transportation infrastructure, including roads, bridges, waterways, ports, and airports, and a widescale effort to modernize the power grid.1 The resulting contracts from such a plan could mean years of work for contractors and subcontractors as well as more prevailing wage jobs for skilled workers across the nation.

Most contracts under this plan would fall under prevailing wage law with many construction companies looking toward government contracting as a new revenue stream. Although this can be an effective path toward growth, every potential government contractor should prepare for possible pitfalls along the way in order to successfully transition into government contracting.

What Are Prevailing Wage Laws?

Prevailing wage laws dictate how much certain classifications of workers must be paid when working on public works projects. Federal prevailing wage laws started with the Davis-Bacon Act in 1931,2 expanding over the years with related acts and additional laws at the federal and state levels. The goal of these types of laws is to prevent companies from undercutting the local wage rates by bringing in cheaper labor from outside areas.

Federal prevailing wage laws include the Davis-Bacon and Related Acts (DBRA)3 and the McNamara-O’Hara Service Contract Act (SCA).4 DBRA applies to federally-funded contracts over “$2,000 for the construction, alteration, or repair (including painting and decorating) of public buildings or public works.”5 SCA applies to prime contracts in excess of $2,500 and governs service-related federal work,6 which can include regular maintenance and upkeep-related work or professional services such as accounting.

For both DBRA and SCA, if the prime contract is over $100,000, eligible workers must be paid at least 1.5 times their regular pay rate for all hours worked over 40 in the work week. Contracts under these various dollar thresholds typically fall under the federal minimum wage. Additionally, provisions within other labor laws, including the Contract Work Hours and Safety Standards Act and the Fair Labor Standards Act (FLSA), may also apply to prevailing wage contracts.7

While 24 states do not currently have prevailing wage laws in place,8 many do have their own prevailing wage laws that govern how state-funded contracts are handled with varying dollar thresholds and rules that contractors must follow. There are also federally assisted contracts in which federal dollars help fund a project, but the government is not a party to the construction contract itself.

All prevailing wage laws, both federal and state, come with their own set of requirements governing what type of work qualifies, how much must be paid, and what type of reporting must be completed to prove compliance. It is the responsibility of the company that holds the contract for the work to follow all applicable laws.

What Happens If a Company Does Not Follow Prevailing Wage Laws?

At the federal level, the Wage and Hour Division (WHD) of the Department of Labor (DOL) is responsible for investigating and enforcing prevailing wage laws. States also have various organizations in place to oversee their own prevailing wage laws. For instance, the Department of Industrial Relations is responsible for enforcing state labor laws in California and the Texas Workforce Commission oversees labor issues, including prevailing wages, in Texas.

If a worker reports a potential prevailing wage violation, the WHD will investigate by visiting jobsites, interviewing workers, and examining payroll records. If they find that a violation has occurred, they have the authority to take action to recover lost wages. They can also issue penalties and investigate related labor violations that fall under other laws, such as the Contract Work Hours and Safety Standards Act. If the investigation determines that the issue was a willful violation, they can debar the company from future government contracts.9

The WHD can also simply decide to investigate a jobsite, even without a complaint. Typically, enforcement actions include one or more of the following:

  • Repayment of back wages, adjusted to the correct prevailing wage rate when applicable.
  • Repayment of back fringe payments, adjusted to the correct rate when applicable.
  • Financial penalties for noncompliance.
  • Debarment from future government contracts.10

In February 2021, the WHD investigated and ruled against a Baltimore-based contractor for several labor law violations that occurred while working on a contract for the U.S. military. As a result, the company was ordered to pay more than $293,000 in back wages and fringe benefits, which included prevailing wage violations as well as overtime violations under the Contract Work Hours and Safety Standards Act.11

States have their own enforcement procedures in place, but they are similar to federal standards. State agencies will investigate employee complaints or simply spot check companies for prevailing wage compliance. They will also visit jobsites, interview workers, and examine payroll records. They can level penalties, collect back wages and fringes, and debar companies from future state contracts.

Who Has to Follow Prevailing Wage Laws?

Prevailing wage laws must be followed by contractors and subcontractors that work on eligible government contracts. Essentially, if the dollar threshold is met under the DBA, SCA, or state prevailing wage law, then those performing work under the contract must follow all applicable laws.

Here are a few questions to help decide if a project falls under prevailing laws:

  • Do you work on federally-funded or assisted contracts that involve the construction, alteration, or repair of public buildings or public works that are in excess of $2,000? If yes, then you must pay prevailing wages.
  • Do you perform services for federal entities with costs exceeding $2,500 (accounting, automotive work, janitorial services, etc.)? If yes, then you must pay prevailing wages.
  • Do you perform state-funded or jointly-funded projects that are paid for with federal and state dollars? If yes and the project meets the prevailing wage threshold, then you must pay prevailing wages.

Remember, there are also prevailing wage laws in many states and municipalities. It’s important to check with the local labor board to understand the various labor laws with which a company must comply before beginning any prevailing wage work.

Common Prevailing Wage Pitfalls

The rules and regulations surrounding prevailing wage work can be complicated, which makes compliance an ongoing struggle. One way to stay safe and on track is to make preventing common errors a priority by learning to recognize the compliance danger areas and implementing solutions that catch and prevent mistakes before payroll is processed.

The following common errors and solutions will help contractors understand the pitfalls of prevailing wage work so they can safely move into government contracting.

Failing to Pay the Correct Prevailing Wage Rate

One of the most common prevailing wage violations is failing to pay eligible workers the correct hourly wage rate. This tends to happen due to one of the following mistakes:

  • The wrong wage determinations are used to set hourly pay rates.
  • The wrong work classifications are used to determine which wage determination to use.

The Solution

Wage determinations tell what the prevailing wage rate is for every work classification. Often, the awarding agency provides wage determinations for the project, but the information may also be in the project bid package. Whether the information is provided or not, it is important to verify it. If a construction company finds itself in violation due to using the wrong wage determination, then the company faces compliance action, not the awarding agency that provided the information.

Work classifications define the type of work being done and the hourly and fringe benefit rate for that work. For example, bricklayers, carpenters, laborers, and roofers are all work classification types that come with their own hourly prevailing wage and fringe benefit rate. Work classification mistakes can happen because the wrong wage determination is used to determine the hourly rate or because workers fail to report the various types of work they do during their shift.

Wage determinations display work classifications, so if either is wrong, then the entire payroll will also be wrong. To eliminate this error, you must verify both the wage determinations and work classifications used to generate payroll. For federal jobs, use the award date of the project and look up the official wage determinations published by the DOL on sam.gov. On state prevailing wage jobs, check with your state’s labor office for updated wage determinations.

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