The Davis-Bacon act
The prevailing wage was set out as part of the state law by the Davis-Bacon act in 1931. The act stipulated that workers and subcontractors should pay their employees a prevailing wage per hour any time they are working on any construction projects financed by the state in a surplus of $2000. The U.S Department of labor is the institution that is responsible for establishing the prevailing wage for a new project. It is usually dependent on the wages paid to the employees employed on the same projects around the area. The idea behind the act was to prevent cases where contractors would reduce their proposed costs on a project at the expense of their employees' wages. Also, there are 27 States which have the prevailing wage laws called Little Davis-Bacon acts for all the state-funded construction projects. In some cases, it extends to projects at the local and municipal levels as well.
What is prevailing wage rate?
The answer is yes, and no. The prevailing wage is made up of two parts. The first part is the basic hourly rate, which is paid to every employee. The other part is known as the fringe benefits amount, and it is a single hourly dollar amount that can be paid as workers wage or can be used to finance a bonafide benefits plan like life and health insurance, vacation, and holiday pay, and sometimes apprenticeship training programs. In simpler terms, is the base pay of an employee or a project was $20 per hour and the fringe benefit amount was $5 per hour, the contractor can pay the $5 in fringe benefits as wages consequently increasing the workers hourly-paid to $25 or they can opt to put that $5 into a benefits plan for their workers. Learn more about prevailing wage here.
Therefore, which is better between cash or a bona fide benefits plan?
A majority of the contractors pay their employees the mandatory fringe benefits as wages since it is the simplest way to adhere to the law. Even though that might be true, it is more expensive for the contractor. The reason for this is that all the wages paid to workers are subject to payroll taxes like social security taxes, among others. The rate usually changes; however, it is approximated that the extra cost to the contractor for the payroll taxes is about 25 cents for each dollar paid out in wages. Find out what is prevailing wage on this link.
On the contrary, if the contractor uses the fridge dollars to finance a bona fide benefits plan for his or her workers, the money will not be subjected to all payroll taxes. As a result, the contractor can save thousands of dollars each year. If the contractor uses the fringe dollars correctly, it enables them to implement or upgrade the existing benefits programs. When employers that have benefits pay the fringes by cash, it means that they are financing the benefits in double because these payments are paid from the operational account of the business. The expenses can be decreased significantly if they use the dollars to the benefit of the employer and employee. Ultimately, if used appropriately, the prevailing wage is composed of hourly cash wage and an hourly benefit wage. It is a significant benefit to the laborers and contractors working on federally-funded construction projects.