It's all in the numbers!
TURNING PREVAILING WAGES INTO EMPLOYEE BENEFITS
As contractors vie for new public works projects, the prevailing wage — the minimum wage contractors generally are required to pay employees working on construction, reconstruction, demolition and maintenance projects initiated by public agencies — is getting more attention. The Davis-Bacon Act requires that a prevailing wage be paid on all federal projects for which costs exceed $2,000, and 32 states have their own prevailing wage laws.
Under Davis-Bacon, the U.S. Department of Labor sets prevailing wage rates for federally funded projects. For each job, the prevailing wage is divided into a minimum basic hourly rate and a fringe benefits amount, which the Labor Department also determines. For state-funded projects, individual states determine their own wage rates and fringe benefits amounts. If a project uses both state and federal funds, the higher wage typically applies.
Although contractors are required to pay their employees the base rate in cash, the fringe benefit portion can be paid in cash or in the form of a “bona fide” benefit plan, which can be used to fund a retirement account; medical, dental and vision insurance; life insurance; and even vacation and other paid time off. For many contractors, such a benefits plan can be a cost-efficient, mutually beneficial way to pass on their employees’ prevailing wage.
CASH CAN BE COSTLY
Many contractors who choose to pay all of the prevailing-wage in cash do so because they’re overwhelmed by the perceived complexities of a bonafide benefits plan. True, it may be a little easier to pay the entire prevailing wage in cash, but it’s much more expensive for your business.
The cash wages you pay your employees are subject to payroll taxes, including the Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) taxes, as well as state unemployment taxes and workers’ compensation. These taxes typically add about 25 cents to every dollar in wages paid. So, by channeling the fringe benefits portion of the prevailing wage into a bona fide plan, you’re reducing payroll costs.
For example, say your construction company has 25 employees who work on prevailing wage projects. You currently pay the entire $30 hourly wage in cash, but you’re thinking about channeling the $10-per-hour fringe benefits portion into a bona fide plan. The employees work 1,000 hours each annually, resulting in 25,000 hours total, which amounts to the $250,000 in fringe benefits. Factoring in the additional 25% in taxes you’d incur if you paid out the fringe portion in cash, that’s $62,500 you could be saving by switching to a bona fide benefits plan.
BUILDING A BETTER FUTURE
A substantial savings, it will not only boost your profitability but also give you the room you need to be more competitive in bidding on state and federal contracts. And should you choose to allocate the fringe portion of your employees’ prevailing wage to a retirement plan, you’ll be providing your employees with a reliable savings plan in the face of an unstable Social Security system.
If you already have a profit-sharing retirement plan in place, you can still initiate a prevailing wage plan as well, though you won’t be able to combine the two. You can establish a separate plan for your employees’ prevailing wage contributions, ensuring the new plan works in tandem with the current one. On the other hand, if you have an existing 401(k) plan, it may be possible to amend it to add qualified employees’ prevailing wages as an additional contribution.
THE DOWNSIDES OF A PLAN
Common pitfalls of a prevailing wage plan include a potential “annualization” requirement, depending on state law. An annualization provision requires an employer to make the same fringe benefits contribution on all hours worked, including time spent on private projects.
Other areas that vary according to state law include overtime payments, as well as compensation for transportation. Your CPA can help explain these issues and point you in the direction of a plan administrator who knows the intricacies of state labor law as well as the ins and outs of the construction business.
When rolling the plan out to employees, it’s best to explain to them that the savings generated by the new plan could result in more bids, more projects, and more job security. It’s also helpful to remind participants that the plan will benefit them, such as by helping them save for retirement and pay for medical expenses.
BENEFITS AND COMPLEXITIES
Ultimately, using prevailing wages to channel fringe benefits into a bona fide benefits plan can save money, boost your competitive edge, and create a solid retirement and insurance plan for your employees. But this strategy does come with complexities and regulations that are best discussed with your CPA and any prospective plan administrators beforehand.
COULD MY PREVAILING WAGE PLAN BE AUDITED?
By implementing a prevailing wage benefits plan, you could face an audit from the U.S. Department of Labor’s Wage and Hour Division (or one of its state equivalents) that would investigate whether you’re paying the wages appropriately and legally.
There are a number of related issues a compliance officer may investigate, including the proper classification of projects and whether you’re making sufficient contributions on behalf of your employees to the bona fide fringe benefits plan. Ask your CPA about the Employee Retirement Income Security Act (ERISA) requirements a plan must meet to be bona fide.
The key to dealing with an audit is thorough preparation. Your compliance officer will likely request records such as payroll reports, fringe benefit contribution records, and relevant trust documents. It’s important to keep these documents up to date so, if you should face an audit, the process will move forward smoothly and efficiently.