Don't blunder the benefits

With the private construction market still slow, many roofing contractors either are performing work on government construction projects subject to the Davis-Bacon Act for the first time or considering doing so. And as a result of state law or federal assistance by grants or loans, including the American Reinvestment and Recovery Act, many roofing contractors are learning state, local and county projects also may involve the requirement to pay prevailing wages in accordance with the Davis-Bacon Act.

Although you may be familiar with the requirement to pay prevailing wages on projects subject to the Davis-Bacon Act, complying with a fringe benefit obligation in the act proves more complicated.

The Davis-Bacon Act

Enacted in 1931, the Davis-Bacon Act protects local wage standards and gives local laborers and contractors a fair opportunity to participate in federal projects by preventing contractors from basing bids on wages lower than those prevailing in the area. The
Davis-Bacon Act requires prevailing wage rates, which are determined by the Department of Labor (DOL), to be paid to all laborers and mechanics who work on federal government construction projects in excess of $2,000.

In 1964, the Davis-Bacon Act was amended to include fringe benefits in the meaning of the terms "wages" or "prevailing wages." The cost of a fringe benefit usually is an hourly rate reflected in the wage determination though sometimes the fringe benefit contribution or cost may be expressed in a formula or payment method other than an hourly rate.

Meeting the obligation

You may meet the obligation for paying basic hourly rates and fringe benefits when both are contained in a wage determination in one of the following ways:

• Paying at least the basic hourly rate and making a contribution for fringe benefits in the wage determination
• Paying in cash for the basic hourly rate and making an additional cash payment in lieu of required benefits
• A combination of these methods, such as paying an hourly rate partly in cash and partly in payment of costs for fringe benefits, which total at least the fringe benefit obligation set forth in the wage determination

You also can meet the fringe benefit obligation by providing wages in excess of the prevailing wage requirement and applying the excess wages as an offset against the fringe benefit obligation.

Regardless of the method chosen, the total hourly wagerate paid to any roofing worker (basic wage or basic wage plus fringe benefits) may not be less than the total wage determination (basic wage or basic wage plus fringe benefits).

Paying in cash

If you pay the fringe benefit in cash, employees do not earn overtime pay on that amount. In other words, though laborers will receive the straight-time cash equivalent of the fringe benefit for each hour worked in excess of 40 hours for the week, on federal Davis-Bacon Act projects they do not earn the half-time component for fringe benefits paid in cash for hours that exceed 40 hours.

In addition, you are required to include the cash payment in your payroll and the cash payment is subject to withholding taxes, as well as workers' compensation. In general, depending on state law, the average payroll tax burden is between 14 and 25 percent.

However, the tax can be significantly reduced by providing bona fide fringe benefits instead. When the fringe benefit portion of the prevailing wage is met by providing a bona fide fringe benefit, the cost of providing such a benefit is taken off the payroll and exempt from taxes.

Bona fide benefits

Examples of bona fide fringe benefits include life insurance, health insurance, pension, vacation, holidays and sick leave. Importantly, payments required by federal, state or local law, such as workers' compensation insurance and Social Security, are not fringe benefit contributions. Per diems and use of a company vehicle also do not qualify as fringe benefits nor do discretionary bonuses or holiday bonuses.

Let's say you are working on a project subject to the Davis-Bacon Act that requires prevailing wages of $25 per hour and a fringe benefit of $10 per hour. If you pay the fringe benefit in cash, you are paying laborers $35 per hour ($25 hourly wage plus $10 fringe benefit). Assuming a payroll tax burden of 14 percent, the total payroll burden is $4.90 ($35 x 14%). When you prepare your bid for this work, the total hourly wage per employee will need to be $39.90 per hour ($35 plus $4.90).

On the other hand, if you provide a bona fide fringe benefit with a cash equivalent of $10 per hour, the payroll tax burden is $3.50 ($25 x 14%). The bid in this case will include a total hourly wage per employee of $38.50 per hour ($35 plus $3.50), which results in a savings of $1.40 per man-hour.

Only fringe benefits structured as either funded fringe benefits or qualifying unfunded fringe benefits may be used to meet the fringe benefit obligation.

A funded fringe benefit is a contribution you make to a trustee or third party pursuant to a fund, plan or program that covers your total future obligation. The third party must not be affiliated with you; the fund must be set up in such a way so you are not able to recapture any of the contributions paid or divert the funds for your use or benefit; and the contributions must be at least quarterly. An example of a funded fringe benefit would be vested contributions made to a 401(k) fund.

If benefits are unfunded, they must meet certain requirements to qualify for Davis-Bacon Act purposes. In particular, they must be given pursuant to a plan that could be reasonably anticipated to provide benefits, represents a commitment that can be legally enforced, is financially responsible and is communicated in writing to affected employees.

A plan that is reasonably anticipated to provide benefits must be able to withstand tests for actuarial soundness. An example of an unfunded fringe benefit would be contributions to a bank account (set up pursuant to sound actuarial principles) that would be sufficient to meet future obligations under the plan.

Calculating cash equivalents

Once you understand which benefits qualify as bona fide fringe benefits, the issue becomes verifying the benefit provided meets or exceeds the hourly rate as set forth in the applicable wage determinations. Many roofing contractors are surprised to hear this analysis must be done by looking at each employee assigned to a project and determining the benefits received by that individual and the hours that individual works. You cannot use averages to determine the applicable offset.

To calculate the cash equivalent of a benefit that will be used to meet the Davis-Bacon Act, consider the time period covered by the contribution or payment being made.

For example, if you pay health insurance premiums for employees in the amount of $200 per month per employee, the total hours worked each month by each employee on any project must be used to determine the hourly cash equivalent for which you are entitled to take credit. Again, this must be done separately for each employee because though each employee may receive the same premium payment, each may have worked a different amount of hours during the course of the month. In this example, regardless of the project, an employee who works 160 hours during the course of the month is receiving a fringe benefit with a cash equivalent of $1.25 per hour.

What if instead of providing health insurance, you offer to pay vacation days pursuant to a funded or un-funded plan that meets
Davis-Bacon Act requirements? The cash equivalent of this fringe benefit is a function of how much paid vacation is provided and the regular wage rate paid to an employee. If an employee earns $2,600 per year of paid vacation and works 40 hours per week for 52 weeks, the cash equivalent for this fringe benefit is $1.25 per hour ($2,600 divided by 2,080 hours).

If you offer vacation pay to employees but the pay is not pursuant to any plan, funded or unfunded, you still may claim vacation pay as a fringe benefit for Davis-Bacon Act purposes after the employee has used the paid vacation day. As a result, the fringe offset would only apply in the week within which the vacation day was used.

For example, say an employee is paid a regular rate of $14 per hour. The employee takes a vacation day on Monday and works 32 hours for the balance of the week. The paid vacation day has a value of $112 ($14 x 8 hours). Because the payment is made during the week and the employee worked only 32 hours this week, the cash equivalent of the benefit provided is $3.50 per hour ($112 divided by 32 hours).

Or let's say you provide only the health insurance benefit or the vacation benefit pursuant to a funded or unfunded plan but are working on a project subject to the Davis-Bacon Act where the fringe benefit hourly rate is $2.50. Using the previous examples, you only are providing a fringe benefit with an hourly cash equivalent of $1.25. As a result, you can use cash to make up the difference. However, this cash payment is subject to payroll taxes and withholdings. To avoid the payroll tax burden, you may instead choose to provide an additional benefit with a cash equivalent of at least $1.25.

One other option is available: If employees' regular rate of pay exceeds the prevailing wage, you may use the excess to offset the fringe benefit obligation. So if the regular wage rate exceeds the prevailing wage by at least $1.25, no further cash payment is required and you are not obligated to provide any additional fringe benefits.

Following an analysis of the cash equivalent of the benefits provided, you may find the benefit provided exceeds the benefit obligation. If this is the case, you are permitted to take the excess fringe benefit and offset it against the prevailing wage requirement.

For example, consider the situation where the prevailing wage is $14 per hour and the fringe benefit requirement is $1 per hour but you provide a fringe benefit with a cash equivalent of $3.50 per hour. In this instance, you can pay an hourly wage of $11.50 per hour for the week, which is $2.50 less than the prevailing wage obligation, because you are using the excess fringe benefit of $2.50 ($3.50 cash equivalent of benefit provided less the $1 required fringe benefit obligation) to offset the prevailing wage requirement.

Making the right choice

There are many issues to be addressed when determining how and whether your company will meet its fringe benefit obligation on a project subject to the Davis-Bacon Act.

Questions concerning whether fringe benefits are bonafide and how the cash equivalent of fringe benefits provided is calculated should be referred to DOL's Wage and Hour Division. There are regional offices for the Wage and Hour Division that are charged with answering these types of questions. Contact information for the regional wage and hour specialists can be obtained from the contract administrator assigned to the project. You also should consult with your benefits plan provider and legal counsel to ensure the fringe benefit obligation on a Davis-Bacon Act project is being met in a way that is most beneficial to you.

Philip J. Siegel is a partner with Atlanta-based law firm Hendrick, Phillips, Salzman & Flatt.