Prevailing Wages in Construction

Prevailing wages are a mechanism used by the U.S. Department of Labor to ensure that construction workers receive consistent pay rates, especially for government-related projects. This includes jobs such as painters, carpenters, construction workers, and other tradespeople working on government contracts.

Are you planning to employ labor for a construction project that necessitates prevailing wage rates? If so, it’s critical to understand the exact amounts you’ll need to compensate your employees. These amounts can vary greatly depending on your location, the type of workers you hire, and applicable laws.

In this post, we’ll guide you through the fundamentals of prevailing wages in the construction industry: what they are, how they work, and best practices. Feel free to read straight through for a complete understanding, or use the links below to jump to specific sections:

What is prevailing wage?

A prevailing wage is the basic hourly wage and benefit rate provided to a group of similarly employed workers in a specific geographic area. Current compensation levels are used by policymakers to establish pay and benefit floors for workers in the area. This applies to many occupations, like carpenters or electricians, who are doing work through a government contract or when working with a government agency.

Here’s an example: Let’s say that the Los Angeles City Council determines that a local road needs repairs. Consequently, they hired a local asphalt and cement company to work on the paving project. Workers employed on this public-private contract must be paid in accordance with prevailing wage laws, provided that the state maintains prevailing wage requirements.

Note that several related acts determine how prevailing wages are applied:

• According to the Immigration and Nationality Act, hiring a foreign worker must not negatively impact the pay and working conditions of American workers. U.S. Department of Labor laws demand that a foreign worker’s pay be equal to the prevailing wage rate. The average pay provided to workers in a specific occupation is known as the prevailing wage rate.
• For federally sponsored public works projects, such as repairing public buildings or constructing roads or bridges, the Davis-Bacon Act mandates that prevailing wages be paid. Federal legislation sets a $2,000 minimum threshold, so prevailing wages must be paid if a public works contract exceeds that amount.
• The McNamara-O’Hara Service Contract Act (SCA) applies to contractors and subcontractors providing services for prime contracts valued over $2,500. Employers must pay service employees at least local prevailing wage rates and benefits, or the amount designated in the predecessor’s collective bargaining agreement, including any future increases. The Department of Labor will make contract-by-contract wage determinations upon specific requests from contracting agencies.

Prevailing wage vs. minimum wage

Prevailing wage laws differ from minimum wage laws and usually apply to unique occupational categories within the construction industry. Minimum wage laws set the lowest amount businesses are legally allowed to pay employees, regardless of the occupation.

Prevailing wages specifically apply to work performed on public works projects or through a government agency, primarily affecting labor in construction projects, electrical work, and carpentry. Often, the prevailing wage may be higher than the minimum wage, as the latter is meant for workers performing “unskilled” labor.

Which states have prevailing wage laws?

About half of the U.S. states have prevailing wage laws specific to the construction industry, though the dollar threshold after which the laws apply can vary by state. Some states have a lower threshold—like California, where the prevailing wage rate must be paid on any project exceeding $1,000. New York has no threshold at all. Other states have higher thresholds; Maryland’s is $500,000.

States that do not have prevailing wage laws include:

• Alabama
• Arizona
• Arkansas
• Colorado
• Florida
• Georgia
• Idaho
• Indiana
• Iowa
• Kansas
• Kentucky
• Louisiana
• Michigan
• Mississippi
• New Hampshire
• North Carolina
• North Dakota
• Oklahoma
• South Carolina
• South Dakota
• Utah
• Virginia
• West Virginia
• Wisconsin

The Department of Labor provides a table to explain the varying thresholds in each state, along with a list of resources and fact sheets.

How is prevailing wage calculated?

The prevailing pay rate is the basic hourly rate paid on public works construction projects to most workers in a certain occupation. This information is gathered from the local area and the surrounding labor market region, provided that most workers are paid at a particular rate.

If most workers aren’t paid at a certain rate, the modal rate—the most common rate—is used. In some cases where a modal or majority wage cannot be determined, a special prevailing wage determination may apply instead.

Why is it important to understand prevailing wage as a construction business owner?

Federal prevailing wage laws are just that—laws. While it might be tempting to reduce payroll costs by paying workers less, this is not advisable. Violating these laws can result in significant penalties and fines in addition to the back pay owed to underpaid workers. Being found in violation can also result in being barred from future government contracts, a major setback for construction businesses relying on these contracts for revenue.

Since 1985, businesses have paid over $197 million to workers in back wages due to underpayment on prevailing wages. It’s simplest to comply and pay the prevailing wage. Besides being legally required, it’s also the right thing to do for your workers. Now, let’s look at the benefits your business can reap from adhering to these laws.

How does your construction business benefit from prevailing wage laws?

Paying your construction workers a higher wage can benefit your business significantly. Here are a few advantages:

• Workers earn a living wage: Prevailing wage laws help workers maintain sufficient earnings for a comfortable life, ensuring they can provide for their families, plan for retirement, and more. Workers earning fair wages tend to be happier and more productive.
• Aid in addressing racial inequities: Adhering to prevailing wage laws helps close wage gaps and ensure fair pay across all demographics. By pairing prevailing wages with targeted hiring programs, construction businesses can support communities that traditionally struggle with fair-paying work.
• Promote high-quality work: Workers paid higher wages generally perform better, benefiting both taxpayers and businesses. A construction company’s reputation for good work strengthens, and taxpayers see a better return on their investments.

Best practices for complying with prevailing wage at your construction business

Ensuring compliance with prevailing wage laws benefits businesses, workers, and taxpayers. Here’s how to keep your business on track after being awarded a government contract:

• Research and understand the law: As a construction business owner, it’s your responsibility to know applicable laws, including labor laws. Research local prevailing wage laws in your state before taking on government contract work. Ensure you have all necessary foreign labor certifications if hiring non-residents.
• Certified payroll reports: Clear and understandable payroll reports make it easier to demonstrate compliance with the law. Utilize certified payroll reports to streamline your prevailing wage payroll process.
• Dedicated payroll software: Using payroll software like Tesseon’s makes it simpler to complete payroll tasks quickly, fairly, and in full compliance with the law. With a few clicks, you can manage pay, payroll deductions, workers’ compensation, and local law compliance all in one place. Plus, your payroll records will be easily accessible and well-organized.
• Make careful hiring decisions: Even if a subcontractor commits a payroll violation, the business owner may still be held liable. Ensure all subcontractors involved in a project are briefed on prevailing wage laws and remain compliant.

Key takeaways for prevailing wages

Here’s what to remember about prevailing wages:

• The U.S. DOL mandates that employers working through government contracts must pay their workers the prevailing wage in some states.
• Prevailing wages are based on the local majority or modal pay, depending on the occupation and location.
• Research local prevailing wage rates before committing to public works through the government.
• Only about half of all states have prevailing wage laws.
• Adhering to prevailing wage laws benefits workers, businesses, and taxpayers.
• Ensure your construction business stays on top of payroll and in compliance.

As a construction business owner, navigating payroll can be overwhelming, especially understanding the nuances of prevailing wages. Thankfully, with the help of guides like this one and payroll software like Tesseon’s, you can find answers to questions like “What is payroll?” and “How do prevailing wages work?” and ensure your employees are paid correctly and on time. Make payroll stress-free and keep your workforce happy with Tesseon’s tailored payroll solutions.