Effective October 23, 2023, the prevailing wage will increase for workers on government-funded construction projects that cost more than $2,000. This change will affect over one million construction workers.
As an employer, not only will this alter your bottom line, but it will also affect how you bid on government projects and operate competitively.
Let's dive into what the new prevailing wage law is, how it's different from the previous one, and what you need to do to prepare for it.
What Is the New Prevailing Wage Law?
The new prevailing wage law for 2023 says if a majority of workers in an area doing the same type of work are paid a certain rate, then that becomes the prevailing wage.
If there isn't a majority, then the prevailing wage is what 30% of other workers make in that area and for that type of work.
For example, say 50% of laborers in your area make $18 per hour—then this would be the prevailing wage rate. But if there's no majority? And 30% of workers make $22 per hour? Then, you would need to pay your team $22 per hour.
The previous law said that if there was no majority, workers had to make at least what 50% of other similar workers in the area were making—rather than 30%.
That means wages could have been lower since you're drawing from a bigger pool, including any contractors paying their workers excessively low wages.
By returning to the 30% rule, the new prevailing wage law should ensure that laborers receive a more competitive hourly wage.
Remember: This law only applies to government projects over $2,000.
What if There is No Clear Rate?
If there isn't one set hourly rate earned by at least 30% of workers, the DOL will use a weighted average. For example, let's say there are 1,000 laborers and:
- 250 earn $15 per hour
- 200 earn $20 per hour
- 150 earn $25 per hour
- 100 earn $25 per hour
The DOL will calculate the weighted average:
((250 x $15) + (200 x $20) + (150 x $25) + (100 x $25)) / (250+200+150+100) = $20 per hour, which becomes the prevailing wage rate.
Additional Prevailing Wage Requirements under the New Law
On top of the re-introduction of the three-step process to determine a prevailing wage, the new law will have several additional regulations, including:
- The Department of Labor can periodically update prevailing rates to address out-of-date wage determinations.
- The DOL can also adopt state or locally prevailing wage determinations based on specific conditions.
- Workers will receive greater protection via new policies surrounding debarment and anti-retaliation. For example, employers may need to compensate workers if they lose wages due to retaliation-based actions.
- Employers will have stricter recordkeeping requirements, including maintaining certified payroll records and employees’ contact details (email addresses and phone numbers) for at least three years after they complete a government project.
Brief History of How Prevailing Wage Is Determined
The prevailing wage law originates from the Davis-Bacon and Related Acts (DBRA) that Congress passed in 1931. It applies to all construction projects and assisted contracts that exceed $2,000 and are funded by a public body (any government organization).
The Prevailing Wage Act requires contractors and subcontractors involved in federal government projects to pay their laborers wages equal to, or more than, what a majority of workers in the same area earn.
Up until the 1980s, the Wage and Hour Division (WHD) used a three-step process to determine the locally prevailing wage rates for each classification of worker in a particular area:
- If a specific wage rate already applied to over 50% of laborers, then it became the prevailing rate.
- If there was no majority rate of wages, the DOL used the most popular rate as long as it matched the earnings of at least 30% of laborers.
- If there was no wage rate earned by at least 30% of laborers in the classification, the Department of Labor used a weighted average rate.
In 1983, Congress amended the Davis-Bacon Act and removed the second part of the process, so the standard became:
- The WHD identified if a single wage rate was paid to over 50% of laborers in a classification.
- If not, it used the average wage for that location and trade.
But as mentioned earlier, the DOL will revert to the pre-1983 process when the law goes into effect on October 23, 2023.
Now, before getting into the details of what you should do to follow the new prevailing wage law, let's briefly go over the difference between prevailing and minimum wage.
How Is Prevailing Wage Different from Minimum Wage?
Minimum wage is the lowest amount employers can legally pay their employees. In most industries, it applies primarily to low-skilled and entry-level positions and aims to protect workers from exploitation.
In 2023, the federal minimum wage is $7.25 per hour, but many states set their own minimum wages, which are often much higher. For example, California's minimum wage is $15.50 per hour—more than double the federal rate.
Prevailing wage, on the other hand, ensures contractors on government projects pay skilled laborers salaries and benefits comparable to local standards.
In short, minimum wage rates are broad and apply to low-income workers in all industries. In contrast, prevailing wages apply to skilled employees working on government-funded projects to ensure their wages align with those near their job site.
What Should Employers Do to Follow the New Prevailing Wage Law?
The new wage law will significantly impact construction workers and their employers. You'll likely have more obligations and responsibilities when it comes to public works contracts and labor-related issues.
Given that the new prevailing wage law will become effective on October 23, 2023, here's what you can do to ensure you comply.
Enhance Your Recordkeeping Processes
As mentioned earlier, the new rule requires you to maintain payroll records and employees' contact details for at least three years after you complete a government project. You must also keep records of each laborer's work classification and the hours they worked.
An efficient recordkeeping software can help you maintain detailed payroll data, employees' contact details, and other required information.
Bonus tip: With Hourly's payroll app, hours and wages are tracked automatically, helping you avoid legal pitfalls. The app stores all essential records, so you can easily access the files and pull up records for any worker, even on your phone. You can also set up payroll to reflect the prevailing wages for a specific government project.
Educate Your Staff
It's a good idea to bring your employees up to date on the latest regulations any time changes are made to prevailing wage law.
In the case of this new law, the most significant update is the re-introduction of the three-step process used to determine the prevailing wage rate before 1983. Besides that, the new law will also allow the DOL to frequently update the prevailing wage rates and adopt state or local prevailing rates under specific circumstances.
Without adequate knowledge, your staff might overlook these details or misinterpret the implications, which could lead to accidental non-compliance.
To prevent this from occurring, conduct training sessions with your HR and payroll teams to ensure they understand the new requirements and how to effectively navigate them.
Adjust Your Budget Accordingly
Although the new prevailing wage law is expected to help over one million construction workers earn higher hourly wages, it will make federally-funded public works projects more expensive on average.
This means your business may have to pay higher wages based on the updated calculations. Also, bear in mind that the DOL can adopt state or local prevailing rates, which may be higher than the rate you expected.
Monitor Subcontractors to Ensure They Follow the Law
While you, the primary contractor, may take extra pains to follow the new prevailing wage law, if your subcontractors fail to comply, it could still lead to legal issues for everyone involved. You could be liable for your subcontractor's non-compliance, even if you follow the law.
Therefore, actively monitor your subcontractors to ensure they pay their workers the correct prevailing wages. This not only helps the laborers get their fair share of compensation but also protects your business from legal consequences.
Seek Legal Advice
The Department of Labor has increased its focus on making sure employers follow the new DBRA labor standards, and those who don't may face stricter penalties for labor law violations.
Consulting with legal experts familiar with these laws will help you fully comply with the new prevailing wage law and understand your potential liabilities.
In addition, attorneys can offer invaluable advice that protects your interests when disputes arise, either with subcontractors or employees.
Maintain Open Communication with Employees
The new rules bring about changes that directly impact the wages and benefits of construction workers. So it's only fitting that your laborers should know what to expect with regard to their pay.
Your workers may also have questions or concerns about these changes. Open communication will help you clear up any confusion and help them understand their rights under the new regulations.
Furthermore, open dialogue builds trust between you and your workforce, which leads to a more harmonious and productive working environment.
Perform Regular Payroll Audits
Systematically review your wage payments and recordkeeping practices to ensure they align with the updated regulations. This proactive approach will help you catch and rectify any discrepancies or non-compliance issues, minimizing the risk of legal consequences.
Moreover, audits will help ensure that your subcontractors comply with the new law, protecting you from liabilities.
Understand the New Prevailing Wage Law and Stay Out of Trouble
The incoming prevailing wage law changes are likely to have a significant impact on how wage rates are set for federally funded public works projects. As an employer in the construction industry, you should be prepared to pay more for labor than you have in the past.
As with any legal process, consulting your legal team is the best way to understand how to work with this new law. You can also find additional information about these rules on the Department of Labor website in the frequently asked questions (FAQs) section.