Many construction firms today are finding it difficult to navigate the complexities of the Davis-Bacon Act or state prevailing wage laws, especially those that work on both public and private contracts. All too often, contractors are incurring additional and unnecessary payroll costs due to improperly designed benefit plans or a general misunderstanding of the applicable prevailing wage laws.
The wage determination belongs to the contractor (not the employee) with the mandate that it be spent for the employee’s benefit in some combination of wages and bona fide third party administered benefits (i.e. health insurance, qualified retirement plans, flexible spending accounts, certified training programs, vacation plans and severance pay plans).
In California, the base wage must be paid out as cash compensation. Contractors not governed by Collective Bargaining or Project Labor agreements may redirect some or the entire fringe portion of a wage determination into the aforementioned plans at their discretion. The employee has no say in how the fringes are allocated. These monies are clearly viewed as employer contributions – not employee elective contributions.
An Merit Shop contractor has enormous flexibility in allocating fringe dollars (absent a Project Labor Agreement) to include allocating some or the entire fringe as an add-on to base wages.
In addition, these allocation choices can be made on a job by job and labor classification basis. As a result, if it is advantageous to pay additional cash wages to compete for labor or to attract certain trades on a particular job, there is latitude to do it.
Because of the discretionary nature of the fringe allocations, benefit plan designs can be customized to meet a contractor’s individual specifications. This flexibility often allows benefit plans to operate off the same platform for work performed in either the public or private sector – or, conversely, prevailing wage driven benefit plans can be established to operate concurrently with existing core benefit plans.
The ability to redirect fringe dollars into benefit plans affords a significant tax savings to both the employer and employee.
Since these dollars don’t flow through payroll, they are not subject to payroll taxes (FICA, FUTA, SUTA, Workers Compensation or General Liability insurance based on payroll) nor are they subject to income tax at any level.
This tax advantage allows an Open Shop contractor to compete with Union contractors who realize this savings by virtue of being mandated to contribute fringe dollars to Union Trusts under Collective Bargaining Agreements.
How these tax savings (often 5% or more of the labor cost associated with a project) are applied is at the total discretion of the contractor. They can be utilized to reduce bids or increase profits – and that decision can be made on a job by job basis.
Visit www.mbottinelli-fis.com to learn more.
All of the complex issues facing contractors require special assistance and unique benefit planning.