What business owners need to know about prevailing wages

You may have heard of minimum wage laws, but did you know many states require businesses and other employers to pay prevailing wage requirements, too? Prevailing wages are one way the U.S. Department of Labor ensures people who work in similar areas are paid at consistent rates for government-related work. This can include painters, carpenters, construction workers, and those who work for a government agency.

Do you plan to hire labor for a project that will require prevailing wage rates? If so, it’s important to know the exact amounts that you will be required to compensate your employees. That amount can vary significantly depending on your locality, the type of workers you hire, and the laws that may apply.

In this post, we’ll walk you through prevailing wage basics: what they are, how they work, and best practices. Read from end to end for a full guide, or use the links below to jump straight to the answer to your question:

• What is prevailing wage?
• Prevailing wage vs. minimum wage
• Which states have prevailing wage laws?
• How is prevailing wage calculated?
• Why is it important to understand prevailing wage as a business owner?
• How does your business benefit from prevailing wage laws?
• Best practices for complying with prevailing wage at your business
• Key takeaways for prevailing wages

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 can be used by policymakers to establish pay and benefit floors for workers in the area. This applies to many occupations, like security guards 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 has determined that a local road needs repairs. Consequently, they hire a local asphalt and cement company to work on the paving. Workers who are employed on this private-public contract must be paid in accordance with prevailing wage laws, provided that the state maintains prevailing wage.

Note that there are a few related acts that determine the way that prevailing wages are used:

• 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 to comply with the law. The average pay paid to workers employed in a specific occupation is known as the prevailing wage rate.
• What about federally sponsored public works projects, such as repair or improvement of public buildings or construction of public roads or bridges? In such cases, the Davis-Bacon Act mandates that prevailing wages must be paid. Federal legislation establishes a $2,000 minimum threshold, so prevailing wages must be paid if a public works contract is slated for more than that total.
• The  McNamara-O’Hara Service Contract Act  (SCA) applies to contractors and subcontractors. If they provide services for prime contracts valued at over $2,500, employers must pay service employees at least local prevailing wage rates and benefits. Or, they must be paid the amount designated in the predecessor’s collective bargaining agreement, including any future increases. In response to specific requests from contracting agencies, the Department of Labor will make contract-by-contract wage determinations.

Next, it’s important to understand the distinction between two kinds of wage laws: minimum wage and prevailing wage.

Prevailing wage vs. minimum wage

Prevailing wage laws work differently from minimum wage laws and often apply to unique occupational categories. Minimum wage laws apply to all work categories: It’s the lowest amount that businesses are legally permitted to pay employees, regardless of occupation.

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

A list of types of workers whose labor may be protected under prevailing wage laws includes:

• Carpenters
• Electricians
• Plumbers
• Ironworkers
• Flaggers
• Craftsmen
• Welders
• Concrete finishers
• Longshoremen
• Power equipment operators
• Helpers

Which states have prevailing wage laws?

About half of U.S. states have prevailing wage laws, though the dollar threshold after which the laws apply can vary depending on the state in question. Some states have a low threshold—like California, where the prevailing wage rate must be paid on any project in excess of $1,000. And New York has no threshold. Others are higher; 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 listofresources and fact sheets.

How is prevailing wage calculated?

The prevailing pay rate is the basic hourly rate paid on public works projects to the majority of 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 a majority of workers aren’t paid at a certain rate, the modal rate—the rate that’s the most common—is used. In some cases where a modal or majority wage is not determined, a special prevailing wage determination may apply instead.

Need help calculating pay for your workers? Use our paycheck calculator.

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

Federal prevailing wage laws are just that—laws. While it might be tempting to lower the cost of payroll by paying workers less, it’s not a good idea. If you break these laws, you’ll likely face penalties and fines—and that’s on top of the back pay you’ll owe the workers you underpaid. If you’re found in violation of prevailing wage laws, you may also be barred from ever taking on government work again. For industries where government work can account for a significant amount of business revenue, this can be a massive setback.

Since 1985, businesses have paid over $197 million to workers in back wages owed due to underpayment on prevailing wages. Rather than being found out and owing even more money, it’s easiest to simply pay the prevailing wage to workers. And, in addition to being legally required, it’s also the right thing to do for your workers. That brings us to the benefits you can expect from adhering to these laws.

How does your business benefit from prevailing wage laws?

The good news is that paying your workers a higher wage will benefit your business more than it hurts it. This is evident in much of the data on the fringe benefits of prevailing wage laws. A few of the benefits that your company can expect by sticking to these laws include:

• Workers earn a living wage.  Prevailing wage laws help workers maintain high enough earnings to lead a comfortable life, provide for their families, plan for retirement, and more. Workers who earn more money are likely to be happier at work and produce better output.
• Aid in racial inequities. Racial inequities continue to be a systemic problem in America. But by adhering to prevailing wage laws, you can help close these gaps by ensuring everyone is paid fairly. The  CenterforAmericanProgress recommends pairing prevailing wages with targeted hiring programs that benefit communities who may struggle to find fair-paying work traditionally.
• Promote high-quality work.  Workers who are paid more do a better job. Taxpayers and businesses both benefit from this, as workers who are paid a higher prevailing wage salary can provide a significant return on taxpayers’ investments. Businesses benefit as their reputation for good work becomes stronger.

For more prevailing wage information, labor standards, and other prevailing wage FAQ, see our article on  DavisBaconAct tips.

Best practices for complying with prevailing wage at your business

Complying with prevailing wages benefits business, workers, and taxpayers. So how can you ensure that your business stays on track after awarding a government contract? Try these best practice guidelines the next time you’re working on a public project.

• Researching and understanding the law.  As a business owner, it’s your responsibility to know the laws that apply to you, including labor laws. Be sure that you research local prevailing wage laws in your state ahead of time as you consider taking on government contract work. You also want to make sure that you possess all foreign labor certifications if you’re hiring non-residents.
• Certified payroll reports. Having clear and understandable payroll reports makes it easier to demonstrate to authorities that you’re in compliance with the law. Try using certified payroll reports to make your prevailing wage payroll process simpler.
• Dedicated payroll software. Payroll software makes completing payroll quickly, fairly, and fully in compliance with the law much easier. With a few simple clicks, you can manage pay, payroll deductions, workers’ compensation, and local law compliance in one convenient place. Plus, your payroll records will be conveniently accessible and well organized and you won’t have to figure out how to set up payroll.
• Make careful hiring decisions.  Note that even if a payroll violation is made by a subcontractor, the business owner may still be held liable. Be sure that all subcontractors involved with a project are briefed on prevailing wage laws and will remain in compliance.

Key takeaways for prevailing wages

Here’s what to remember about prevailing wages:

• The U.S. DOL maintains laws in some states requiring that employers working through government contracts must pay their workers the prevailing wage.
• Prevailing wages are a set amount based on the local majority pay or modal pay, depending on the occupation and location.
• Be sure to research what local prevailing wage rates are before signing on to do public works through the government.
• Only about half of all states have prevailing wage laws.
• It’s in your business’s best interest to adhere to prevailing wage laws, which benefit workers, businesses, and taxpayers.

Make sure your business is on top of payroll and in compliance

As a business owner, figuring out how to do payroll can be overwhelming—let alone understanding all the nuances of prevailing wages. Fortunately, you’re not left to your own devices to figure it out. Using this guide and payroll software, you can get answers to questions like “ What is payroll?” and “How do prevailing wages work?” and get payments on track.

For anything and everything payroll, QuickBooks is here to help—from setting up semi-monthly vs. biweekly payroll to making sure payroll taxes are filed. Minimize the stress of payroll and keep your employees happy with rapid direct deposit through QuickBooks Payroll—find out more today.