Construction contractors have come under fire recently for Davis-Bacon Act ("DBA" or "the Act") compliance issues. Department of Labor ("DOL") investigations are becoming more frequent, aggressive and far-reaching. For most construction contractors, it is not too late to refresh their understanding of DBA's numerous requirements and reevaluate their compliance programs.
The DBA is a Great Depression-era statute designed to protect construction workers from the deflationary effects of intense price competition for public works contracts. The Act established a minimum level of wages and benefits based on skill level and geographical location (i.e., the region's "prevailing wages and benefits"). These prevailing wages and benefits apply to contracts and subcontracts ". . . in excess of $2,000, to which the Federal Government or the District of Columbia is a party, for construction, alteration, or repair, including painting and decorating of public buildings and public works . . . located in a State or the District of Columbia and which requires or involves the employment of mechanics or laborers . . . ."1
Before concluding that DBA does not apply to your contract, remember that approximately 60 other federal statutes (e.g., the Federal Water Pollution Control Act) invoke DBA prevailing wage and benefit provisions. Thesestatutes greatly expand the prevalence and geographical reach of DBA compliance requirements to a wide variety of construction contracts supported directly or indirectly by federal grants, loans, loan guarantees, and insurance. For example, while the DBA is limited to the 50 states and the District of Columbia, a construction contract located in the Virgin Islands funded under the Housing and Community Development Act of 1974 would be subject to DBA wage and benefit provisions.
Further complicating matters, several states also have DBA-like laws applicable at varying monetary thresholds.
An Increasingly Hostile Oversight Environment
The DOL identifies the construction industry in its most recent Strategic Plan as one of its four high-risk target industries. DOL explains that attributes such as significant levels of "subcontracting, franchising, temporary employment, independent contracting, and other contingent workforce characteristics"2 underpin its assessment of risk.
To implement its Strategic Plan, DOL's Wage and Hour Division (WHD) – the group responsible for administering and enforcing DBA – has hired over 350 new investigators. While the WHD has always investigated employee assertions of DBA non-compliance, the WHD's expanded army of auditors now routinely self-initiates DBA compliance reviews. Additionally, the WHD is extending the scope of its audits under the presumption that a specific infraction may be a symptom of chronic non-compliance. For example, while an employee complaint may have prompted an investigation into a particular job site, the investigation may now include other construction sites where similar non-compliances could occur.
Harsh Consequences of Non-Compliance
Not only are construction contractors facing increased DOL scrutiny and a larger audit workforce, but consequences of non-compliance have never been more severe. WHD auditors are generally less willing to negotiate and quick to use any of the weapons in their arsenal. Consequences of non-compliance can include the following:
- Payment of back wages and fringe benefits to employees;
- Withholding of payments due the contractor on active Federal contracts;
- Contract termination (including payment for any Government reprocurement costs);
- Personal liability for company officials;
- Debarment from all government contracts for a 3 year period; and/or
- False Claims Act liability.3
In FY 2012 alone, the WHD initiated more than 50 DBA related project investigations and collected more than $32 million in back wages for underpaid workers on DBA-covered contracts.
Overview of the Key Requirements
The Act's primary provision requires contractors to pay minimum wages and fringe benefits to covered employees that reflect the "prevailing" rates paid to similar laborers and mechanics in the subdivision of the state where the work is performed.4 Accordingly, each covered construction contract should incorporate one or more wage determinations ("WD") or collective bargaining agreements prescribing the prevailing wage and fringe benefit rates for applicable labor classifications in the project's geographical area. The contractor is contractually obligated to pay the rates set forth in the WD (or collective bargaining agreement), regardless of any pre-existing contractual relationship between the contractor and its employees.5
DBA's minimum compensation requirement has two essential components – hourly wage rates and minimum fringe benefits. During contract performance, the Act mandates that employees "will be paid unconditionally and not less often than once a week, and without subsequent deduction or rebate on any account, the full amount of wages and bona fide fringe benefits" required under the WD.6 Contractors have several options for discharging these payment obligations, including:
- Making cash payments directly to employees;
- Contributing to a fund, plan or program managed by a third party for the benefit of the employees;
- Assuming an enforceable commitment to bear the costs of such a plan or program; and/or
- Any combination of the above, provided the aggregate payments, contributions and obligations meet or exceed the prescribed hourly wages and fringes due.7
In fulfilling these obligations, it is important for contractors to understand what constitutes a "bona fide" fringe benefit in accordance with the Act.
To ensure the appropriate prevailing wages and fringe benefit rates are paid in accordance with the applicable WD, contractors must determine the correct job classification for each employee. This is a critical aspect of DBA compliance and a common pitfall for contractors of all sizes. A single WD typically includes ten to twenty different classifications ranging from easily-identifiable categories (e.g., electricians, plumbers, painters, and bricklayers) to more generic classifications (e.g., ironworkers, mechanics, and laborers). More recent WDs also tend to include specialized trades that can cause further confusion in the classification of labor. However, in response to industry concerns, DOL has more recently directed its wage surveyors to identify these trades only in limited circumstances.
Unless an exemption from DBA applies, contractors should identify the appropriate labor classification for each individual working on the project, including those employed by subcontractors. If an employee does not qualify for an exemption under the Fair Labor Standards Act8 and the WD does not contain a necessary labor classification for one or more employees, contractors must pursue a "conformance" (using Standard Form 1444) with the contracting officer. DOL ultimately reviews conformance requests and has broad discretion to recognize and define the various classes of workers for whom the prevailing wage must be determined.9 Where a contractor fails to make a DBA classification or misidentifies the nature of the work performed, the procuring agency is authorized to withhold contract payments retroactively to account for the full amount of back wages owed.10
Once a contractor classifies its employees, it is responsible for making known and paying the prevailing rates on the WD. The contractor must post notice of the applicable wages and benefits in a "prominent and easily accessible place at the site of the work."11 The Act's primary oversight mechanism is the certification of payrolls. Each contractor and subcontractor must furnish a weekly statement of the wages and benefits paid to each of its employees engaged on DBA-covered work during the preceding weekly payroll period.12 Certified payrolls must accurately and completely depict the name and address of each laborer and mechanic, his correct classification, rate of pay, daily and weekly number of hours worked, deductions made, and actual wages paid (see form WH-347). These DBA wage statements "shall be executed by the contractor or subcontractor or by an authorized officer or employee of the contractor or subcontractor who supervises the payment of wages."13
Contractors and subcontractors must mail or deliver a copy of their certified payrolls to a representative of the contracting agency — typically the contracting officer — who reviews them for compliance and makes them available for inspection by the DOL. While subcontractors are required to generate their own records of DBA-related payroll information, the prime contractor is responsible for the actual submission on behalf of its subcontractors.14 More broadly, prime contractors are responsible for subcontractor compliance with the Act and frequently face the brunt of DOL imposed penalties for any non-compliance. This amplifies the risks construction contractors take in subcontracting work under DBA-covered contracts and underscores the importance of strong oversight of the prime-sub relationship.
Strategies for Successful Compliance
A robust compliance program is the best means for a construction contractor to mitigate potential risk of significant DBA non-compliances. The following tactics are critical elements of an effective compliance program:
- Include key personnel in the compliance process – Successful DBA compliance involves, at a minimum, individuals from contracts, human resources, legal, finance/accounting, and project management.
- Understand the requirements and implement key compliance mechanisms – Ensuring you understand the complexities of the Act is half the battle. Instituting and consistently executing policies, procedures and ongoing trainings will make compliance part of your company's culture.
- Identify DBA requirements early – The pre-bid review is vital both for appropriately pricing the contract and maintaining the desired level of profitability considering the minimum compensation required.
- Validate and verify subcontractor compliance – Prime contractors are responsible for the compliance of covered subcontractors. While DBA-covered contracts include a mandatory flowdown provision, prime contractors should consider contractual protections such as audit rights, certifications, withholding mechanisms and indemnifications in each of their subcontract agreements.15
- Engage experts (consultants, attorneys, benefit processors) where appropriate – These individuals generally have the most experience and can either augment in-house expertise or assist when resources are not available.
- Develop and maintain trusting relationships with employees – While the DOL has increased its self-initiated audits, the majority of investigations originate from employee complaints. Not surprisingly, employees are often very knowledgeable of DBA because it affects their compensation. A culture of trust and respect improves the likelihood that employees will raise potential compliance matters to management rather than DOL.
1. 40 U.S.C. § 3142
2. U.S. Department of Labor Strategic Plan, Fiscal Years 2011-2016
3. See United States ex rel. Wall v. Circle C Construction, L.L.C., 697 F.3d 345 (6th Cir. 2012).
4. 40 U.S.C. § 3142(b)
5. 40 U.S.C. § 3142(c)(1)
6. 40 U.S.C. § 3142(c)(1)
7. 40 U.S.C. § 3142(d)
8. 29 C.F.R. 541
9. Associated Builders & Contractors, Inc. v. Herman, 976 F. Supp. 1, 17 (D.D.C. 1997).
10. 29 C.F.R. § 5.5(a)(2)
11. 40 U.S.C. § 3142(c)(2)
12. 29 C.F.R. § 3.3; 3.4; 5.5
13. 29 C.F.R. § 3.3(b)
14. 29 C.F.R. §5.5(a)(3)(ii)(A)
15. FAR 52.222-11