If you are a Public Works contractor and offer a bona fide prevailing wage plan, you are likely familiar with the concept of annualization. The U.S. Department of Labor prevailing wage resource book refers to annualization as:
“The computational method that is used to calculate the hourly rate of benefit plan contributions that are creditable to a contractor’s prevailing wage fringe benefit obligation on covered projects.”
Practical use of the annualization calculation works like this:
Employee A works a total of 1500 hours during the year. 1000 of those hours are public works hours.
– The employee had a total of $20,000 of bona fide benefits, health insurance, supplemental unemployment, and retirement contribution.
– The employee earned $30 per hour base pay and $20 per hour fringe for a total package of $50 per hour.
The calculation: $20,000 total bona fide benefits / 1500 Total Hours = $ 13.33 Hourly Credit
The formula provides the contractor with a $13.33 credit towards the contractor’s fringe benefit payment obligation.
Prevailing Wage and Underpayment of Fringe Benefits
A common mistake that many contractors make is they use the $13.33 for bona fide benefits–once the employee stops doing public work and performs private work, the contractor does not continue to pay $13.33 on private hours.
If you think you are “all set” by using the fringe dollar credit on public hour only, you will be in for a big compliance problem. In my example, the employee works a total of 1500 hours, and 1000 of those hours are public works.
To avoid an underpayment, the contractor must pay $13.33 fringe dollar on both public (fringe dollars) and private hours (contractor dollars). Total payment required by the contractor on private hours: $6665.00 ($13.33 x 500 hours).
You may be asking: Does this make economic sense for a contractor to pay $13.33 on every private hour?
Here are some things to consider:
1. How much does it cost you to pay your employee a dollar of compensation? This includes Workers Compensation/General Liability insurance/FICA/FUTA
2. Do you contribute employer dollars for health insurance, 401(k) or vacation pay?
3. Amount of public works projects performed
– These questions will play a very important part in the decision made by a contractor to use employee fringe benefit dollars for bona fide benefits.
Making Annualization Work for You
Dealing with annualization can be more than a bit complicated. The variables can significantly impact profit or loss. Because of this, it is important to choose a method of annualization that works for your company. Whether you decide to put the fringe benefit dollars in the paycheck, use the dollar credit method or implement a prevailing wage Trust, we can help!
Our firm has more than twenty years of experience working with contractors and helping them make these important decisions. We will provide you with the necessary guidance to make these decisions with total confidence.