On August 8, 2023, the U.S. Department of Labor (DOL) announced a final rule that will change the prevailing wage rate landscape for employers on construction projects backed by federal funds (the Rule). The Rule updates regulations to the Davis-Bacon Act and related acts (the Acts) to change the way that prevailing wage rates are calculated and to place additional compliance obligations on federal contractors.

The Rule applies to federal contractors in the construction industry (covered employers), which the DOL expects will encompass over one million workers and $200 billion in covered work. The Rule will take effect 60 days after its final publication in the federal register, which should occur in short order, and will apply to new covered contracts with the federal government. With a limited exception addressed herein, current contracts are not impacted.

New prevailing wage rate methodology

Employers receiving federal funds for construction projects are required by the Acts to pay a “prevailing wage.” Since 1982, the prevailing wage rate has been deemed the wage rate earned by a majority of workers in a job title within a geographic area – typically a county – and, if there is no such rate, a weighted average of the rates earned by workers in that job title within that geographic area.

The Rule returns to a pre-1982 scheme that adds an intermediate step. If there is no majority-earned wage rate in the geographic area, the prevailing wage will be calculated based on the wage rate paid to the greatest number of employees within a given job classification within the geographic area, provided that rate was paid to at least 30 percent of such employees. The weighted-average method will apply only where there is no wage rate applied to at least 30 percent of employees within a given job classification.

Other key changes

The Rule presents additional changes and clarifications to the regulatory framework, including the following key changes:

  • Updates to the area and geographic scope. The Rule updates the definitions of “area” and “geographic scope” to allow the DOL Wage and Hour Division (“WHD”) to issue multi-county project wage determinations with a single wage rate per job classification, using data from all relevant counties, and permits state highway districts or similar State geographic subdivisions to serve as the “area” for a highway project. The Rule also permits WHD to pull data from adjacent counties when a given county does not have sufficient wage data, even when one county is characterized by the regulations as “metropolitan” and the other as rural. The elimination of the strict bar on mixing metropolitan and rural county data is a significant departure from current processes that may result in significant wage increases.
  • Updates to wage rates for a given contract. While wage-rate determinations generally still apply for the life of a contract, the Rule clarifies that, if a contract is modified to include additional substantial construction, alteration, or repair work, or to require the contractor to work for longer than originally obligated, then the wage-rate determination will be updated. This provision includes instances where a federal agency exercises an option to unilaterally extend the term of a contract. This update provision applies to current contracts later amended or extended after the effective date of the rule. For indefinite-delivery-indefinite-quantity contracts, wage rates must be determined on an annual basis.
  • Applicable projects and job classifications. The Rule clarifies whether several types of projects and job classifications are subject to the regulations and under what circumstances. For instance, demolition and removal activities are subject to the standards “when such activities in and of themselves constitute construction, alteration, or repair of a public building or work.”
  • Fringe benefit changes. The Rule addresses several issues regarding the treatment of fringe-benefit obligations under the Acts, including the creditability of unfunded plans, apprenticeship programs, and expenses incurred in administering a fringe-benefit plan against the Acts’ obligations, as well as the requirement that fringe benefits be annualized. Annualization refers to a method for calculating the hourly equivalent amount of an employer’s contributions to fringe benefit plans that may be credited against the employer’s contribution obligations.
  • Assumption of liability. The Rule clarifies existing requirements that prime and upper-tier subcontractors are liable for back wages owed by lower subcontractors and adds that prime contractors are liable for such back wages “regardless of intent,” whereas upper-tier subcontractors must have some degree of intent, such as recklessness or knowledge, to be liable.
  • Anti-retaliation and debarment. The Rule requires that applicable employers have an anti-retaliation provision in contracts that will prevent covered employers from taking adverse employment action against employees who participate in WHD investigations and other compliance actions. The Rule also strengthens debarment provisions that allow the DOL to bar employers from future contracts when they show a “disregard of obligations to employees or subcontractors.”
  • Recordkeeping. The Rule heightens recordkeeping requirements for covered employers, requiring that records are kept for at least three years, as well as including a requirement that employers keep additional records of employees, including email addresses and phone numbers, and for longer than previously prescribed.

The Rule is a robust reframing of the regulatory scheme and has several changes beyond the key changes identified herein.

Moving forward for employers

Although it is likely that lawsuits will be brought that seek to stall the Rule’s imminent effective date, covered employers should do the following to ensure compliance alongside business needs:

  • Prior to bidding for or entering a covered contract, covered employers should ensure they are aware which prevailing wage rate is applicable and consider that rate in calculating any bid for contracted work or to determine whether the contract is economically viable. Covered employers must also consider changes to wage rates when modifying contracts.
  • Covered employers should avoid provisions in contracts that allow for unilateral extension of the contract by a federal agency, which could bind the employer to unaffordable updated wage rates.
  • Covered employers should have anti-retaliation training and processes in place that cover protections for employees who initiate or otherwise participate in WHD investigations or other compliance activities.
  • When in doubt, employers should confirm whether they are covered by the Acts and regulations based on new or clarified interpretations in the Rule. Employers should also confirm which job classifications on a project will be covered by a prevailing wage rate.

The Rule will likely increase covered employers wage costs and present additional regulatory hurdles and risks, but proactive measures can ensure that covered employers minimize risk while continuing to participate in over $200 billion in covered work.