Case Study – An Easy Win-Win for Employer and Employees
I recently spent some time consulting with a small paving contractor in the Southern Tier of New York. They have had some challenges controlling payroll related costs which, of course, impacts their bidding and profitability.
Their team of 25 field staff works approximately 85% on public works projects subject to the New York State prevailing wage law. The other 15% of their time is spent on private commercial projects, and time in the shop repairing and maintaining equipment.
In New York, the prevailing wage and fringe benefit rate must be paid on all public work hours. Contractors may satisfy the fringe benefit portion of the prevailing wage by either paying the prevailing benefit rate as additional cash wages, or by providing bona fide benefits that at least equal the rate.
I learned that the contractor has always paid the fringe benefit rate as additional cash wages. When I asked why, they told me that this was the easiest way for them to handle it and that the employees preferred getting a larger paycheck rather than a comprehensive benefit plan.
Although paying the fringe benefit rate as additional cash wages is an easy and compliant solution, it can also be the most expensive solution. This is because fringe benefits paid as wages are subject to what is commonly called the “labor burden” or “payroll burden” (payroll related taxes and premium such as FICA, workers compensation, liability premiums, etc.). According to this contractor, their labor burden was 47%. This means for every dollar they pay an employee, it cost them an additional .47 cents in taxes and premiums.
This particular contractor worked 34,000 total hours on public works projects. The average prevailing wage fringe benefit rate was $23 per hour which equates to $782,000 in fringe benefits. Paying those as wages created an additional cost to he employer of $367,000 ($782,000 x .47).
That is a lot of money for the sake of convenience and can also be the difference between a winning bid and coming in second place. However, before this problem can be solved, proper consideration needs to be given to the fact that their employees like things just as they have always been. Afterall, who doesn’t like a bigger paycheck?
This is a very common and valid concern. I have found that an effective way to address this concern is to provide an incremental solution utilizing Supplemental Unemployment Benefits which provides the same level of savings.
Supplemental Unemployment Benefits (SUB) provide cash benefits to workers when they need it most, during a seasonal layoff. The best part of SUB is that it is paid in-addition to state unemployment benefits and does not effect the amount of money employees receive from the state. It is also not considered wages, so it passes to the employee free of FICA – a 7.65% savings. You can learn more about SUB here (Harnessing the Power of Supplemental Unemployment).
Although the employees will no longer receive the fringe benefit rate in their weekly paychecks, they will be getting back all of their money and more, at a tax advantaged rate, spread through the winter layoff.
If you are paying close attention, you may ask why would they be getting more? The prevailing wage laws require the cost of benefits to be annualized. Essentially this means that in order for the contractor to get full credit for the fringe benefit contributions made to a benefit plan, they must provide equivalent benefits when working on non-public work.
The method this contractor will use to comply with the annualization requirements will be to pay the prevailing fringe benefit rate on non-public work just the same as they do on public work. I mentioned earlier in this article that the average fringe benefit rate was $23 per hour. This contractor will pay approximately $23 per hour into the benefit plan for all hours an employee works – not just the public work hours. The total expense to comply with annualization is the total of the non-public work hours times the fringe benefit rate – in this case about 5,100 hours x $23 = $117,000
To learn more about annualization please read Working the Fringe.
Let’s recap what the financial impact of this strategy means:
- Gross savings by providing SUB $367,000
rather than additional wages
($782,000 fringe x .47 labor burden)
- Cost to annualize
(5100 non-public hours x $23/hr fringe rate) ($117,000)
- Net savings to contractor $250,000
- Savings to employee:
($782,000 x 7.65%) $60,000
- Employer annualization contribution $117,000
- Administrative fees ($47,000)
- Net savings to employee $130,000
- Total Savings $380,000
As I mentioned earlier, I view this as an incremental approach. Benefits offerings can be expanded as employees grow more comfortable with the transition of fringe benefits being provided as actual employee benefits rather than as wages.
Any combination of bona fide benefits can be provided with prevailing wage fringes including, medical, dental, group life and disability, training benefits, paid-time off, supplemental unemployment and retirement benefits.
This small Southern Tier contractor is well on its way of becoming more profitable and their employees more financially secure.
How we can help:
DirectAdvisors, established in 2001 and located in Albany, New York provides bona fide benefit plan consulting and third party administrative services to merit shop (non-union) construction companies that are subject to the Davis-Bacon Act, Service Contract Act and state prevailing wage regulations. Our clients are located throughout the United States and range in size from 10 to 3,000 employees.
This year, our construction company clients will contribute tens of millions of dollars of prevailing wage fringe benefit contributions to The DirectAdvisors Trust (health & welfare benefits) and retirement plans managed by our team.
Our solutions are free from any conflict of interest as we do not sell any financial or insurance products. We work with existing agents, brokers and insurance companies.