Changes to Davis Bacon Act - $217 Billion In Construction Spending

The Department of Labor (DOL) recently took an important step in enhancing the Davis-Bacon Act by publishing a notice of proposed rulemaking (NPRM) on March 18, 2022. This NPRM outlines crucial updates to sections of the 29 CFR, focusing on parts 1, 3, and 5. Leading the charge under the guidance of Amy DeBisschop, the Wage and Hour Division at the DOL has been entrusted with the responsibility of overseeing these regulations.

The Davis-Bacon Act (DBA) is an important piece of legislation that ensures the payment of prevailing wages and fringe benefits on Federal construction contracts. It applies to contracts exceeding $2,000 that involve the construction, alteration, or repair of public buildings or public works. In addition, the DBRA encompasses a range of "Related Acts" that extend prevailing wage requirements to Federal agencies involved in construction projects. Though the regulations were last updated by the Department of Labor in 1981-1982, it is important to acknowledge the significant expansion in the scope of the DBA and Related Acts since then.

$217 Billion in Construction Spending

The Department of Labor (DOL) oversees a substantial amount of Federal and federally assisted construction spending each year, totaling around $217 billion. This has a significant impact on approximately 1.2 million construction workers in the United States. With the implementation of the final rule starting on October 23, 2023, there are specific applicability dates and exceptions to be considered.

The Davis-Bacon Act (DBA), known as a "minimum wage law designed to benefit construction workers," plays a crucial role in safeguarding local wage standards. However, the Wage and Hour Division (WHD) has faced challenges regarding wage determination surveys, outdated wage determinations, and the absence of DBRA contract clauses.

Addressing the extensive feedback received on the Notice of Proposed Rulemaking (NPRM), the Wage and Hour Division has made the decision to adopt the proposed changes from the NPRM, albeit with some modifications. After careful evaluation, it has been determined that the existing regulations do not prioritize reliance interests at the expense of agency goals, as there were no significant reliance interests identified among contractors or other parties.

To ensure the regular updating of specific prevailing wage rates, especially those that are not collectively bargained, the Wage and Hour Division has revised § 1.6(c)(1). Additionally, they have granted the Wage and Hour Division Administrator the authority to adopt State or local wage determinations by revising § 1.3. Furthermore, new anti-retaliation provisions have been finalized in Davis-Bacon contract clauses. These provisions aim to enhance and clarify the process of recovering back wages through cross-withholding.

In an effort to minimize the need for "conformances" caused by insufficient data, revisions have been made to § 1.3 and 5.5. The Wage and Hour Division also delves into the DBRA regulations, which require contractors and subcontractors to provide fringe benefits or cash equivalents to workers. While periodic revisions have taken place over the years, a comprehensive review of the regulations has not occurred since 1981-1982. The DBRA allows the Department of Labor to exercise broad rulemaking authority, while the Wage and Hour Division administers the Davis-Bacon program, encompassing wage surveys and determinations, contract formation and administration, and enforcement and remedies provided by the department.

Guidance Documents

The Department's examination of guidance documents such as the "Manual of Operations" and "Prevailing Wage Resource Book" provides important context for understanding the Davis-Bacon and Related Acts (DBRA). These acts place certain obligations on contractors and subcontractors with regards to fringe benefits or cash equivalents for their workers. As the enforcer of these regulations, Wage and Hour outlines the measures and remedies available under the DBRA, including the authority to withhold funds, debar contractors from future contracts, and provide them with a right to a hearing. The agency also emphasizes the responsibility of the Secretary of Labor to establish "reasonable regulations" for contractors and subcontractors. The process for determining prevailing wage rates and fringe benefits, detailed in 29 CFR part 1, is also explained.

Moving forward, Wage and Hour delves into the proposed changes to the definition of "prevailing wage" in § 1.2. The objective of these changes is to reinstate the original three-step process for determining the prevailing wage. The agency highlights the significance of the final rule, which aims to modernize and update the existing regulations found in 29 CFR parts 1, 3, and 5. Of particular concern is the use of averages in wage determinations. Historical data reveals that prior to the 1982 final rule, only 15 percent of classification rates were based on averages. This reliance on averages is seen as conflicting with the purpose of the DBRA, which is to protect local wage standards. As a result, the agency asserts that a return to the three-step process is necessary.

The comments received on the definition of "prevailing wage," the proposed reintroduction of the three-step process, and the 30-percent threshold are also discussed. In the end, Wage and Hour has adopted the proposed re-definition of "prevailing wage" and has decided to revert to the three-step process. The agency acknowledges that the Department of Labor currently relies on weighted averages, which account for 63 percent of classification determinations. However, it argues that this use of averages contradicts the long-standing interpretation of the term "prevailing" in the DBRA. Consequently, Wage and Hour has chosen not to consider the median wage rate as the "prevailing" rate, as it does not align with their interpretation.

Debate Over the Definition of "Prevailing Wage"

The ongoing debate surrounding the definition of "prevailing wage" and the use of averages in determining wages is a subject of significant interest for the Wage and Hour Division. Within this discussion, the Associated General Contractors (AGC) and union representatives hold contrasting viewpoints. While supporters of the Department's proposal believe that using averages contradicts the purpose of the Davis-Bacon Act (DBRA), opponents argue that only a wage rate paid to the majority of workers truly qualifies as "prevailing."

In this regard, the Wage and Hour Division stands firmly in support of the proposal, asserting that the 30-percent threshold aligns with the authentic meaning of "prevailing." They argue that employing a modal methodology, rather than relying on averages, better serves the purpose of the DBRA. Their aim is to ensure that the prevailing wage accurately reflects what the majority of workers in a survey response are being paid.

To determine the prevailing wage, the division applies the 30-percent rule, which deems a wage rate as "prevailing" if it is paid to at least 30 percent of workers in a survey response. Moreover, according to the majority-only rule, a wage rate must be paid to the majority of workers to be considered "prevailing." These rules, together with the weighted average, form a three-step process for determining the prevailing wage.

The department acknowledges the arguments both in favor of and against the 30-percent rule. Some commenters assert that it does not precisely align with the definition of "prevailing," while others argue that it adheres to the intended meaning. Nevertheless, Wage and Hour stands by its decision to revert to the three-step process, emphasizing that it better aligns with the true meaning of "prevailing." They firmly believe that this approach provides stronger protection for workers against the potential negative impact of outlier wage rates.

The 30-Percent Rule

The Wage and Hour department is currently discussing the potential return to the 30-percent rule for determining prevailing wages under the Davis-Bacon Act. Supporters argue that this rule serves as a reasonable threshold and accurately represents the wages paid to a significant portion of workers. However, opponents believe that the 30-percent rule leads to less accurate rates that fail to reflect the actual wages and benefits in a specific area. Wage and Hour, however, dismisses these criticisms and instead attributes them to differing interpretations of the term “prevailing.” The agency also examines the potential impact of the 30-percent rule on wage rates and emphasizes the importance of following existing fluctuations when considering any changes.

Wage and Hour also explains why they do not rely on data from the Bureau of Labor Statistics (BLS) for Davis-Bacon Act wage determinations. According to them, BLS data lacks essential information, such as benefits, county-level data, and construction type breakdowns. They explore suggestions for improving the wage survey process, including the use of certified payrolls, updated and standardized classifications, and contractors providing wage information by individual craft classifications. Wage and Hour reaffirms their decision to revert to the 30-percent threshold for determining prevailing wages, as they believe that the current reliance on averages contradicts their long-standing interpretation of the Act. They refute claims suggesting that the D.C. Circuit's Donovan decision prohibits a return to the 30-percent threshold, considering it unnecessary and unfavorable to abandon the current Davis-Bacon wage survey process or require changes to survey data through regression or statistical analyses.

Moreover, Wage and Hour rejects arguments stating that the return to the 30-percent threshold can only be justified by proving that the current majority rule is inherently prohibited by the statute. They consistently maintain that relying on BLS data instead of conducting Davis-Bacon wage surveys is not ideal for determining prevailing wages. Additionally, Wage and Hour disagrees with the proposal to adopt the standardized national Standard Occupational Classification system for construction worker classifications in the Davis-Bacon program, as suggested by ABC.

The agency discusses the benefits of reverting to the 30-percent threshold for determining prevailing wages, emphasizing the reduction in conformances and increased frequency of wage determinations. They argue that these changes will improve the wage determination program without deviating from the statutory language and purpose of the Davis-Bacon Act. While some may advocate for more flexibility in analysis and the use of averages or statistical modeling, Wage and Hour disagrees, emphasizing the importance of determining prevailing wages based on "projects of a similar character" and ensuring accuracy through project-specific reporting.

Furthermore, Wage and Hour asserts that using BLS data would result in less accurate craft classifications. They address concerns about potential inflationary effects of the 30-percent threshold but argue that it does not consistently lead to the highest prevailing wage rate. While some argue that prevailing wage requirements rarely increase overall construction costs, others claim that the 30-percent threshold will raise costs and make certain projects financially unfeasible. The department addresses these concerns and dismisses arguments against the reversion to the 30-percent threshold. Wage and Hour discredits the reliability and accuracy of past reports, such as the 1979 GAO report, the Department's 1981-1982 analysis, and the two CBO reports from 1983 and 1985, asserting that they fail to consider labor market forces or productivity losses.

The Department's findings indicate that reverting to the 30-percent threshold will have little impact on contract costs or national inflation rates. They reference various studies that support this conclusion. In response to claims that the rule could contribute to a wage-price spiral, the Department cites the 1983 CBO report, which found no measurable effect on inflation. They also present studies suggesting that wage increases do not lead to significant economy-wide price increases. Since DBRA-covered contracts represent only a small portion of the overall economic output, the Department argues that the 30-percent rule will not have a significant effect on inflation. The Department addresses concerns about the rule's impact on residential construction, stating that it is unlikely to result in wage rate increases for residential projects, and any potential increase in construction costs would not broadly impact housing prices or rents. The Department dismisses concerns about the rule's interaction with increased infrastructure spending, asserting that their analyses show no substantial impact from the 30-percent rule. Finally, the Department explores the legal question of whether it is appropriate to use a method aimed at reducing construction costs, considering that the DBA was enacted to protect employees from earning substandard wages. They acknowledge their shift in stance since 1982, when they expressed criticism of the 30-percent rule, but note that certain commenters, such as ABC, are making similar arguments, asserting that non-union contractors are more likely to base compensation on skills or productivity.

Three Step Process for Determining the Prevailing Wage

The Department of Labor has responded to concerns regarding the potential impact of the proposed changes on affordable housing development costs. They argue that the 30-percent threshold may not necessarily increase expenses. In their proposal, the Department discusses the return to the three-step process for determining prevailing wages. They estimate that the use of single prevailing wage rates not derived from collective bargaining agreements (CBAs) would increase from 12 percent to 36 percent. The agency also addresses the impact of the proposed change on fringe benefit rates, referring to the Mistick Construction decision in 2006 that limits the Department's consideration of functionally equivalent wage rates.

To determine the prevailing wage, the Department suggests allowing the inclusion of functionally equivalent variable rates in the regulations. Comments in favor and against the change have been received, with some arguing that it may distort wage determinations, while others believe it aligns with the Davis-Bacon and Related Acts (DBRA). Despite potential reliance interests, the Department concludes that the value of the functionally equivalent analysis outweighs this concern. Criticisms regarding the use of collectively bargained rates are dismissed, as the Department argues that the functionally equivalent analysis does not compromise the accuracy of wage determinations. The Department agrees with commenters supporting the proposal, stating that it will reduce reliance on average wage rates and provide a better reflection of local construction wages.

The Department rejects arguments that the proposal conflicts with the definition of "prevailing wage" or contradicts the Mistick decision. Likewise, they disagree with the notion that the proposal increases the likelihood of collectively bargained rates being considered prevailing rates. The Department clarifies that the functional equivalence analysis applies to both collectively bargained and non-collectively bargained rates. They provide examples of wage differentials that may be considered functionally equivalent, such as rates based on the time of day or day of the week. The Department explains that the functional equivalence idea does not apply to wage differentials arising from different underlying work. Additionally, concerns about potential disadvantages for contractors bound by collective bargaining agreements (CBAs) are addressed.

CBA's Standard Rate as "Functionally Equivalent"

The Department recognizes that treating market recovery rates and standard rates from collective bargaining agreements (CBAs) as "functionally equivalent" may not always be appropriate. However, the Department has implemented the change, allowing for the consideration of rates as functionally equivalent when determining the prevailing wage. While some suggestions were made to further clarify this aspect, they were not accepted.

To maintain consistency in the language used in the rule, the Department will revise the wording to refer to "workers" instead of "employees." Additionally, the Department will amend the text to allow for a determination of functional equivalence based on one or more collective bargaining agreements or written policies.

The Department emphasizes the importance of flexibility when identifying functionally equivalent wage rates and provides an example of how zone rates have been regularly identified in wage determinations. Proposed changes to the definition of "area" are discussed, allowing for different geographic units. To streamline the process for project wage determinations, the Department proposes adding language that would enable the issuance of project wage determinations with a single rate for each classification, using data from all relevant counties where the project will take place. The proposal to allow for multi-county project wage determinations has garnered support, as it would reduce administrative burdens and be beneficial for highway and broadband projects.

While there are some complaints about the proposal, suggesting that it should be used only when appropriate and that wage determinations should accurately reflect local labor markets without undercutting the highest rates paid in any county included, the Department assures that the proposal aligns with the purpose of the Davis-Bacon Act (DBA). The Department will follow a three-step process to determine if any wage rate prevails in a given "area." Although there is support for making single-rate project wage determinations required, there is also opposition, arguing that the statute requires separate prevailing wages for each subdivision. However, the Department disagrees and adopts the proposed language. The proposal to use State highway districts as the relevant wage determination area for highway projects is also addressed. Several commenters support this proposal, stating that it would simplify the process. Despite opposition from one commenter, the Department cites the plain text of the DBA and the Wight decision and adopts the proposal.