Davis-Bacon Act Rule Changes: DOL's Priority on Withheld Funds

Goals of the Davis Bacon Act Rule Changes and Timeline for Implementation of the Final Rule

The Davis-Bacon Act is a federal law that mandates contractors and subcontractors to pay their laborers and mechanics employed under federally funded contracts at least the prevailing wages and fringe benefits for the corresponding work in the local area. On August 23, 2023, the Department of Labor (DOL) published a final rule titled "Updating the Davis-Bacon and Related Acts Regulations," which came into effect on October 23, 2023. The DOL's 812 pages of rule justifications and explanations contain many substantial changes that will both expand the scope of work covered by Davis Bacon and change the way that the DOL administers the Act.

The Department's revision of the Davis Bacon Act (DBRA) regulations is driven by a clear set of goals, which include providing clarity, enhancing usefulness, and addressing existing challenges. By outlining specific changes, such as reverting to the original definition of "prevailing wage" used from 1935 to 1983 and revising the delineation of wage survey data, the agency aims to achieve these objectives. Additionally, the reduction of the need for "conformances" is another significant aspect of the updated regulations.

The impact of these rule changes is expected to be substantial, potentially affecting a significant number of firms and workers. According to the Department's estimations, approximately 92,800 firms and 1.2 million workers could be affected by the new regulations governing the DBRA. To assess the potential impact on workers, the Department has adopted the same approach used in the 2021 final rule "Increasing the Minimum Wage for Federal Contractors." Furthermore, the Department projects that between 152,900 and 184,500 firms could be affected by the Related Acts, with an estimated 883,900 workers potentially impacted.

The final rule will generally apply to new contracts entered into after the effective date of October 23, 2023. However, certain exceptions exist to this general rule. Contracts that undergo significant changes to include covered work, contracts with exercised options to extend the term, and certain ongoing contracts may also fall under the purview of the rule.

By addressing the goals of clarity, usefulness, and challenges, these rule changes to the DBRA regulations aim to have a meaningful and far-reaching impact on the construction industry, ensuring fair wages and improved working conditions for countless workers involved in federally funded projects. The Department's estimates underscore the scale of potential influence, emphasizing the significance and scope of these regulatory revisions.

DOL Asserts Priority Over Competing Claims

The Department of Labor (DOL) has made it clear that their main priority when it comes to funds withheld for Davis-Bacon Act (DBA) and Contract Work Hours and Safety Standards Act (CWHSSA) violations is to ensure that they have precedence over other claims. This means that claims from a contractor's surety, contracting agency, trustee, assignee, successor, or claims under the Prompt Payment Act would not take precedence over the DOL's claim.

The DOL justifies their priority by stating that allowing other claims to take precedence would be unfair and go against public policy. They point to various court cases that support their stance, including cases that establish that withheld funds are not considered part of the contractor-debtor's bankruptcy estate.

Wage and Hour, the agency responsible for enforcing these acts, emphasizes that withholding funds covers a wide range of obligations, including unpaid wages and monetary relief. They also note that fund suspension can occur if a contractor fails to submit certified payroll or provide the required records. To ensure clarity and precision, Wage and Hour has proposed changes to the rule. These changes involve edits to the withholding contract clauses and the addition of language specifying that fund suspension should continue until the necessary funds are withheld.

Revised Recordkeeping Requirements for Contractors and Subcontractors

The Department of Labor's Wage and Hour division oversees the management of information collection requirements for the Davis-Bacon and Related Acts (DBRA) regulations. These requirements encompass two specific information collections: the Davis-Bacon Certified Payroll and Requests to Approve Conformed Wage Classifications and Unconventional Fringe Benefit Plans. Contractors and subcontractors are obligated to maintain records related to contracts and subcontracts, encompassing bids, proposals, amendments, changes, and extensions for a minimum of 3 years after completing all work on the prime contract.

To enhance recordkeeping practices, the Department of Labor (DOL) proposes a new requirement that includes the inclusion of telephone numbers and email addresses in the records. This measure ensures accessibility to the DOL and contracting agencies upon request. Furthermore, the proposed rule aims to eliminate the use of conformances that are designed to evade the application of listed classifications in the wage determination.

Feedback on the proposed changes has been varied, with some individuals supporting the revisions and others expressing concerns about potential burdens placed on contractors. In response to the comments received, the DOL has decided to adopt the changes as originally proposed in the final rule. As a result, there will be a slight increase in the paperwork burden for the Davis-Bacon Certified Payroll, while the burden for Requests to Approve Conformed Wage Classifications and Unconventional Fringe Benefit Plans will remain unchanged. 

Reverting to the "Three-Step" Method for Determining Prevailing Wages

As part of these updates, the DOL has decided to revert to the "three-step" method for determining prevailing wages. This shift in the DOL's approach marks a notable change from the previous method employed in determining prevailing wages. Under the new rule, the three-step method will be reintroduced, reflecting a departure from the use of single-source wage data that had been adopted in recent years.

By reverting to the "three-step" method, the DOL aims to achieve more accuracy and transparency in determining prevailing wages. This method involves a systematic process that considers wage surveys, collective bargaining agreements, and other relevant sources of wage information. Each step serves a distinct purpose, contributing to a comprehensive evaluation that reflects the actual wages paid to workers in a given locality.

The first step involves consulting existing wage surveys conducted by third-party organizations. These surveys capture wage data from various employers operating in the area and provide a broad overview of the prevailing wage rates. The DOL can leverage this comprehensive data to establish a solid foundation for further analysis.

The second step involves examining collective bargaining agreements (CBAs) to identify prevailing wage rates negotiated between labor unions and employers. CBAs often represent fair and mutually agreed-upon wage standards that reflect market conditions and the needs of workers. By incorporating these rates into the determination process, the DOL acknowledges the value of labor-employer negotiations in setting wages.

In the final step, the DOL evaluates additional sources of wage information, such as employer-provided data, state and local wage laws, and wage rates established by federal government agencies. This step ensures that no significant sources of wage information are overlooked and that the prevailing wage determination accounts for all relevant factors.

Compared to the previous approach using single-source wage data, the reinstatement of the three-step method provides a more robust and comprehensive approach to determining prevailing wages. By considering multiple sources, the DOL aims to capture a more accurate representation of wage rates and ensure a fair standard that reflects the actual wages paid to construction workers.

Furthermore, this change brings about increased transparency in the determination process. The use of multiple sources and the public availability of wage surveys and collective bargaining agreements foster greater accountability and allow stakeholders to review and validate the prevailing wage determinations.

Comprehensive Requests for Project Wage Determinations

The Wage and Hour Division (WHD) plays a crucial role in ensuring fair wages under the Davis-Bacon Act, and they have introduced changes to improve the process in 2023. One significant change is the emphasis on submitting a comprehensive request for a project wage determination. This request should provide detailed information about the project and the specific job classifications required. By doing so, contractors can ensure that the wage determination accurately reflects the prevailing rates for the work.

The WHD also addresses the process of revising wage determinations. It is important for these determinations to stay current and reflect any changes in prevailing wage rates. To rectify any clerical errors, contracting agencies are now required to make necessary amendments to wage determinations promptly. 

Additionally, WHD clarifies how to incorporate a wage determination after contract award or during ongoing construction. This is especially relevant in cases where the determination was not initially included or an incorrect determination was used. Contractors need to follow the outlined procedure for requesting reconsideration of a determination or a decision made by the Administrator. General wage determinations remain valid until they are revised, superseded, or canceled.

Noncompliance with wage determinations can have severe consequences. If a recipient or sub-recipient of federal assistance fails to incorporate the required wage determination, the agency may terminate the contract or withhold funds.

In addition to the Davis-Bacon Act, the WHD also addresses the "anti-kickback" regulations under the Copeland Act. These regulations apply to contracts subject to federal wage standards. Contractors and subcontractors have an obligation to submit weekly statements regarding wages paid, ensuring transparency and accountability. The WHD also outlines the circumstances and procedures for payroll deductions, further promoting fair and lawful practices in the industry.

Consideration for Small Businesses

The Wage and Hour Division understands the importance of considering the impact on small businesses when proposing changes, aligning with both the Regulatory Flexibility Act of 1980 (RFA) and the Small Business Regulatory Enforcement Fairness Act of 1996.

As part of this consideration, the department acknowledges that it currently lacks specific data to quantify the potential effects on firms' payroll costs. However, they do provide estimates on the number of small businesses that could be affected, ranging from 101,700 to 127,800.

Additionally, the Wage and Hour Division estimates the impact of the rule on small businesses by projecting direct employer costs. In the first year, these costs are estimated to be $39.3 million, with an average annualized cost of $7.3 million over a 10-year period.

Addressing comments from the Small Business Administration (SBA) and other small business representatives, the department has extended the estimated time for small businesses to familiarize themselves with the rule.

Despite the minimal potential impact on small businesses and no significant expansion of Davis-Bacon coverage, the agency has narrowed the scope of coverage at secondary construction sites, taking into account the cost concerns of small businesses. Although alternatives such as relaxing recordkeeping requirements were considered, the agency prioritized effective compliance and enforcement, leading to the rejection of those alternatives.

Implementation Costs and Regulatory Familiarity of the Final Rule

The Department of Labor (DOL) has made updates to the Davis-Bacon Act (DBA) regulations in accordance with Executive Order 13563, which emphasizes the consideration of costs and benefits when implementing regulatory changes.

When considering the overall expenses of the final rule, the Department of Labor (DOL) estimates that the implementation costs over the next decade will be around $7.3 million. Furthermore, the DOL recognizes that human resources personnel will need to allocate an average of four hours to review the rule for regulatory familiarity. Additionally, the DOL acknowledges the ongoing costs of updating wage rates, with the Wage and Hour Division planning to publish new rates derived from an average of 7.8 wage surveys annually.

While the revision of the prevailing wage definition and the provision to update outdated wage rates using the Employment Cost Index (ECI) may present administrative burdens for agencies, Wage and Hour believes that the overall time involved will be insignificant. It is worth noting that the implementation costs of the final rule are higher compared to the proposed rule due to increased time required for regulation review.

Addressing the regulatory familiarization costs, the DOL estimates that it will take approximately four hours for a human resources staff member to review the final rule. However, some firms may not incur additional implementation costs if they already regularly pay updated prevailing wage rates.

In terms of construction costs and inflation, Wage and Hour asserts that the impact on wages will be minimal and the direct costs for employers will be manageable. Furthermore, the update of outdated prevailing wage and fringe benefit rates on Davis-Bacon projects could potentially result in income transfers to workers.

The DOL highlights potential benefits of the rule, including enhanced government services, improved productivity, and decreased turnover. Referencing various studies, the DOL points out that the implementation of living wage ordinances in municipal contracts does not negatively impact competitiveness and, in some cases, even improves it. The department also cites research suggesting that union workers tend to be more productive than non-union workers and that higher wages can contribute to increased productivity. While these studies may not directly address changes in DBRA prevailing wages, the DOL argues that their general findings may still be applicable.