How to Calculate Fringe Benefits for Certified Payroll

Certified payroll is a mandatory reporting process for contractors and subcontractors on federally funded or assisted construction projects. This process ensures laborers and mechanics receive fair compensation, including a basic hourly wage and fringe benefits, as determined by prevailing wage laws. Accurately calculating and reporting these fringe benefits is fundamental for compliance. Proper calculation directly impacts a contractor’s ability to meet wage obligations and avoid penalties.

Foundations of Certified Payroll and Fringe Benefit Requirements

Certified payroll is a weekly report, typically submitted via Form WH-347, for projects receiving federal funds. Its purpose is to verify employees receive stipulated prevailing wages. The Davis-Bacon Act of 1931 originated this requirement, mandating minimum wages for laborers and mechanics on public works contracts over $2,000.

The Davis-Bacon and Related Acts (DBRA) define the “prevailing wage” as a combination of the basic hourly rate and fringe benefits for a specific job classification in a given geographic area. This prevents contractors from undercutting local wage standards.

Contractors can fulfill their prevailing wage obligation by paying cash wages or a combination of cash wages and contributions to bona fide fringe benefits. The Department of Labor determines these prevailing wage rates, which are included in the contract’s wage determination.

The DBRA applies to various construction work, including painting, plumbing, electrical work, and cleaning. It covers laborers and mechanics who perform physical or manual labor on the project site.

Determining Which Fringe Benefits Qualify

For a fringe benefit to be creditable towards the prevailing wage obligation under the Davis-Bacon Act, it must be “bona fide.” A bona fide fringe benefit is defined as a contribution irrevocably made to a trustee or third party to a legitimate fund, plan, or program. These contributions must be for laborers and mechanics, and the contractor cannot recapture or divert the funds.

Qualified bona fide fringe benefits include employer contributions to health insurance plans, pension or retirement plans, and various forms of paid time off. This includes vacation pay, holiday pay, and sick leave. Employer contributions to approved apprenticeship programs also qualify as creditable fringe benefits.

Conversely, certain employer costs do not qualify as creditable fringe benefits. Payments required by federal, state, or local law, such as Social Security (FICA) taxes, Medicare taxes, federal and state unemployment taxes (FUTA and SUTA), and workers’ compensation insurance premiums, are not bona fide fringe benefits. These are statutory obligations of the employer, not additional benefits.

Other non-creditable expenses include general overhead costs, administrative expenses, or contributions not irrevocably made on behalf of employees. For a benefit to qualify, funds must be dedicated to the employees’ benefit and managed by an independent entity or through a financially responsible plan.

Valuing Qualified Fringe Benefits

Valuing qualified fringe benefits is an important step in calculating the total hourly fringe benefit credit. The valuation method depends on the benefit type, converting the cost into an hourly rate. For health benefits, the annual or monthly premium cost per employee is converted to an hourly rate by dividing the total annual employer contribution by the total annual hours worked by that employee or classification. For example, if an employer pays $6,000 annually for an employee’s health insurance, and the employee works 2,080 hours per year (40 hours/week x 52 weeks), the hourly value of this benefit is approximately $2.88 ($6,000 / 2,080 hours).

Employer contributions to pension or retirement plans are valued similarly. The total amount contributed to an employee’s qualified retirement plan is divided by the total hours worked during the same period. For instance, if an employer contributes $2,000 to an employee’s 401(k) plan annually, and the employee works 2,080 hours, the hourly value is approximately $0.96 ($2,000 / 2,080 hours). This method applies to defined contribution and defined benefit plans.

Paid time off (PTO), including vacation, holiday, and sick leave, is valued by determining the cost of the paid leave and distributing it across total hours worked. For example, if an employee accrues 80 hours of vacation pay annually at an hourly wage of $25, the annual cost is $2,000 ($25 x 80 hours). Dividing this by 2,080 hours yields an hourly value of approximately $0.96 ($2,000 / 2,080 hours).

Contributions to approved apprenticeship programs are also creditable. To value these, the total annual cost or contribution made by the contractor to the program is divided by the total hours worked by all laborers and mechanics in that specific classification. Contributions for workers in one classification cannot be credited towards the prevailing wage obligations of workers in a different classification.

Calculating the Hourly Fringe Benefit Credit

The hourly fringe benefit credit is calculated by summing the individual hourly values of all qualified bona fide fringe benefits for each employee or job classification. This total amount applies towards meeting the prevailing wage fringe benefit requirement. For example, if an employee receives health benefits valued at $2.88 per hour, pension contributions at $0.96 per hour, and PTO at $0.96 per hour, their total hourly fringe benefit credit is $4.80 ($2.88 + $0.96 + $0.96).

This calculated total hourly fringe benefit credit is then compared to the required fringe benefit amount specified in the prevailing wage determination for the employee’s classification. If the employer’s actual hourly fringe benefit contributions meet or exceed the required amount, the fringe benefit portion of the prevailing wage obligation is satisfied.

An important aspect of Davis-Bacon compliance is the “cash equivalent” rule. This allows any excess fringe benefit contribution to offset a deficiency in the basic hourly rate. For instance, if the prevailing wage requires a basic hourly rate of $25.00 and fringe benefits of $5.00, but an employee is paid a cash wage of $24.00 and receives fringe benefits valued at $6.00, the $1.00 excess can cover the $1.00 deficiency. In this scenario, the total prevailing wage obligation of $30.00 ($25.00 cash + $5.00 fringe) is met by the $24.00 cash wage plus the $6.00 in fringe benefits.

While excess fringe benefits can cover a cash wage deficiency, cash wages paid in excess of the basic hourly rate cannot satisfy a fringe benefit deficiency. The goal is to ensure the sum of the basic hourly wage and creditable fringe benefits equals or exceeds the total prevailing wage rate.

Reporting Fringe Benefits on Certified Payroll Forms

Accurately reporting calculated fringe benefits on certified payroll forms, particularly the WH-347, is essential for compliance. The WH-347 form requires specific details about each employee’s work and compensation for the reporting week. This includes the employee’s name, Social Security number, job classification, hours worked, and total gross wages.

Fringe benefit information is reported in Column 6 of the WH-347 form, labeled “Total Basic and Fringe Benefits.” This column reflects the combined hourly rate of the basic cash wage and the hourly value of all qualified fringe benefits. Contractors must also indicate if benefits are paid directly to employees in cash or contributed to bona fide plans, typically in Section 4, “Statement of Compliance.”

For benefits contributed to bona fide plans, contractors must specify the plan type (e.g., health, pension) and the hourly rate of contribution in Section 4(b) of the WH-347. The form also includes space for deductions from wages.

Maintaining detailed record-keeping is fundamental. Contractors should retain documentation of all fringe benefit contributions, including proof of payments to third-party administrators for health or pension plans, and records of accruals and payouts for paid time off. These records are essential for demonstrating compliance during audits or investigations.