The Department of Labor is poised to publish in the Federal Register its first comprehensive updates to the Davis Bacon Act in 40 years. Enacted during the Depression, the Act was intended to protect local wage rates by preventing contractors from bidding based on wages lower than the prevailing wage in the locality around the worksite. To this end, the Act provides that workers on federally funded construction projects must be paid the “prevailing wage” for their services.

“Prevailing wage” is a concept familiar to companies whose employees work on public works projects. Although the concept is straightforward—any person who works on a construction project paid in whole or in part by public funds must be paid the “prevailing wage”—actually calculating the “prevailing wage” is a bit more difficult.

Among other things, the DOL’s proposed new rules reinstates a step in the “prevailing wage” calculation, and also expands the “site of the work” definition.

Calculating the “Prevailing Wage”

From 1935 until the Reagan-era revisions to the rule that took effect in 1983, the DOL used a three-step process to calculate the "prevailing wage." This three-step process is what the DOL recommends using again in its new rule, and it involves going through the following three steps to calculate the prevailing wage:

• First, the prevailing wage can be any wage rate paid to a majority of workers.
• Second, if there is no wage rate paid to a majority of workers, then the so-called “30-percent rule applies”: the prevailing wage can be the wage rate paid to the greatest number of workers, provided it was paid to at least 30 percent of workers.
• Last, if the 30-percent rule cannot be met, then the weighted average rate in the locality is the “prevailing wage.”

In the 1980s, the DOL issued a new rule that eliminated the second step, as lobbyists and lawmakers argued that it had contributed to inflation. The DOL’s new rule proposes returning to the above three-step process, and thus resurrecting the second step.

Expanded Coverage of Offsite Work

Existing regulations provide that offsite work constituting a “significant portion” of the work is covered only where the offsite facility was established specifically for the project at issue. The final rule expands the “site of the work” to include offsite locations where a “significant portion” of a building or work is constructed for specific use in the designated building or work provided the offsite location is established specifically for, or dedicated exclusively or nearly so to, the performance of a covered project. “Significant portion” is defined as entire portion(s) or module(s) of work (e.g., a complete room), and not simply materials or prefabricated components. The final rule also makes clear that exclusively working on a project for a few hours or days to meet a deadline is not enough; the period triggering coverage is one of weeks, months, or more. The geographic area relevant for calculating the prevailing wage will be the location of the secondary construction site, not the primary worksite.

This final rule is an expansion of coverage, but is not the sea change expected. The DOL’s original NPRM issued over a year ago would have eliminated the requirement that the facility be established for the performance of the project. This would have left the “significant portion” requirement as the only apparent restriction on offsite work. This was a large expansion of coverage and faced considerable industry pushback over the last year. In its final rules, the DOL acknowledged some of the opponent’s arguments, including the impracticability of paying prevailing wage in factory environments where products were created for multiple clients. The final rule reflects a more moderate, but still significant, expansion of coverage.

Other Updates from the New Rule

The new rule redefines several terms, both clarifying and expanding the coverage of the Act by doing so. To name just a few, the “building or work” is now defined to specifically include solar panels, wind turbines, broadband installation, and installation of electric car chargers. By adding these energy-infrastructure related activities to the non-exclusive list of construction activities, the DOL signals the significance of energy infrastructure to modern construction and provided examples of what types of activities are covered by "building or work." The DOL also clarified that the definition of “building or work,” whether public or private, includes construction involving just a portion of a building or work, including installation of equipment or components into a building or work. This additional language locks in the long-standing guidance from the DOL on this issue.

The new rules also codify the DOL’s guidance that demolition is covered work when demolition itself constitutes construction, alteration, or repair, or when future construction that will be subject to the Act is contemplated on the demolition site. Finally, the new rules expressly define “contractor,” “subcontractor,” and “prime contractor,” which were not defined in existing regulations. A material supplier, defined as an entity responsible for delivery of materials and supplies and incidental tasks, is expressly excluded from the definition of “contractor.”

Key Takeaways for Contractors/Employers:

There are a variety of changes brought on by this new rule, many of which are nuanced. California contractors who pay their employees the prevailing wage will need to consult with employment counsel to make sure they are calculating the prevailing wage correctly—particularly if they have been calculating it based on the weighted average rate of the locality. The federal law now reaches beyond California’s own prevailing wage law, which still generally tracks the now-defunct federal rule by requiring only the first and third steps outlined above, which will undoubtedly make the analysis more complicated. In addition, coverage of offsite work is now more expansive under the federal rules than under California's law, which generally tracks the old federal rule on this issue as well.

Contractors/employers should also be aware of the following changes made by this new rule:

• The new rule clarifies employers’ record-keeping and retention obligations for payroll records, federal contracts, and related documents.
• Prime contractors and upper-tier subcontractors may now be liable for lower-tiered subcontractors’ violations of the rule, including employment-related violations.
• The new rule codifies an annualization principle for fringe benefit plans, and makes various changes to requirements for claiming apprenticeship-related fringe benefit credits.
• The new rule makes changes to rules for incorporation of omitted contract clauses and wage determinations (under the Act and related laws).
• The new rule institutes new anti-retaliation provisions (and remedies) in contract clauses.
• Interest must now be calculated on back wages that are owed to employees under the Act.

Vice President Kamala Harris described the new rule as “giving workers across the nation a raise,” but the Government Accountability Office stated that the new rule will “drastically increase the price of construction.” Either way, we can expect to see near-immediate challenges to the new rule, so keep an eye out for any updates in this area.

The new rules are expected to be published later this month, and will take effect 60 days thereafter. You can read the final rules here.