Prevailing Wages and Construction Payroll Compliance

Payroll is already a complicated process — but for construction companies, it’s a whole different arena. Unlike traditional businesses that follow standard wage and tax rules, construction firms must juggle union agreements, overtime regulations, and, in many cases, prevailing wages for public works projects.

If you’re new to government contracting, prevailing wages may feel like another layer of red tape. But make no mistake: getting them wrong can be costly. Miscalculating wages or benefits for government contracts can lead to steep penalties, sometimes up to 15% of your total payroll.

Anytime your company takes on a public works project, you must comply with prevailing wage laws. That means paying your workers at least the hourly rate set for their specific occupation in that location. If you operate across multiple states, you may have to pay different wages for each job location.

So, what exactly are prevailing wages? How do you determine the right wage for each worker? And how do you ensure compliance when managing a large workforce with multiple trades and subcontractors?

This guide will break down everything you need to know about prevailing wages — from their purpose and legal requirements to practical strategies for payroll compliance.

What Are Prevailing Wages?

Prevailing wages are minimum wage rates and working conditions (including fringe benefits, holidays, and overtime rules) set for certain labor or mechanic positions on public works projects. These rates apply regardless of union status and are typically higher than standard minimum wages because they are based on market conditions for a given location and/or occupation.

The Davis-Bacon Act (DBA) and Federal Prevailing Wage Laws

Prevailing wages were established under the Davis-Bacon Act (DBA) of 1931. This law requires contractors and subcontractors on federal construction projects valued at over $2,000 (or state projects of the same size that receive federal funding) to pay at least the prevailing wage for that area. The law applies across all 50 states to ensure workers receive fair wages rather than being undercut by low bids.

The law covers all contractors, subcontractors (and even subcontractors hired by subcontractors) on public projects.
As of March 2025, 32 states have their own prevailing wage laws that mandate certain wages and benefits for state-funded projects.
For contracts over $100,000, workers must receive 1.5x their regular pay for overtime beyond 40 hours in a workweek

These laws help prevent wage suppression by ensuring that government-funded projects don’t drive wages down for local workers.

What Are Public Works?

Public works projects include government-funded infrastructure such as:

Highways and bridges
Railways
Sewer/water systems and dams
Public parks
Schools and municipal buildings
Airports
Military and federal government facilities

Even projects that receive a mix of public and private funding may still fall under prevailing wage laws if they involve public use or benefit. The U.S. Department of Labor’s Wage and Hour Division (WHD) regulates prevailing wages and determines them in two ways:

General Wage Determination: Covers wages for specific occupations within a region.
Project-Specific Wage Determination: Tailored to a particular government contract.

Additional Regulations: The McNamara–O'Hara Service Contract Act

For service-based government contracts (outside general construction and labor), the McNamara–O'Hara Service Contract Act of 1965 (SCA) also protects wages. The SCA applies to service-related jobs, including roles like programmers, accountants, clerks, and janitors, for contracts over $2,500. It covers both contractors and subcontractors. The act states that:

“...contractors and subcontractors performing services on prime contracts in excess of $2,500 [must] pay service employees in various classes no less than the wage rates and fringe benefits found prevailing in the locality, or the rates (including prospective increases) contained in a predecessor contractor's collective bargaining agreement.” - Department of Labor

This ensures that non-construction government contractors also receive fair pay.

What Is Certified Payroll?

When a construction company works on a government-funded project, they must submit certified payroll reports to the governing agency on a weekly basis. These reports must include:

Employee wages
Fringe benefits
Hours worked
Type of work performed

Each state may have its own reporting requirements, but their goal remains the same: to verify compliance with prevailing wage laws.

How Are Prevailing Wages Calculated?

Federal and state agencies set prevailing wage rates by job classification (e.g., electricians, laborers, welders).

For years, prevailing wages were determined by the most common wage rate (used more than 50% of the time for a certain occupation) in a given region.

However, in 2023, the Biden administration updated the formula for calculating prevailing wages on federal contracts. Now, the rate is based on the wage paid to at least 30% of workers in a given area (a return to the pre-1983 standard). If a single wage rate is most common, that still takes precedence. If no rate reaches 30%, a weighted average is used instead.

In essence, contractors are entitled to the higher of:

The prevailing wage rate determined under the Davis-Bacon Act
The minimum [enforced] wage for federal contractors (now $13.30 per hour)
The applicable state or local minimum wage (varies)
The federal minimum wage ($7.25 per hour)

In many cases, union rates in collective bargaining agreements (CBAs) influence the prevailing wages for specific occupations and locations. Wages can also vary by project and contract, meaning companies must review contract terms carefully to ensure compliance.

Example: Prevailing Wage Calculation

Let’s compare standard wages with prevailing wages. You can look up the prevailing wage for any occupation/location using the Department of Labor’s wage determination tool.

Private-Sector Pay: A construction laborer works 40 hours at $18 per hour → $720 per week.
Government Project Pay (Los Angeles County, CA, March 2025):
- Prevailing Wage: $19.71 per hour
- Weekly Pay: $788.40 (40 hours × $19.71/hr)

This difference may seem small, but across an entire workforce and multiple projects, the complexity adds up quickly.

The Importance of Prevailing Wages

Prevailing wage laws exist in about half of U.S. states, as well as in some cities. These laws help protect workers, stabilize industries, and prevent government-funded projects from driving down wages in local economies.

Without these regulations, companies could win public contracts by paying workers as little as possible, reducing pay rates across an entire region.

But the benefits of prevailing wages go beyond just maintaining fair pay. Here’s why they matter:

Ensure Livable Wages – Prevailing wages make sure wages are high enough to provide a good living for construction and trade workers. These often come with health insurance and pension plans that exceed minimum legal requirements.
Promote Fair Pay – They help narrow racial and gender wage gaps, especially benefiting women and minority workers in male-dominated industries.
Improve Industry Standards – Set wages for certain occupations prevent wage undercutting, boost productivity, enhance safety, and reduce worker turnover in government projects.

Who Is Affected by Prevailing Wages?

Anyone performing labor or mechanic work on a public works project must be paid at least the prevailing wage for their classification. This includes:

Construction Companies & Trades

Some examples of contractors and skilled trade workers:

General contractors and subcontractors
Independent contractors
Sheet metal workers
Roofers
Plumbers
Painters
Masons
Glaziers
Electricians

Union and Non-Union Workers

Union contracts (CBAs) may influence the prevailing wage, but prevailing wage laws apply regardless of union status. Apprentices, trainees, and helpers working as laborers or mechanics on government-funded projects must also be paid according to these laws.

Other Workers Covered Under Prevailing Wage Laws

While construction laborers and mechanics make up the majority of those affected, prevailing wages can also apply to service workers such as:

Custodial staff
Security guards
Food service workers
Call center employees
Temporary office service workers

Who Is NOT Covered?

Many administrative, executive, and clerical positions typically do not qualify for prevailing wage requirements. These laws specifically target manual labor and mechanic work tied to public projects. However, some adjacent positions may qualify for prevailing wages under The McNamara–O'Hara Service Contract Act.

Staying Compliant With Prevailing Wages

Compliance with prevailing wage laws goes beyond paying the correct rate — it also involves proper worker classification, adherence to visa program regulations, and more. Failing to comply can lead to costly penalties.

Understanding Public Works Compliance

As we established, prevailing wage laws apply to public works projects — which include government-funded construction on highways, bridges, and federal buildings. However, compliance doesn’t stop there.

Prevailing wage laws may also apply to:

Direct government contracts
Federal grants and loans for public projects
Tax incentives tied to government-funded work

If you’re uncertain whether a project falls under federal prevailing wage requirements, you can verify compliance by contacting the Wage and Hour Office through the Wage and Hour Division (WHD) hotline (866-487-9243) or a local Department of Labor office.

In any case, staying proactive is key. Government agencies aren’t usually lenient around misunderstandings or miscalculations.

The Immigration and Nationality Act (INA)

When hiring foreign workers, companies must ensure their wages do not negatively impact U.S. workers in similar roles. This means paying at least the prevailing wage for the occupation and geographic area of employment.

While the L-1B visa program does not have a prevailing wage requirement, the H-1B, H-1B1, and E-3 visa programs require employers to pay the higher of either the prevailing wage or the actual wage paid to comparable U.S. employees (DOL).

Failing to meet wage requirements for foreign workers can trigger investigations, fines, and sometimes the loss of work visas for certain employees.

Employee Classification

Misclassifying employees is one of the most common compliance pitfalls. Sometimes it is intentional, but it’s often accidental. Construction payroll is complex, and with so many different roles, proper classification can be challenging.

However, misclassification denies workers their rightful wages, overtime pay, and benefits. It can also lead to significant penalties, back-pay obligations, and legal repercussions under federal and state laws.

The main confusion typically involves determining whether a worker should be classified as a W-2 employee (hourly or salaried) or an independent contractor (1099). While legal counsel should be consulted for specific cases, here’s a general guide:

Hourly (W-2)

Worker is paid an hourly wage for time worked
Employer controls when, where, and how work is performed
Employer provides tools, equipment, and supplies
Work is integral to the company’s core business
No opportunity for increased profit through managerial skills

Example: A construction laborer who works on-site, uses company-provided tools, and is paid hourly for their work.

Salary (W-2)

Worker is paid a fixed salary regardless of hours worked
Employer controls work schedule and methods
Role typically involves managerial or specialized skills
Position is permanent and essential to company operations
Employer may provide benefits (health insurance, PTO, etc.)

Example: A project manager who oversees multiple construction sites, manages teams, and receives a fixed salary with benefits.

Independent Contractor (1099)

Works independently and determines how tasks are completed
Uses own tools, equipment, and materials
Work is not integral to the company’s core business
Has opportunity for profit or loss based on business decisions
Typically works on specific projects or contracts rather than ongoing employment

Example: A specialized electrician who takes on multiple projects for different companies, uses their own tools, and sets their own schedule.

The Risks of Non-Compliance

Failing to comply with prevailing wage laws can lead to:

Paying back wages to employees who were underpaid
Withheld payments from the awarding body or contractor
Fines and penalties from regulatory agencies
Disqualification from future government contracts
Potential criminal prosecution in cases of deliberate wage violations

How To Manage Payroll With Prevailing Wages

Managing prevailing wages is no small task — especially if your company employs workers across multiple roles, government contracts, and locations.

For instance, if you’re juggling payroll for general contractors, electricians, plumbers, and other skilled trades across different states, you’ll be dealing with several wage rates, overtime rules, and union agreements. Add in CBAs, and payroll becomes even more complex.

To stay competitive while ensuring compliance, here are some best practices for managing prevailing wages effectively.

Use Dedicated Payroll / HR Software

Surprisingly, many construction companies still rely on manual payroll processes that are inefficient and error-prone. Those errors can lead to penalties and a lot of wasted time.

Modern construction companies need a dedicated payroll system for automating wage calculations, tracking compliance, reporting, and more. But not all payroll software is built for the complexities of construction payroll.

That’s where HCM (Human Capital Management) software gives you an edge. A strong HCM platform integrates payroll with HR data to automatically account for different positions, pay rates, union affiliations, overtime rules, and project locations. This is also important for generating certified payroll reports, since all of the information is available on the same platform.

Criterion HCM has helped several construction companies save time and money on payroll processing. Some have eliminated entire days (or even entire positions) from the process by switching to Criterion.

Integrate With Project Management and ERP Software

Each construction project comes with unique wage requirements and contract details. That also means unique requirements for your workforce. Your HCM software should integrate seamlessly with your project management tools to sync contract details and wage rates directly with payroll.

Likewise, your ERP is your accounting hub. All your project and payroll/HR data should be correlated with the right cost centers from day one to ensure proper GL mapping and accounting.

This also helps improve profitability and payroll workflows by adjusting for project-specific labor costs. With project, ERP, and HCM data fully synced, you can also generate better reports for certified payroll, labor cost allocation, and compliance audits with less effort.

Criterion HCM seamlessly integrates with key construction platforms like Procore, Acumatica, Sage Intacct, Microsoft Dynamics, and more. Our Rest API allows for instant data transfer and provides powerful reporting and automation features.

Allow Employees To Track Their Own Time

Manual time tracking can create massive inefficiencies. The best construction payroll systems empower employees to log their own hours, helping businesses eliminate errors from manual time entry.

Geofencing features built into Criterion HCM’s mobile app ensure employees clock in and out at the correct job site. This can also be used to automatically calculate the correct prevailing wage based on location data.

Stay Up-to-Date on Payroll Laws

Prevailing wage laws change frequently, both at the federal and state level. To avoid costly penalties and delays, your team must follow legislation updates in your industry and the locations you work in.

At Criterion, we continuously update our HCM platform to align with the latest employment laws across the United States, Canada, and the UK. Our software:

Automates key payroll calculations for construction companies and union workers
Ensures compliance with evolving prevailing wage regulations
Adapts to local, state, and federal employment requirements

With built-in compliance tools, you don’t have to spend hours researching wage laws yourself — our system keeps you ahead of the curve.

Final Thoughts

Prevailing wage laws play a crucial role in maintaining fair wages for government-funded projects. But managing them manually can be overwhelming — especially for large construction companies with diverse workforces.

To remain competitive, construction businesses need software that simplifies compliance and payroll operations.

With Criterion HCM, you can:

Streamline time tracking directly into payroll
Configure payroll workflows for even the most complex projects
Generate compliance reports instantly
Integrate with third-party project management tools with our open API
Recruit, nurture, and retain top industry talent
Automate onboarding and training workflows

Most importantly, you get all this backed by a team that understands construction payroll. We’re more than just a software provider — we’re a long-term partner for your success.

Book a demo today to see how Criterion HCM can help you manage prevailing wages and other construction payroll challenges with ease.

What Are Prevailing Wages? A Construction Payroll Guide