One common type of payroll-related question that we hear from both employers and workers is related to the difference between what is called prevailing wage and minimum wage. Most everyone understands minimum wage, but many don’t understand the idea of the prevailing wage. This blog will help you understand the differences and how they affect your organization’s payroll.
What is Minimum Wage?
The minimum wage is mandated by the U.S. federal government. It was created early in the 20th century to protect workers from unscrupulous employers who paid wages that were well under realistic market expectations. Many states also set their own minimum wage requirements, and they all exceed the current rate mandated by the government. Imagine how complex payroll can get if your teams are dispersed across state lines. In fact, 29 states and the District of Columbia currently have higher minimum wages than what the federal government requires.
If your state has a minimum wage rate today over $7.25 per hour, according to the U.S. Department of Labor, you must pay the higher rate. This is just another of the complexities HR teams must navigate related to payroll and benefits. However, the idea of protecting workers from being paid pennies for their hard work is a good one.
What is the Prevailing Wage?
The prevailing wage is different from the minimum wage. It’s still set by the federal government via the Davis-Bacon Act and Service Contract Act. The prevailing wage is the rate of pay that vendors and contractors must offer employees who are engaged in working for the government. This standard also prevents workers from employers who would lowball a contract, win it based on low bid, and then pay their employees less than standard market rates. It also protects contractors, particularly smaller companies, from losing a low-balled contract to a large outfit. It levels the playing field regulating that all contractors will be paid a baseline fee. What they bid above that baseline is up to them.
To make things more complicated, lawmakers in several states like Arkansas, Kentucky, Indiana, Michigan, and West Virginia, have tried to repeal these laws. But cities and municipalities have created their own rules, too. Other states, such as Maine, moved to make the prevailing wage covered under projects that were not fully federally funded but fully or partially funded by the state.
Benefits of Prevailing and Minimum Wages
Yes, these laws are quite confusing simply because both the minimum and prevailing wage laws vary by the state and municipality you’re in. However, there are benefits to these rules, despite their complexities. For example:
- They support good wages for workers. This makes it easier for employers to attract a better caliber of talent to their job.
- They break down pay gaps based on race. One analysis found a 7% income gap between white and black construction workers. Having wage-related regulations can close that gap.
- The data shows that better pay equals greater productivity and engagement. Is there a single employer out there today that wouldn’t benefit from this?
No matter how you feel about minimum or prevailing wage rules, the one thing we can agree on is that they are increasingly complicated. That’s where FoxHire can help. As an employer of record, we can manage HR complexities in ways that keep you compliant with ever-changing rules. Contact us to find out more about what we do and how FoxHire can help your business.