How did you go bankrupt?” Bill asked.

“Two ways,” Mike said. “Gradually and then suddenly.”

“What brought it on?”

“Friends,” said Mike. “I had a lot of friends.”

  — Ernest Hemingway, The Sun Also Rises

 The Department of Labor (“DOL”) likes to annualize the fringe benefit calculations for workers under the Davis-Bacon Act (“DBA”). The amount of the credit is generally determined by dividing the actual cost of the benefit by the total number of hours worked by the employee on government and private projects during the year. This is to prevent contributions made during the DBA-covered work from being used as the main or exclusive source of a benefit that continues during a period of non-DBA work. This is known as the “effective annual rate” calculation rule.

Stated another way, DOL is concerned where the DBA benefits are allegedly being used to subsidize the non-DBA work, like a situation where the employer use to pay $2 an hour worth of benefits but took them away for non-DBA work, since they considered the DBA benefit payments to be enough. In that case, arguably the DBA benefits are being used to subsidize the non-DBA work. In that event DOL wants to impose what they call an effective annual rate calculation.  DOL wants to divide the total hours worked annually by the H&W benefits furnished to come up with an annualized benefit rate. If that rate is below the required fringe benefit rate set forth in the wage determination, DOL wants to require employers to make up the difference. That, in effect, makes the employer pay DBA benefits for non-DBA work. Whether DOL can universally enforce that position is in dispute.  

With respect to pension and profit sharing plans, DOL has made its intention explicit in the form of guidance to its investigatory staff. That guidance states:

(2)             For all defined benefit pension plans and defined contribution pension plans which do not provide for immediate or essentially immediate vesting schedules (100 percent vesting after an employee works 500 or fewer hours), DBA credit for contributions made to the plan is allowed based on the effective annual rate of contributions for all hours worked during the year. In other words, if a contractor wishes to receive $2.00 per hour credit for pension plan contributions, the contractor must contribute at this same rate for all hours worked during the year. If this is not done, the credit for DBRA purposes would have to be revised accordingly.

 (3)           For example, assume that a firm’s contributions for the pension benefit were computed to be $2,000.00 a year for a particular employee. If that employee worked 1,500 hours of the year on a DBRA covered project and 500 hours of the year on another job not covered by DBRA, only $1,500.00 or $1.00 per hour would be creditable towards meeting the firm’s obligation to pay the prevailing wage on the DBRA project. This method for determining the allowable DBA credit for fringe benefit payments results from the fact that employers are prohibited from using contributions made for work covered by DBRA to fund the plan for periods of non-DBRA work, except as stated in (g)(2) above.

Field Operations Handbook (“FOH”) 15f14(f)(2) and (3).  

DOL desire to enforce annualization of benefits has sometimes collided with the reality that fringe benefits may just not be paid in the real world on commercial contracts to construction workers. When DOL tries to enforce its annualization rule, it sometimes gets push back. There has been some DBA litigation, and some courts have refused to enforce the annualization requirement unless DOL can show private sector subsidization. If the employer pays the same benefits for the non-DBA covered work as they have always done, some courts seem to reject annualization and refuse to enforce DOL’s position.  

For example, in Tom Mistick & Sons, 30 W.H. Cas. (BNA) 837 (W.A.B. 1991), aff’d sub. nom. Tom Mistick & Sons, Inc. v. Reich, 126 Lab. Cas. ¶33,027 (D.D.C. 1993), aff’d in part, rev’d in part, 54 F.3d 900 (D.C. Cir. 1995), the contractor had a number of trustee administered funds or plans that the Board found were not bona fide fringe benefit plans under the Act in part because the contribution amounts the contractor was putting into the plans bore no relationship to the cost of the benefits being provided. In Tom Mistick, the amount of the contractor’s contributions to the fringe benefit plan was simply the difference between the Davis-Bacon prevailing wages and the wages the contractor regularly paid its non-Davis-Bacon workers. However, DOL’s position on annualizing DBA fringe benefits suffered a blow in Tom Mistick & Sons v. Reich, 54 F.3d 900 (D.C. Cir. 1995). There the Court overturned the ruling that the contractor’s fringe benefit plan was not bona fide (1) because the costs were not “reasonably related” to the cost of providing fringe benefits and (2) because the benefits had not been calculated under DOL’s annualization rules.

Specifically, on the annualization requirement, DOL argued that DBA fringes should not be used to subsidize non-Davis-Bacon work. To prevent this, DOL requires contractors to annualize or average out all fringe benefits paid for Government and commercial work to individual workers over a year’s period. In this case, the D.C. Circuit Court found that the Administrator had not shown that in the absence of the contractor’s Davis-Bacon fringe benefit contributions, the contractor would have given his employees additional fringe benefits on its private work. Since it was not established that the fringe benefits in that manner subsidized private work, the rationale for annualizing an employer’s contributions did not apply.

However, the DOL Administrative Review Board (“ARB”) upheld the annual rate rule in Cody-Zeigler, Inc., ARB No. 01-014, Dec. 19, 2003, holding that contractors that perform both DBA-covered work and non-DBA-covered work must “annualize” pension contributions so covered work does not subsidize non-covered work. The ARB’s decision in Cody Zeigler was cited favorably by the U.S. District Court for the Northern District of California in Independent Roofing Contractors Council Apprenticeship Training Trust Fund ex rel. Royal Roofing, Inc. v. Chao; No. C05-03605 (N.D. Cal., Sept. 18, 2006). The court ruled that since apprenticeship training of necessity is conducted continuously and not only during periods of performance of DBA-covered contracts, the training spans both DBA and non-DBA work. Accordingly, ruled the court, the cost of that training cannot only be borne by the Davis-Bacon work. Instead, it must be “annualized.” In reaching its decision, the court distinguished the Tom Mistick decision by the D.C. Circuit. In Tom Mistick, the court said, the contractor had plans and separate contributions for DBA work and for non-DBA work. In the California case, there were no contributions during performance of non-DBA covered work. Also, said the court, the nature of apprenticeship training is that it goes on all year around. “You cannot start and stop it” to coincide with the performance of DBA work. The California case was appealed  to the Court of Appeals for the Ninth District Circuit which affirmed the District Court and upheld DOL’s application of the effective annual rate rule. Independent Roofing Contractors et al. v. Chao, No. 06-16983 (9th Cir. Nov. 14, 2008).

In Miree Construction Corp. v. Dole, 930 F.2d 1536 (11th Cir. 1991), the court held that in order for an employer’s contribution to an approved apprenticeship program to count as a bona fide fringe benefit contribution under the Act, it must be reasonably related to the cost of the apprenticeship training provided by the program. In that case, the employer was taking credit toward the prevailing wages for all its DBA-covered employees for contributions to the apprenticeship program, when in fact only one apprentice was enrolled in the program. The cost to the contractor for each enrolled apprentice was $500.00, and any additional employer payments to the program were voluntary. The contractor had paid 25 cents per hour into the fund for each worker on DBA-covered projects but made no payments for workers on non-DBA projects. The Board allowed the contractor $500.00 credit for only the one worker and determined that the $11,200 that had been paid voluntarily to the program was owed instead to the employees. While the contractor could claim credit for the full cost of enrolling employees in the apprenticeship training program, the court held that there must be a direct correlation between the contractor’s hourly contributions to the program and the actual cost required by the plan to enroll one apprentice. On projects where the contractor is employing few apprentices, it must meet its obligation under the Act through payments to its employees rather than payments to an apprenticeship plan. Either way, the financial effect is the same on the contractor; it must still pay its employees at least the amount of the prevailing wage.

See also Royal Roofing Co., ARB No. 03-127, Nov. 30, 2004, affirmed Independent Roofing Contractor Council eta ex rel Royal Roofing, Inc. v. Chao , Case No. C05-03605JW (N.D CA Sept. 18, 2006). Relying on Miree, the 9th Circuit eventually held that the cost of the fringe benefit claimed (apprenticeship training) had to bear a reasonable relationship to the benefits obtained. Independent Roofing Contractors et al. v. Chao, No. 06-16983 (9th Cir. Nov. 14, 2008).

What this all means is unclear. DOL continues to use its annualization rules. Contractors continue to push back. Courts continue to resolve each case on its facts.