ILLINOIS PREVAILING WAGE AMENDMENT. Annualization of Fringe Benefits & PW Overtime Rates

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1 ILLINOIS PREVAILING WAGE AMENDMENT Annualization of Fringe Benefits & PW Overtime Rates Attorney Jeffrey A. Risch SMITHAMUNDSEN LLC Labor & Employment Practice Group Nationwide Practice Midwest Based (IL, IN, MO & WI) As of January 2014 All Rights Reserved.

2 Public Act Effective Date: January 1, 2014 Amended Recordkeeping Requirements Amended the Deadline for Submitting Certified Transcripts of Payroll from the 10 th of the month following when work is completed to the 15 th of the month following when the work is completed. Added the term annualized to the definition section of the Act with respect to fringe benefits.

3 Public Act Con t The section that defines prevailing rate of hourly wages now reads: The terms general prevailing rate of hourly wages, general prevailing rate of wages or prevailing rate of wages when used in this Act mean the hourly cash wages plus annualized fringe benefits for training and apprenticeship programs approved by the U.S. Department of Labor, Bureau of Apprenticeship and Training, health and welfare, insurance, vacations and pensions paid generally, in the locality in which the work is being performed, to employees engaged in work of a similar character on public works.

4 Annualization of Fringe Benefits What is the big deal about adding one word to the definition? Probably not significant as related to health and welfare fringe benefits, BUT Significant and arguably unlawful encroachment on a contractor s ability to structure a pension plan that fits the needs of the company and employees. In addition, IDOL s updated explanation about annualization calculations indicates the Department may change the way it enforces overtime under the Act.

5 Annualization of Fringe Benefits Con t As early as 2011, IDOL provided information in the form of a FAQ stating that contributions to health and welfare plans had to be annualized, but without using that terminology. The FAQ provided the calculation required to determine the hourly equivalent credit for health and welfare contributions. A comparison of the FAQ language from 2011 to the present illustrates changed enforcement practices.

6 2011 FAQ In 2011, IDOL talked about the prevailing wage rate as being two separate components: (1) the hourly base rate; and (2) the fringe benefit rates. The FAQ read: I am a non-union contractor. Am I required to pay prevailing wage, including fringe benefits? Yes, fringe benefits or the equivalent are a part of the total prevailing wage just like the basic hourly wage rate. To be in compliance with the Act, all components of the prevailing wage (base + fringes) must be paid by all contractors who perform work regardless of their affiliation or lack of affiliation with a union. See term "general prevailing rate of hourly wages. For more information, click here 820 ILCS 130/2.

7 2014 FAQ - NEW CHANGE! In contrast, the information posted today states: How do fringe benefits affect the prevailing base hourly wage rate that a contractor/subcontractor must pay? ANSWER?

8 2014 FAQ Con t The Prevailing Wage Act establishes a total hourly wage determination that must be paid on public works. The Act allows for certain fringe benefits (Health and Welfare, Pension/Annuity, Training, and Vacation in some localities) to be considered in determining the prevailing rate and be taken into account as part of the component by being an offset to the total in determining compliance with the prevailing rate. Contractors/subcontractors may choose to pay the entire prevailing wage determination in cash or they may choose to pay some in cash and some in allowable fringe benefits. If a contractor/subcontractor does not pay any allowable fringe benefits, then the total prevailing wage hourly determination must be made up in the base hourly wage rate in order to comply with Prevailing Wage Act. We ll revisit what this may mean for overtime calculations.

9 Calculation of Benefit Credit The amendments from PA prompted IDOL to revise the FAQ language as related to how contractors calculate the allowable benefit credit. The major change is that the IDOL will now require contractors to annualize all fringe benefit contributions and not just those for health and welfare benefits.

10 2014 FAQ How does a contractor calculate the allowable benefit: (Health and Welfare, Pension/Annuity, Training, and Vacation in some localities) component? In the question itself, IDOL adds references to other forms of fringes beyond health and welfare.

11 2014 FAQ Con t To establish the proper hourly calculation for allowable fringe benefits, contractors/subcontractors must divide the total amount they contribute to a bona fide fringe benefit plan by the total of all hours worked on an annualized basis. The annualized rate is calculated by dividing the total amount of contributions by the total hours worked (including all hours worked both prevailing and non prevailing wage work) during the twelve month period ending with the month preceding the month in which the work was performed for which the certified transcript of payroll is being completed.

12 2014 FAQ Con t A contractor/subcontractor cannot simply take the hours worked and contributions made on public works/prevailing wage jobs to make the hourly calculation. The contactor/subcontractor who wish to take credit must maintain records to verify any plans for which the contractor/subcontractor participates. The records required for substantiation include but are not limited to records that document all hours worked by all employees on public as well as private works, contributions made, employee co-pays and deductions from employees if any, the total contribution requirements, policies including eligibility requirements, vesting provisions, and calculation of fringe benefit credit taken, if any. It is the burden on the contractor/subcontractor to justify any credit taken.

13 2014 FAQ Examples Now IDOL provides multiple examples: Example: If a contractor contributes $520 per month for single insurance coverage and the employee works 2080 hours (40 x 52 weeks) then the effective annual contribution rate is determined by dividing $6240 ($520 x 12) by 2080 which equals $3.00 per hour. If the health and welfare portion of the prevailing wage is $5.05 per hour, the contractor/subcontractor can take a credit of $3.00 per hour and must pay $2.05 ($5.05-$3.00) additional on the hourly base wage.

14 2014 FAQ Examples Example: If a contractor contributes $520 per month for single insurance coverage and the employee works 2000 hours and the contributions are only made for three months, which happen to coincide to work on public works, then the effective annual contribution is determined by dividing $1560 ($520 x 3) by 2000 which equals $0.78 per hour. If the health and welfare portion of the prevailing wage is $5.05 per hour, the contractor/subcontractor can take a credit of $0.78 per hour and must pay $4.27 ($5.05 -$0.78) additional on the hourly base wage. The contractor/subcontractor cannot take a credit for the amount contributed divided by the hours worked on public works only.

15 2014 FAQ Examples Example: If a contractor contributed to a bona fide fund $5.05 for every hour worked, the effective annual rate of contribution is $5.05. If the health and welfare portion of the prevailing wage is $5.05 per hour, the contractor/subcontractor can take a credit of $5.05 per hour and does not have to pay any additional amount on the hourly base wage.

16 2014 FAQ Examples Example: If a contractor contributed to a bona fide health and welfare fund $6.05 for every hour an employee works, the effective annual rate of contribution is $6.05. If the allowable health and welfare portion of the prevailing wage is $5.05 per hour, the contractor/subcontractor can take a credit of $5.05 per hour. The contractor/subcontractor cannot receive an additional credit of $1.00 ($ $6.05), which can apply to reducing the hourly base wage that must be paid. This additional $1.00 per hour credit can be used to reduce other fringe benefit requirements.

17 2014 Enforcement The multiple examples use health and welfare contributions, BUT The FAQ ends stating: The same formula applies to Pension, Annuity, 401k plans, Training, and Vacation in some localities that are funded by the contractor/subcontractor. Requiring annualization for Pension (aka Retirement) contributions is the most troubling.

18 Federal Law Federal prevailing wage law has a longstanding practice of recognizing that bona fide pension contributions can be made for just hours on public works projects, and annualization is not required. The U.S. Department of Labor will give full hour-for-hour credit based on the terms of a pension plan if:

19 Federal Law Con t 1. The contributions are made to a defined contribution pension plan; 2. The plan provides for immediate participation and immediate (or essentially immediate) vesting schedules; 3. The contributions are irrevocably made to the individual s account; and 4. The contributions conform to any limitations imposed by the IRS.

20 Special Pension/Retirement Plans Contractors have created and use pension plans designed specifically for work performed on public works projects. The indication from IDOL is that the terms of these pension plans will be ignored and credit for pension will be based on an annualized calculation.

21 Legal Challenge to Annualization? The annualization of fringe benefit contributions is difficult to challenge when the benefits cover all work throughout the year. Health and welfare benefits are a good example because monthly contributions are made to have health insurance coverage throughout the year.

22 Legal Challenge to Annualization Con t Pension is different. It is possible for contractors to have a pension plan where the very terms of the plan state that contributions are only applicable for specific work (i.e. work on a public works project). To annualize such contributions would mean the State of Illinois is interfering with the terms of a bona fide pension plan and/or requiring pension contributions for private jobs.

23 Legal Challenge to Annualization Con t State law may not control or interfere with the terms and conditions of a bona fide pension plan recognized under the Employee Retirement Income Security Act (ERISA). California Division of Labor Standards Enforcement v. Dillingham Construction, Inc., 519 U.S. 316, 328 (1997) (recognizing that State statutes which mandate employee benefit structures or their administration are preempted by ERISA).

24 Teachings from New York There have been multiple legal challenges to New York prevailing wage enforcement on this issue of annualization. New York has authority to issue regulations and did so with respect to requiring annualization of fringe benefit contributions. Many of the court challenges focused on whether annualization was a reasonable method under the law.

25 Teachings from New York Con t The courts have generally affirmed that annualization is reasonable. IMPORTANTLY the issue of annualization in these cases was with respect to benefit contributions (such as health care) that were either pooled or provided for all work performed.

26 Teachings from New York Con t New York s annualization regulation has also been challenged on ERISA preemption grounds, BUT Not involving defined pension contributions where the terms of the pension plan were at issue. The court rejected the argument of ERISA preemption because the contributions were pooled meaning the contributions from public jobs were used to provide benefits for work on public and private jobs and to individuals that only worked private jobs. The court concluded the rule is a lawful disincentive to pooling contributions it does not control or interfere with the terms of an ERISA plan.

27 Teachings from New York Con t In 2003, a contractor with a defined contribution pension plan challenged the annualization regulation. Perhaps because two years earlier the court rejected ERISA preemption, this contractor argued NLRA preemption instead of ERISA preemption. The court rejected the NLRA preemption argument and ERISA preemption was never analyzed under this set of facts.

28 Teachings from New York Con t Although the multiple legal challenges to New York s annualization regulation have been rejected by the courts, ERISA preemption has yet to be analyzed in the context of a defined contribution pension plan. ERISA preemption remains a viable legal challenge to annualization of contributions to defined contribution benefit plans.

29 Contractors Must Contractors should review the terms and conditions of their pension plan to be sure it meets the requirements set forth by the U.S. DOL to be exempt from annualization. The critical issue is to establish that the Illinois Prevailing Wage Act is being applied in a manner to control and/or interfere with the terms of a bona fide ERISA pension plan.

30 IF. If contractors in Illinois can establish that pension contributions are excluded from annualization calculations, it is possible the entire fringe benefit package can be provided in the form of pension. Illinois courts have found that the IDOL may not enforce prevailing benefit requirements through a line-item approach it can only require that the package as a whole be provided. Construction and General Laborers District Council of Chicago and Vicinity v. McHugh, 230 Ill.App.3d 939, (1 st Dist. 1992). This could be of great importance concerning possible changes to enforcement of prevailing wage overtime requirements.

31 PW Overtime Requirements The overtime requirements are set forth for each labor classification within the prevailing wage rate sheets. Generally, OT at 1.5 times the hourly rate is required for all prevailing wage hours worked over 8 in a day or on a Saturday AND 2.0 times the hourly rate for hours worked on a Sunday or (recognized) Holiday. There are slight variations by trade and by county.

32 PW Overtime Requirements Con t The IDOL s revised FAQ s suggest that all fringes must be annualized, which likely means the hourly fringe contributions will be less than the required hourly fringe amount and the remainder will have to be paid in cash. IDOL now states that this remainder has to be added to the hourly base rate. In other words, the hourly base rate will increase.

33 PW Overtime Requirements Con t If employees work overtime, the premium overtime rates will be significantly higher due to the higher base rates. Cash payments in lieu of benefit contributions will trigger this (potential) higher cost. Contractors that contribute to fringe benefit plans at the full rate will have a significant advantage over those that pay any level of fringes in cash. No doubt intentional on IDOL s part to assist the labor unions, but difficult to prove this point.

34 PW Overtime Requirements Con t IDOL will argue the practice is simply an incentive to contribute to bona fide fringe benefits and it applies equally to all contractors regardless of union status.

35 PW Overtime Requirements Con t In Dillingham, the U.S. Supreme Court recognized that it is okay to have a decreased prevailing wage rate for bona fide apprentices. The Court concluded that it was just an incentive to use bona fide apprentices, but there was no mandate because contractors could choose to pay the higher prevailing wage rates. We would expect IDOL to make an analogous argument that all contractors can take advantage of decreased prevailing wage rates by contributing to bona fide fringe benefit plans, but there is no requirement to do so.

36 PW Overtime Requirements Con t A plausible legal challenge is that IDOL does not have authority to make this particular interpretation, or that IDOL s interpretation is not reasonable. IDOL only has authority to issue regulations as related to the prevailing wage administrative hearing process. The challenge would be that IDOL is essentially issuing a rule that has not been properly promulgated under the law. This challenge could come after IDOL has committed that its enforcement practice is to apply overtime premiums to cash fringe benefit payments (e.g. by assessing a contractor for back wages).

37 PW Overtime Requirements Con t The definitions in the IPWA are silent about whether cash fringe benefit payments are subject to overtime premiums. Not less than the general prevailing rate of hourly wages for work of a similar character on public works in the locality in which the work is performed, and not less than the general prevailing rate of hourly wages for legal holiday and overtime work, shall be paid 820 ILCS 130/3. Remember the general prevailing rate of hourly wages is defined as hourly cash wages plus annualized fringe benefits. 820 ILCS 130/2.

38 PW Overtime Requirements A potential argument: Con t IDOL recently added FAQs for survey crew work and indicated IDOL follows U.S. DOL guidance regarding federal prevailing wage law (i.e. Davis-Bacon and Related Acts). IDOL will argue that it only follows Davis-Bacon guidance for survey work, but one may use these FAQs to argue that IDOL generally follows Davis-Bacon guidance. Under Davis-Bacon regulations, it expressly states that fringe benefit payments are removed from the hourly rate before calculating overtime. 29 C.F.R. 5.32(c)(1).

39 Thank you! Helpful links: Jeff Risch, Esq. SmithAmundsen LLC (L&E BLOG) DISCLAIMER: THE INFORMATION & MATERIALS CONTAINED IN THIS OUTLINE ARE FOR INFORMATIONAL & EDUCATIONALS PURPOSES ONLY AND SHALL NOT BE CONSTRUED OR CONSIDERED AS LEGAL ADVICE. CONSULT AN EXPERIENCED ATTORNEY FOR SPECIFIC QUESTIONS AND ANSWERS.