AGC Protests Change to Fringe Calculation on Public Projects

Labor and Industries is proposing to move forward -- outside the normal rule-making process -- with changes on how it calculates employer fringe benefit contributions on prevailing wage jobs. The move would increase payroll costs and taxes for many contractors.

AGC is fighting the change. "This is a unilateral change of a long-standing practice," said AGC Legislative Council Van Collins. "L&I is inserting itself into marketplace and competitiveness issues, and doing so without the public, open rule-making process that we believe is required."

The technicalities involve the calculation of the value of the employer contributions to bona fide fringe benefits on public works projects, in particular defined contribution pension plans. Washington contractors with a defined contribution retirement plan calling for immediate employee vesting have long been able to take dollar for dollar credit for such contributions since the employees’ right to those dollars immediately vests based on their public work hours. This conforms with federal Davis Bacon regulations as well as the state prevailing wage laws and practices of most states. However, L&I is now saying that the value of the employer contribution to defined contribution pension plans with immediate vesting must now be divided by the total employee hours on both private and public works, typically 2080 hours, in order to arrive at the “true value” of the contribution which will count toward satisfying the prevailing wage rate.

L&I has long practiced this so-called “annualization” policy for employer contributions to health and welfare plans, vacations, and holidays, and AGC has no quarrel with this annualization since the employer contributions are “earned” by employees on all work; in other words, the employer monthly premiums are for all hours worked, not just public work. However, L&I’s proposed application of the annualization policy to contributions to defined benefit plans misses the fact that contributions into these plans are triggered only by work time on public works so that annualization is unwarranted. The upshot is that contractors participating in such plans will have their hourly contribution watered down and have to make up the difference with higher wages with resulting increased labor burden.

It is also possible that some contractors would be made responsible for retroactive payments under L&I’s proposed plan. L&I had initially intended to reject Intents and Affidavits on the basis of this new proposed policy, but after protests by AGC and ABC, decided to approve them pending contractor input into the proposed change.

On behalf of AGC and ABC, Judd Lees (Williams Kastner) sent a letter to L. Ann Selover, Industrial Statistician for L&I expressing the two associations' opposition. Lees indicated that, among other things, the unilateral implementation of the internal rule is contrary to common sense, is contrary to the practices on federal public works as well as other state public works, violates rule-making requirements under the Washington Administrative Procedures Act and may also raise ERISA preemption issues: "The contemplated policy flies in the face of federal law, employee interests, and common sense," Lees said. "It may also be pre-empted by ERISA which, under governing WACs, the state must follow. At the very least, this sea change must proceed through the proper rule-making law statutes and regulations under the Washington Administrative Procedures Act."

At press time AGC had not yet received a response from L&I.

AGC members with questions or comments about this issue should contact Van Collins, 360-352-5000.

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