Demystifying Certified Payroll

What is certified payroll and prevailing wage?

Certified payroll is a requirement for contractors that work on government contracts to provide information on the wages that they pay their employees. The intent of the law is to ensure that employers pay their employees at least as much as a government established prevailing wage. The prevailing wage is defined for each type of work and for the region where the work is performed. It therefore may vary greatly from contract to contract and place to place. 

Prevailing wage rate

Contracts that are subject to prevailing wage requirements will have a published prevailing wage rate table that lists the minimum wage that should be paid. Each prevailing wage rate will be listed with two values: 

• Base rate - This is the minimum hourly rate that must be paid for the work performed
• Fringe rate - The employers must pay at least this much per hour in fringe benefits

The minimum rate that you pay your employees must be greater or equal to the combination of these two rates. This becomes your effective prevailing wage rate.

Base Rate + Fringe Rate = Effective Minimum Rate 

Rate Calculations and Adjustments

If you already pay fringe benefits as part of your normal employment you are allowed to subtract these expenses from the fringe rate to ensure that you are not paying your employees twice for the same benefits. Determining the hourly rate for the fringe benefits is complex and should be done in consultation with an expert that fully understands the certified payroll and employment law. 

Examples of fringe benefits might include an employer matching payment for health care insurance, paid time off, or guaranteed training. Start by developing a list of these benefits. For each benefit determine the cost (this may vary from employee to employee so this list might be employee specific) and the frequency of payment - hourly, weekly, or yearly. Then take the amount paid and divide it by the expected number of hours for the period to derive the hourly rate. 

Once you have determined the fringe rate for each of your employees you may adjust the hourly rate to make sure that you are not compensating your employees twice for the same benefits. 

Base Rate + (Fringe Rate - Employer Paid Fringe Benefits) = Adjusted Effective Minimum Rate

This effective minimum rate then becomes the hourly rate that you pay your employees when they work that particular contract. You only have to pay this rate if they are performing work on the contract and if their regular rate is less than the adjusted rate you calculated. It is important to note that all work on the contract must be accounted for and that the law applies to both hourly workers and salaried employees. With salaried employees you will need to translate their salary into an hourly rate so you can properly compare rates. 

Overtime calculation

Since the prevailing wage rate is the combination of the base rate and adjusted fringe rate, care must be taken to ensure that the fringe rate is not included when calculating overtime. So if you are paying time and a half for overtime the the rate paid should be: 

1.5 X Base Rate + (Fringe Rate - Employer Paid Fringe Benefits)

The same holds true for all overtime calculations such as double time. The overtime multiplier should only be applied to the base rate portion of the prevailing wage and not to the fringe. Afterall the fringe rate is the cost of benefits and the cost of benefits do not change if the employee is working overtime. 

Finally, it is important to remember that your calculations and the decisions you make may be audited. That is why it is important to consult a wage specialist that has experience with prevailing wage compliance. They will help you double check your reasoning and calculations to make sure that they meet government contracting standards.  

Certified payroll in practice

Meeting the requirements of certified payroll starts with time tracking. When working a prevailing wage job your employees must record the hours worked on the job. The best way to do this is with a time tracking system (QuickBooks has an excellent time tracking solution called QuickBooks Time or QuickBooks Workforce and previously known as TSheets). 

Using a time tracking system has a number of benefits, the most important being job costing. In the case of government contracts subject to prevailing wage requirements, though, use of a proper time tracking system is required for auditing and compliance. You can get away with paper and pencil tracking but you will soon find that not having a modern time tracking system causes significant extra work. 

Once you have your time tracking system in place employees will select the job they are working on when they clock in. The result will be an accurate track of the time they spent on each job throughout the week. This is the foundation of the certified payroll and prevailing wage compliance. This tracking is also critical when processing payroll since the employee’s rate of pay will be different for prevailing wage jobs.  

Processing payroll

For accurate payroll you will need to calculate and apply the correct prevailing wage rate for hours worked on prevailing wage jobs. So, you will submit hours in discrete blocks based upon the jobs that they worked during the pay period. For the hours worked on prevailing wage jobs you will need to adjust their rate to apply the correct prevailing wage rate for the job. This will need to be done for each employee and for each prevailing wage job worked during the pay period. Without an automatic system for applying the correct rates this can become very difficult to manage.

Dapt simplifies this by preprocessing your time entries and submitting them to payroll for you. As part of the preprocessing of time, Dapt does the following: 

• Rate look up - Dapt checks each job worked to see if it is a prevailing wage job. If it is Dapt looks up and fetches the rate
• Calculate the pay rate - After fetching the rate, Dapt confirms that it is greater than this employee’s regular rate and if it is performs the rate adjustments including fringe adjustment
• Apply the rate and submits - Dapt then applies this adjusted rate to the block of hours worked on the job and then submits the hourly data to payroll for processing

Dapt is, thereby, able to automatically account for the rate changes required for prevailing wage compliance making the processing and submission of payroll automatic. This ensures an accurate and compliant payroll. 

Certified Payroll Reporting

You will be required to submit certified payroll reports weekly in order to fulfill the requirements of government contracts before receiving payments. While certified payroll reporting varies depending on the jurisdiction, the structure of the reporting is essentially the same. Here is a list of the requirements and sections for the majority of certified payroll reports: 

• Each contract requires a separate report
• The reports are weekly even if your pay period is biweekly, semi monthly, or monthly
• All employees that worked on the contract must be included
• The report contains rows for each employee that worked on the contract. The rows include the following information: some text
  • Employee name, address and an identifying ID (typically the last 4 digits of their social security number)
  • Hours worked on the contract by day and in separate rows for regular, overtime, or double time
  • The rate paid per hour for the work on the contract and the gross amount paid for all work performed by that employee for the contract that week
  • A breakdown of data about the paycheck received by the employee during the pay period that includes the week being reported
• A certification page that is a declaration of the accuracy of the report and is signed by a person that has supervisory responsibility for the payroll

What makes certified payroll reporting difficult to automate is that the report requires information from time tracking and payroll. The information about the employee and information about pay (the prevailing wage and total pay for work on the job) and the paycheck issued also comes from the payroll system while information about the hours worked comes from your time tracking system. To automate certified payroll requires a system that accesses both systems. 

Dapt’s Approach to Certified Payroll

As I noted above, automating certified payroll requires coordinating between time tracking and payroll processing. From time tracking we get the hours worked on the certified payroll project. During payroll processing the prevailing wage rate is calculated and paid to your employees. The payroll results provide the required information about job related pay, net pay, and the other details of the pay check required. 

To simplify job costing Dapt intelligently connects time tracking, payroll, and accounting. In the preprocessing of time tracking data Dapt automates the calculation of prevailing wage rates and configuration of the payroll batch to ensure that employees are properly paid even in situations where their rate varies from job to job. And finally, Dapt processes the payroll results to true up the accounting for job costing. This final step allows Dapt to gather the information needed for certified payroll reporting of paycheck details. 

This holistic approach ensures that certified payroll processing is just a simple part of the normal payroll processing. It stops being a burden. The result is that, rather than being a distraction and a labor intensive burden, certified payroll requires no more than outputting the report and then signing and sending.