Understanding Fringe Pay and Why It’s Important for Government Contractors

Whether it’s health insurance, retirement plans, or paid vacation days, these extras are known as fringe benefits. For instance, for government contractors, fringe benefits aren’t just a bonus; they are a required part of a government contractor’s compensation package. The government requires these additional payments to ensure its contractors are paid fairly.  

However, many government contractor companies improperly label various payments as fringe payments to disguise wages and create an artificially lower hourly rate of pay. This hurts the workers in a number of ways, but primarily it reduces the overtime rate calculation – meaning government contractor workers are often shorted overtime wages.

How do you know if there is an issue? You will see additional wages in the “Earnings” box on your paystubs. For example, some of these extra earnings pay codes are “PW Fringe,” “Hourly Medical Benefits,” and “Hourly Per Diems.” The default rule is that any payments that are reflected in the “Earnings” box on your paystubs should be factored into the overtime calculation. At Josephson Dunlap, we’ve seen dozens of companies that fail to include additional earnings in to overtime calculations.

Types of Fringe Benefits Commonly Offered

1. Health Insurance:

   – Comprehensive health insurance plans covering medical, dental, and vision care are a cornerstone of many fringe benefits packages.

2. Retirement Plans:

   – Plans such as 401(k)s, pensions, and other retirement savings programs help employees plan for their future.

3. Paid Time Off:

   – This includes vacation days, sick leave, and holidays, providing employees with the necessary time to rest and recharge.

4. Life and Disability Insurance:

   – These benefits offer financial protection to employees and their families in case of unexpected events.

5. Education Assistance:

   – Some employers offer tuition reimbursement or education assistance programs to support employees in their professional development.

But, when government contractor companies offer cash in-lieu of any fringe benefits, the worker is often entitled to a significantly higher overtime rate.

What’s the difference between Fringe Benefits and Fringe Pay?

Fringe pay, as opposed to fringe benefits, refers to the additional cash compensation (extra money on a paycheck) provided to employees beyond their regular wages. As opposed to fringe benefits such as health insurance, retirement plans, paid time off, and other non-wage compensations, fringe pay is extra money paid directly to employees in their paychecks.

How do you spot the difference?

• Fringe benefits do not result in money in the pocket of the worker. These benefits are paid to third parties, like health insurance and life insurance companies. Fringe benefits are reflected on the “Deductions” box on the paystub.
  
• Fringe pay is money that goes directly into the workers’ paycheck and pocket. It is reflected in the “Earnings” box on the paystub.
  

The Importance of Fringe Pay for Government Contractors

1. Compliance with the Service Contract Act (SCA):

   – The McNamara-O’Hara Service Contract Act (SCA) requires contractors and subcontractors performing services on prime contracts over $2,500 to pay service employees no less than the wage rates and fringe benefits found “prevailing” in the locality. This ensures that workers receive fair compensation for their labor.

2. Attracting and Retaining Talent:

   – In a competitive job market, offering a robust fringe benefits package can make a significant difference in attracting and retaining skilled workers. Benefits like health insurance, retirement plans, and paid leave are highly valued by employees and can set a contractor apart from competitors.

3. Employee Well-being and Productivity:

   – Fringe benefits contribute to the overall well-being of employees. Health insurance ensures that employees can access medical care, reducing absenteeism and improving productivity. Retirement plans help employees secure their financial future, leading to higher job satisfaction and loyalty.

4. Tax Advantages:

   – Many fringe benefits come with tax advantages for both the employer and the employee. For example, contributions to health insurance and retirement plans are often tax-deductible for employers, and employees may receive these benefits tax-free or tax deferred.

How does fringe pay affect my overtime?

Fringe pay can significantly enhance your overall compensation, including overtime. When calculating overtime, certain fringe benefits like health insurance, retirement contributions, and paid time off can be excluded from your regular rate of pay. However, fringe pay needs to be factored into your regular rate of pay leading to higher overtime earnings. This ensures you are fairly compensated for the extra hours worked, reflecting the full value of your employment package.

Conclusion

Fringe pay is often a vital component of the compensation package for employees of government contractors. Additionally, fringe pay likely increases the hourly rate of overtime pay, which is crucial for compensating employees fairly for extra hours worked and for adhering to labor laws.

If you have any pay, other than your hourly rate, in your “Earnings” box on your paystubs, the lawyers at Josephson Dunlap would like to talk with you. It is our experience that most employers fail to correctly calculate the overtime rate, shorting most employees of government contractors of all overtime due.