FAR 22.406-2—Wages, fringe benefits, and overtime.
Plain-English Summary
FAR 22.406-2 explains how to calculate wages, fringe benefits, and overtime under the Construction Wage Rate Requirements clause at 52.222-6. It tells contractors which items may be counted as "wages" for Davis-Bacon purposes, including cash wages, certain irrevocable fringe benefit contributions, and other fringe benefit costs that have been expressly approved by the Secretary of Labor. It also explains how a contractor may satisfy the wage determination by combining cash wages and fringe benefits, how to convert non-cash benefits into an hourly cash equivalent, and what to do if the parties cannot agree on that conversion. Finally, it sets the rule for computing overtime, including which basic hourly rate must be used and what is excluded from the overtime base. In practice, this section is critical because misclassifying fringe benefits, using the wrong hourly equivalent, or calculating overtime on the wrong base can lead to underpayments, wage violations, and contract administration disputes.
Key Rules
Cash wages and deductions
Only amounts paid in cash to the laborer or mechanic, or deductions allowed under 29 CFR 3.5, may be counted as wages under this rule. Anything outside those permitted categories cannot be treated as part of the wage payment.
Qualified fringe benefit contributions
A contractor may count irrevocable contributions to a trustee or third party under a bona fide fringe benefit plan, but only for the listed benefit types and only if the contributions are not required by Federal, State, or local law. The plan must be genuine and structured to provide the specified benefits.
Secretary-approved fringe costs
Other contributions or anticipated fringe benefit costs may count only to the extent expressly approved by the Secretary of Labor. Contractors cannot unilaterally decide that an unlisted cost qualifies as a wage credit.
Combination of wages and fringe benefits
The contractor may satisfy the wage determination using any combination of cash wages and allowable fringe benefit contributions or costs, as long as the total cost is at least the sum of the basic hourly rate and fringe benefits required for the classification. The test is total cost, not whether each component matches the wage determination exactly.
Hourly cash equivalent method
When wages or fringe benefits are not stated as exact cash amounts, the hourly cash equivalent is calculated by dividing the employer’s contribution or cost by the employee’s hours worked during the covered period. This method is used to translate benefits like health insurance or paid holidays into an hourly value.
Disputed equivalencies go to Labor
If the contractor, contracting officer, and employees or their representative cannot agree on the cash equivalent, the contracting officer must refer the issue to the Department of Labor for final determination under agency procedures. The referral must include a comparison of the wage determination amounts and the contractor’s proposed equivalents, plus the contracting officer’s comments and recommendations.
Overtime base rate
Overtime must be computed at one and one-half times the basic hourly rate of pay, using the higher of the wage determination rate or the contractor’s actual basic hourly rate if higher. The basic rate includes employee contributions to fringe benefits, but excludes the contractor’s fringe benefit contributions, costs, or cash equivalents, and overtime may never be calculated on a rate lower than the wage determination basic hourly rate.
Responsibilities
Contractor
Pay laborers and mechanics using only allowable wage components; make bona fide fringe benefit contributions that qualify under the rule; ensure the combined cash wages and fringe benefits meet or exceed the wage determination; calculate hourly cash equivalents correctly for non-cash benefits; and compute overtime using the proper basic hourly rate while excluding contractor-paid fringe benefits from the overtime base.
Contracting Officer
Review whether the contractor’s wage and fringe benefit structure satisfies the wage determination; help resolve disagreements over cash equivalents; and, when agreement cannot be reached, submit the issue to the Department of Labor with the required comparison, comments, and recommendations.
Department of Labor
Make the final determination on disputed cash equivalents or fringe benefit equivalencies when referred by the contracting officer under agency procedures.
Employees or their representative
Participate in discussions over the cash equivalent of fringe benefits when applicable and provide input on whether the contractor’s proposed equivalency properly reflects the wage determination requirements.
Practical Implications
Contractors often get into trouble by treating every benefit as a wage credit; only permitted fringe benefit contributions and approved costs count.
The hourly cash equivalent calculation matters a lot for benefits like health insurance, holidays, and other non-cash items, because the wrong divisor or period can understate wages.
Overtime is a common audit issue: contractors must use the correct basic hourly rate and cannot include contractor fringe contributions in the overtime base.
If the wage determination and the contractor’s benefit package do not line up neatly, the contractor must be able to show that the total cost meets the required minimums.
When there is disagreement about equivalency, the contracting officer—not the contractor—must escalate the issue to the Department of Labor for final resolution.
Official Regulatory Text
(a) In computing wages paid to a laborer or mechanic, the contractor may include only the following items: (1) Amounts paid in cash to the laborer or mechanic, or deducted from payments under the conditions set forth in 29 CFR3.5. (2) Contributions (except those required by Federal, State, or local law) the contractor makes irrevocably to a trustee or a third party under any bona fide plan or program to provide for medical or hospital care, pensions, compensation for injuries or illness resulting from occupational activity, unemployment benefits, life insurance, disability and sickness insurance, accident insurance, or any other bona fide fringe benefit. (3) Other contributions or anticipated costs for bona fide fringe benefits to the extent expressly approved by the Secretary of Labor. (b) (1) The contractor may satisfy the obligation under the clause at 52.222-6 , Construction Wage Rate Requirements, by providing wages consisting of any combination of contributions or costs as specified in paragraph (a) of this subsection, if the total cost of the combination is not less than the total of the basic hourly rate and fringe benefits payments prescribed in the wage determination for the classification of laborer or mechanic concerned. (2) Wages provided by the contractor and fringe benefits payments required by the wage determination may include items that are not stated as exact cash amounts. In these cases, the hourly cash equivalent of the cost of these items shall be determined by dividing the employer’s contributions or costs by the employee’s hours worked during the period covered by the costs or contributions. For example, if a contractor pays a monthly health insurance premium of $112 for a particular employee who worked 125 hours during the month, the hourly cash equivalent is determined by dividing $112 by 125 hours, which equals $0.90 per hour. Similarly, the calculation of hourly cash equivalent for nine paid holidays peryear for an employee with a hourly rate of pay of $5.00 is determined by multiplying $5.00 by 72 (9 days at 8 hours each), and dividing the result of $360 by the number of hours worked by the employee during the year. If the interested parties (contractor, contracting officer, and employees or their representative) cannot agree on the cash equivalent, the contracting officer shall submit the question for final determination to the Department of Labor as prescribed by agency procedures. The information submitted shall include- (i) A comparison of the payments, contributions, or costs in the wage determination with those made or proposed as equivalents by the contractor; and (ii) The comments and recommendations of the contracting officer. (c) In computing required overtime payments, ( i.e., 1 1/2 times the basic hourly rate of pay) the contractor shall use the basic hourly rate of pay in the wage determination, or the basic hourly rate actually paid by the contractor, if higher. The basic rate of pay includes employee contributions to fringe benefits, but excludes the contractor’s contributions, costs, or payment of cash equivalents for fringe benefits. Overtime shall not be computed on a rate lower than the basic hourly rate in the wage determination.