Originally published in On-Site, ARB’s Construction Industry newsletter.
Payroll complexity is just one of the reasons why running a construction business differs from managing other types of companies. Let’s review four major payroll challenges you and your leadership team likely already face and how to address them.
1. Worker Classification
Properly classifying workers as employees or independent contractors is sometimes tricky for construction companies. However, doing so is critical to issues such as calculating payroll tax and determining eligibility for minimum wages, overtime pay and fringe benefits. Mistakes can be costly.
Over the past decade, various presidential administrations have modified the U.S. Department of Labor’s (DOL’s) regulations for determining whether a worker is an employee or independent contractor under the Fair Labor Standards Act. And that could happen again. To worsen matters, the IRS applies a different test than the DOL.
If you haven’t done so recently, meet with your professional advisors to double-check how your construction business differentiates between employees and independent contractors. Be sure you’re keeping accurate documentation for each worker of factors such as:
- Job duties,
- Payment methods, and
- Your degree of control over the worker’s schedule and activities (regardless of whether you exercise it).
Regularly verify that your employee classifications comply with the latest regulations. Meanwhile, ensure your human resources and payroll teams are current on IRS and DOL guidelines.
2. Overtime and Other Regulatory Requirements
The test for overtime pay eligibility has also been revised in recent years, and yet another round of changes is possible under the second Trump administration. Moreover, you must stay current with state and local regulations. These may include regs for locations where:
- Your workers legally reside,
- You have projects, and
- Your company is based.
State and local rules can be more stringent than federal ones in areas such as overtime, minimum wage, meal and rest breaks, and leave requirements. Plus, states may have their own additional income and payroll taxes and, in turn, withholding and reporting requirements.
Consider creating a compliance matrix outlining payroll regs for every state and locality where your business operates. Additionally, be sure that your payroll software can apply location-specific rules when processing wages — if it can’t, you might want to upgrade.
3. Prevailing Wage Compliance
Under the Davis-Bacon Act of 1931, the federal government established a requirement that contractors pay local prevailing wages to laborers and mechanics when working on public works projects. (State or local laws may also apply.) Prevailing wage rates vary by project, job duties and location, so monitor them carefully.
Accurate documentation is key here, too. Keep detailed and ongoing records of hours worked (divided between regular and overtime), wages and benefits paid, labor classifications, projects worked on, and payroll deductions. This information is required for weekly certified payroll reporting. Payroll records generally serve as the basis for such reports. If those contain errors, the certified payroll reports will also be inaccurate.
And you need to do more than accurately report the required information. You must format the data correctly and meet strict submission deadlines. Errors or omissions can lead to fines and the loss of eligibility for future public projects. Again, your payroll software should be able to help you automate and standardize your reporting.
4. Varying Pay Rates
Payroll for many types of businesses is relatively simple because most employee groups are compensated at a single regular pay rate. Even if overtime is involved, the calculation is just 1.5 times the regular rate.
The High Price of Employee Misclassification
Recently, a national construction business learned the hard way about the high price of misclassifying employees as independent contractors. The Office of the Attorney General of the District of Columbia filed a lawsuit alleging the company, its general contractor and multiple labor brokers misclassified hundreds of workers to avoid paid sick leave and payroll taxes.
Under a settlement reached in July 2024 with the Attorney General, the construction business must pay $3.75 million, including:
- More than $1.7 million in worker restitution,
- More than $1.1 million in civil penalties, and
- $880,000 in attorneys’ fees.
Additionally, the defendants must overhaul their payroll and contracting practices to prevent future employee misclassification. The construction company was also required to submit certified reports to the Attorney General for three years to demonstrate compliance with the settlement terms and Washington, D.C., law. Last, it had to agree to stop working with labor brokers that have misclassified workers or failed to provide paid sick leave to properly classified workers.
However, a construction worker’s pay rate can vary by location, project, task or equipment used. For example, a worker could spend the morning using a forklift and the afternoon operating a crane tower. Because that second piece of equipment calls for greater skill and carries more risk, the operator will be compensated at a higher pay rate. Further, the rates for both types of work might vary in different locations because of prevailing wage requirements, union rules or labor availability.
Train project managers or crew supervisors to log labor classifications and job changes in real time. Reinforce the importance of doing so as part of performance management. In addition, use up-to-date software to integrate time tracking and job costing into your payroll system.
No Surprises
If your construction company has been in business for a while, you’re probably familiar with all four of these challenges. Nonetheless, keep your payroll processes sharp and look for ways to improve them continuously.
This publication is distributed with the understanding that the author, publisher and distributor are not rendering legal, accounting or other professional advice or opinions on specific facts or matters, and, accordingly, assume no liability whatsoever in connection with its use. ©2025
Construction and Real Estate Team Spotlight
David Jean is the Practice Leader of the Construction & Real Estate, Business Advisory, and Succession Planning Services Teams. He focuses primarily on financial accounting and consulting for construction, real estate, and manufacturing companies. He is a Certified Construction Industry Financial Professional (CCIFP) and board member and past chairman of the Associated Builders and Contractors of Maine.
