4 Major Payroll Challenges for Construction Companies

By Erin A. Hockensmith, William M. Dolan and Susan Leach DeBlasio on September 24, 2025

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. (See “The high price of employee misclassification” below.)

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.

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.

Sidebar: 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.

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