What is the Service Contract Act (SCA)?

Thursday, January 18, 2024

The Service Contract Act (SCA), formally the McNamara-O’Hara Service Contract Act of 1965, is a U.S. labor law that applies to specific service contracts, including janitorial, maintenance, security, food service, and other similar contracts. Simply put, SCA mandates that any employee performing on a federal government service contract valued over $2,500 is affected by the SCA, fringe benefits, and their employer’s compliance. This includes not only the Prime federal contractor but also their subcontractors. 

Keeping up with the basics of SCA, fringe benefits, and compliance may not be the most provocative topic in federal government contracting. Still, it is imperative for any federal contractor looking to maximize their competitive advantage. More importantly? Ensuring compliance with SCA keeps your organization out of hot water with the federal government.

To ensure your firm stays in cool and calm waters, The Pulse sat down with GSA National to help us navigate the complex SCA landscape and address a few complexities that have been popping up lately in industry news.

What are SCA regulations, and why do they matter to a federal contractor?

SCA, also known as the Service Contract Labor Standards (SCLS), is a U.S. labor law that applies to service contracts with the federal government. SCA establishes minimum wage and fringe benefit requirements, such that contractors must pay their employees at minimum the wage rates and fringe benefits found prevailing in the locality (per the wage determination) or the rates contained in a predecessor contractor’s collective bargaining agreement. 

These wages must be appropriately accounted for in a contractor’s proposal and accurately administered during contract performance. Strict compliance with SCA is mandatory, and the Department of Labor’s (DOL) Wage and Hour Division actively enforces SCA regulations. Failure of a Prime contractor or their subcontractor to comply can result in negative consequences during or after contract performance, including back payments, contract termination, and suspension or debarment.

SCA regulations matter to federal contractors because wage rates and fringe benefits (including health and welfare [H&W] rates) significantly impact profitability on a government contract. If understood and applied appropriately, understanding the complexities of SCA brings a competitive advantage during the solicitation process. Below are a few examples of how SCA impacts vital elements of an organization: 

  • Cost Estimation and Pricing: When estimating costs and pricing a federal contract, contractors must accurately account for the H&W rate to ensure they cover these benefits’ costs. Understanding SCA and the H&W rate allows contractors to factor in these costs accurately when preparing bids. Properly accounting for these rates ensures contractors can offer competitive pricing while maintaining profitability.
  • Labor Costs: SCA establishes minimum wage standards for covered employees. Contractors must pay employees at least the prevailing wage rates specified in the contract. The H&W rate is often included as part of the prevailing wage rate. Failure to properly account for these rates can result in non-compliance, potential penalties, and increased labor costs that impact profitability.
  • Cost Control and Management: SCA compliance involves tracking and documenting fringe benefit expenses, including H&W costs. A clear understanding of these requirements enables contractors to effectively manage and control their costs related to providing benefits. Efficient cost management can help improve profitability by minimizing expenses and optimizing resource allocation.
  • Compliance Risks and Penalties: Non-compliance with SCA, including inaccurate calculation or payment of the H&W rate, can lead to investigations, penalties, and potential contract termination. These consequences can result in financial losses and damage a contractor’s reputation. Understanding SCA and adhering to its requirements mitigates compliance risks, ensuring profitability is not affected by costly penalties or reputational damage.
  • Contract Renewals and Extensions: Federal contracts are often subject to renewals or extensions. Maintaining SCA compliance, including accurate calculation and payment of the H&W rate, is essential for contract performance evaluations. Compliance can contribute to a positive track record and increase the likelihood of contract renewals or extensions, securing continued profitability for a federal contractor.

Are SCA regulations applicable only to federal contractors providing services? Where do SCA regulations NOT apply to federal contracts? What about materials, OEMs, or VARs?

SCA applies if the “principal purpose” of the contract is to furnish services to the government using “service employees.” FAR 22.1003-1. Unfortunately, there are no precise rules for “principal purpose” determination. However, there is a non-exhaustive list of 55 example service types. 

SCA does not apply to materials, Original Equipment Manufacturer (OEM), or Value-Added Reseller (VAR) contracts. Below is a summary of exempt contract types: 

  • Contracts for construction, alteration, or repair of public buildings or public works;
  • Manufacturing work covered by the Walsh-Healey Public Contracts Act;
  • Contracts for transporting freight or personnel by vessel, aircraft, bus, truck, express, railroad, or oil or gas pipeline where published tariff rates are in effect;
  • Contracts for furnishing services by radio, telephone, telegraph, or cable companies subject to the Communications Act of 1934;
  • Contracts for public utility services;
  • Employment contracts to provide direct services to a Federal agency; and
  • Contracts for operating U.S. Postal Service contract stations.

There are also exemptions for maintenance, calibration, and repair of certain types of equipment.

What are the pros and cons of pursuing SCA federal contracts?

SCA contracts can be administered efficiently and profitably within the minimum wages and fringe benefits when supported with appropriate compliance knowledge. For minimum wages, astute contractors work closely with their Human Resources (HR) department and recruiters to analyze the labor market for the location(s) where the SCA work is performed and have proven that they can recruit and retain employees at the reimbursable wage rates specified in the wage determination

The challenge is balancing these competing priorities – recruitment and retention vs. wages and fringe benefits – for both the short-term contract performance and the long-term viability of the benefits plan offered to employees. 

For example, a federal contractor who elects to pay the fringe benefit requirement (hourly H&W rate) as earnings may have success with recruitment and retention. However, designing benefit plans where only the unhealthiest (i.e., highest medical expense) employees elect medical coverage results in adverse selection to the plan and, eventually, an inability to offer affordable coverage to employees. As contractors grow their SCA employee population, they must be prepared to shift away from paying the H&W as earnings towards allocating these H&W amounts towards benefits, along with stricter requirements for employees to waive medical coverage. 

What should federal contractors consider when developing pricing for an SCA-covered contract?

Federal contractors should be mindful of the wage and H&W rates (determined by the specific wage determination) that apply in their proposals. Wage rates vary by locality, but H&W rates are consistent across the country (except for Hawaii) for each contract.

Contractors may always elect to pay wage rates above the specified rates for recruitment and retention purposes; however, these extra wages are typically not reimbursable. Contractors must also ensure that their benefits offerings, especially the employer-paid portion of the benefits costs, are aligned with the expected H&W rate. 

For example, an employee working full-time hours at a $4.41 H&W rate has an expected H&W obligation (from the employer) of approximately $750 per month. Employers should ensure that the employer-paid portion of the benefits is at most this amount and that benefit elections above $750 per month have the appropriate employee cost shares. 

What constitutes bona fide benefits that can be used to offset H&W wages? Can employers require SCA employees to enroll in certain benefits to offset H&W wages?

To be considered bona fide for SCA purposes, a fringe benefit must:

  • Posses a legally enforceable obligation;
  • Communicate in writing to workers; 
  • Provide payment of benefits under a definite formula; and 
  • Be paid by the employer irrevocably to an independent trustee or third-party administrator under a fund or plan.

It’s important to note that unfunded, self-insured fringe benefit plans where a contractor makes out-of-pocket payments to provide benefits for employees as costs are incurred, rather than making irrevocable contributions to a trust or other funded arrangements, are generally not considered bona fide plans or equivalent benefits except for plans to provide paid vacation and holiday. 

SCA does not require employers to provide any specific benefits to employees or specify any rules regarding mandatory enrollment in benefits. However, under The Employee Retirement Income Security Act of 1974 (ERISA) and with proper plan documentation, employers may require employees to enroll in basic life, disability, medical, and other benefits. The employer’s contributions to these plans may (and should be) counted towards meeting their H&W obligation to the employee. 

What should a contractor do when the Government fails to include the appropriate SCA FAR clauses in a solicitation or does not provide a prevailing wage determination to leverage with an award?

If a contract is SCA, the following should be included in the solicitation package:

  • Either of the following two Service Contract Labor Standards clauses:
    • FAR 52.222-41
    • 29 CFR 4.6
  • Wage Determination(s)
    • FAR 52.222-55 – Minimum Wages Under Executive Order 14026
    • FAR 52.222-62 – Paid Sick Leave Under Executive Order 13706
    • FAR 52.222-43 – Fair Labor Standards Act and Service Contract Labor Standards-Price Adjustment (Multiple year and Option Contracts)

Suppose SCA clauses or Wage Determinations are missing from an active solicitation. In that case, we highly encourage any Offeror bidding to submit a question to the federal government asking if the contract requires SCA coverage. 

In Innovative Technologies, Inc., ASBCA No. 6186, 62185, the Armed Services Board of Contract Appeals (ASBCA) held that despite the federal government’s failure to include or incorporate the SCA FAR Clause 52.222-41 in the contract, the contractor was required to comply with the SCA and not entitled to an equitable adjustment for all costs it incurred from a $1.5M settlement with the DOL for its non-compliance. This case serves as an essential reminder for contractors to be vigilant in determining whether their service contracts are covered by the SCA, even if the agency fails to include or reference the SCA Clause.

It is important to remember that the DOL has the final authority for this determination, even if the contracting office maintains that SCA does not apply. If this is the case, federal contractors should document all inquiries about SCA applicability during the bid phase in the event of a DOL investigation post-award to demonstrate their reasonable faith effort to obtain the appropriate SCA designation. Some contractors avoid asking about SCA applicability in these situations because administering a non-SCA contract is administratively easier. However, employees working on the contract typically complain to the DOL, and then the DOL intervenes to direct the Contracting Officer to retroactively classify the contract as SCA. This corrective action is a significant administrative burden for the contractor and erodes employee trust.

When a new wage determination is released between RFP submission and contract award, what should a contractor do?

Wage determinations have revisions, typically annually following the DOL’s All-Agency Memorandum announcing the new H&W rates. However, the H&W rate in the latest version of a wage determination is not effective until the contract award or contract anniversary date. If a new wage determination is released between RFP submission and contract award, contractors should engage their contracting office to incorporate the latest wage determination(s) into their contract.  

With the DOL’s recent rhetoric going against the direction that trust fees can be applied toward the fringe, what is the compliance industry doing to prepare? Are there any updates on a resolution in the National Office at DOL?

SCA regulations state that the administrative expenses incurred by a federal contractor’s insurance carrier (or third-party trust fund) in its administration and delivery of benefits to service employees can be credited toward the contractor’s fringe benefit obligations under an SCA wage determination. 

However, the recent DOL Final Rule updating the Davis-Bacon and Related Acts (DBRA) regulations provides a more apparent distinction between creditable and non-creditable administrative expenses as follows: 

  • Creditable: costs directly related to administering and delivering bona fide fringe benefits to the contractor or subcontractor’s workers.
  • Non-Creditable: a contractor’s administrative expenses incurred in connection with the provision of fringe benefits, even when a contractor pays a third party to perform its administrative tasks.

Contractors working with insurance carriers and third-party administrators should pay careful attention to these definitions to ensure the expenses for services provided are transparent and appropriate per the SCA regulations and given SCA’s close relationship to DBRA to the recent DOL final rule updates. The DOL’s W&H Division has not provided any formal updates regarding these SCA regulations.   

Want to talk SCA? Contact GSA National! 

To learn more about how GSA National helps contractors with compliance, education, and support for SCA-covered contracts, contact Matt Corzine, President, at mcorzine@gsanational.com.

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