Service Contract Act Part 2 - Complying with SCA Contracts

Page Summary

Comprehensive guidance on bidding for Service Contract Act (SCA) contracts, emphasizing the importance of carefully reviewing contract solicitations for SCA compliance. Understand the potential consequences of non-compliance and gain insights into mapping service workers to SCA wage determinations and pricing strategies.

In Part 1, we provided a basic overview of the Service Contract Act (SCA) to help you understand the most important requirements. In Part 2, we discuss why federal contractors must review the solicitation they bid and win, paying particularly close attention to whether the contract qualifies as an SCA contract. If it does, they must understand what is required to successfully manage SCA contracts.

In Part 3, we provide a list of "real-life" case studies describing common SCA problems and solutions. The case studies describe many business scenarios that will help you develop and implement longer term strategies that will allow you to successfully manage your SCA contracts.

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Bidding on Service Contract Act (SCA) Contracts

Often the government agency's Contracting Officer will inform you of SCA obligations, and other times the contractor is simply left to its own to figure out whether the contract is covered by the SCA. It is not uncommon for contractors to find out a couple years down the road that they should have been paying SCA wages and benefits on a particular contract. Don't let that happen to your company. You need to carefully review the solicitation by asking ... does the solicitation contains SCA requirements, such as:

• Federal Acquisition Regulation (FAR 52.222-41)
• SCA Prevailing Wage Determination
• Language that stipulates that the contract will be subject to SCA

If any one of these conditions are present in the solicitation, expect the contract to be covered by SCA. Even if the solicitation does not have these clauses or other language applicable to SCA. The contract may still be covered if all the following are met:

• Award by the US Government or District of Columbia
• The contract is principally for services that will be performed by "service employees"
• The contract is expected to exceed $2,500
• At least some portion will be performed in the United States or its territories

It is the responsibility of the contractor, not the Government to verify if SCA is applicable to the contract.

NOTE: Inquire throughout the bidding process if you believe the contract may be subject to SCA

The financial penalties for being out of compliance can be steep and intentional disregard of SCA requirements can lead to debarment. If you are unsure about whether the SCA applies to one or more of your company's federal service contracts, reach out to your contracting agency or prime contractor for further guidance.

In formulating a bid, you need to be award of the applicable SCA requirements. The assumptions you make regarding salaries and benefits will be driven by the wage determination and wage rates associated with SCA covered contracts. So be careful to do your homework, while the solicitation may provide some guidance on labor categories, the employer ultimately bears the burden for matching employee with the correct wage determination.

Mapping Service Workers to SCA Wage Determinations

When developing the staffing plan for pricing a SCA contract you'll need to map your resources to the appropriate wage determinate categories. This includes:

• Identify specific job duties each employee will perform
• Identify the associated wage determination labor category (occupation code - title)
• The mapping process will typically include the following steps:
  • Job Duties - review the performance work statement / statement of work, incumbent contract information, any other guidance to determine the scope of the job duties
  • Coverage Analysis - determine each contract employee's actual job duties and responsibilities
  • Labor Categories - Consult the wage determinations, Statement of Equivalents information and DOL SCA Directory of Occupations
  • Document Decisions - All coverage determinations and labor category assignments should be supported by adequate written documentation

NOTE: Make sure that any subcontractors are also on the same page as to which roles on the contract are subject to the Service Contract Act.

SCA Pricing Strategies

Once you've completed the staffing plan and wage determination mappings, you'll need to determine how the health and welfare (H&W) requirements will be satisfied. Chances are you have existing benefit plan in place for hourly employees ... you'll want to examine the existing plan closely to determine if it can be used to meet the H&W rate. The critical things here is not to compute your price using a fringe benefit package that is too expense or does not contain sufficient benefits to satisfy the H&W rate. Either case can create compliance problems. If managing SCA contracts are a part of a longer-term strategy for your business, you may consider creating a SCA specific benefit plan. Service Contract Act Part 3 - Common SCA Compliance Problems & Solutions describes specific business scenarios where this is applicable. Here's a short checklist of tasks you'll want to complete before finalizing your pricing.

• Identify the prevailing wage rates and fringe benefit rates in the geographic locality
  • DOL issues two wage determinations for each locality (odd and even)
  • Identical except for fringe benefit requirements
    • Even - requires fringe benefit plan requiring compliance on an "average cost" basis
    • Odd - satisfies the fringe benefit requirements on a "per employee" basis; calculated using all hours paid
• Understand the escalation provisions:
  • Fixed-price, T&M, or LH basis, FAR 52.222-43, entitles contractors to price adjustments to cover the cost of future increases in prevailing wage or fringe benefits
• Review any applicable wages and price adjustments
• Examine impact on your indirect rates
  • Provide different benefits for SCA versus Non-SCA
• Review Fringe Benefits Cost
  • Identify the minimum fringe benefit amounts in the wage determination
  • Assess your benefits plan to assess those requirements and how it affects proposal pricing. Determine if:
    • Executive Order 13706, Establishing Paid Sick Leave for Federal Contractors, is applicable
    • Planned health and welfare (H&W) benefits qualify as "bona fide" fringe benefits under the SCA
    • Method of calculating vacation is consistent
    • Plan to account for paid holidays
    • Plan to provide cash equivalents in lieu of any benefits if unable to satisfy the benefit requirements with "bona fide" fringe benefits
  • No offsets
    • Worker's compensation, unemployment insurance, social security
  • Review Requirements for Employee Notice
    • Notice of the wage and benefits the employees will receive

Executing Service Contract Act (SCA) Contracts

Complying with Service Contract Act (SCA) leave requirements is challenging, even more so if service employees live in a state or county with local sick leave laws or if the contract is subject to Executive Order 13706, Sick Leave for Federal Contractors. Each of these laws and regulations has unique requirements that must be woven together to develop a compliant leave policy. Once contractors understand the nuances, strategic policy decisions can be made that minimize costs and liability.

Providing leave to employee can be a significant cost for employers. Contractors who spend the time to analyze their leave requirements and make strategic policy decisions are much better positioned to bid SCA contracts competitively, maximize profit, and maintain compliance.

Although combining sick and vacation time into one paid time off policy has become popular in recent years, contractors should examine whether separating vacation and sick leave is the best option to comply with all leave requirements ... especially SCA requirements. Any policy developed should take into consideration legal obligations as well as your corporate culture and operational needs.

Service Contract Act (SCA) Vacation Leave

The SCA requires that a service employee be provided a certain amount of vacation time commensurate with the employee's years of service on the same or similar contract. The employee is not due any vacation until their anniversary date, or the date the employee began work on the same or similar contract, whether as an employee of the current or predecessor contractor. On the employee's anniversary date, the employee is eligible to receive the full amount of vacation time

Service Contract Act (SCA) Sick Leave

The SCA does not require that any sick leave be provided to employees. However, an employer may choose to provide sick leave as bona fide benefit and count the value of the sick leave against the health and welfare benefits due, if providing sick leave is not required by law.

In recent years, many states and localities have passed laws requiring employers to provide sick leave to employees who work in those jurisdictions. To name a few, California, Washington D.C, New Jersey, and Montgomery County, Maryland, all require employers to provide sick leave. The laws have many similarities, but also challenge employers with slight differences. Most of these laws contain a designated amount of sick leave to be provided per year and require that employees be eligible to carry over sick leave from one year to the next.

Service Contract Act (SCA), State & Local Compliance

To comply with SCA and State and Local leave laws, employers often develop paid-time-off (PTO) policies that combine sick leave and vacation. A properly drafted PTO policy may solve the problem of having to provide additional sick leave to employees outside of the vacation leave already required for SCA.

However, employers must ensure that all the other requirements of the SCA and local law are met, including allowable reasons for sick leave and carry over requirements which may not be allowed under the SCA vacation requirements.

The Department of Labor generally has not required employers to provide additional leave to service employees under most of these laws, often because the requirement for the SCA may be met if the policy and leave accounting procedures are well managed. However, an employer may still be liable for additional leave if it is unclear whether the policy was administered to satisfy both laws.

Service Contract Act (SCA) Sick Leave Executive Order

Executive order 13706, Sick Leave for Federal Contractors, adds another twist to leave policy administration. The Executive order applies to solicitations issued on or after Jan 1, 2017. The executive order does not allow contractors to satisfy their sick leave obligations by "double dipping" into the vacation leave already provided by the applicable SCA wage determination. This benefit must be provided in addition to SCA vacation time, and any sick leave provided to employees through the health and welfare benefit.

Additionally, because the executive order is phased in by contract, an employer may be required to comply on one contract but not another. Unlike SCA leave, but like many state laws, executive order sick leave must be carried over from one year to the next, up to 56 hours a year, and does not have to be paid out to employees at the end of the contract.

Handling Service Contract Act (SCA) Predecessor Contract

An Executive Order passed in November 2021, Non-displacement of Qualified Workers Under Service Contracts, provides provision intended to make it easy to retain incumbent works. SCA contract contains provision that allow worker of predecessor contracts to have the first right of refusal on new contract awards. Each agency, to the extent permitted by law, include the following clause:

• "Non-displacement of Qualified Workers"
  • Contractor and subcontractor in good faith should offer service employees first right of refusal for employment who were employed under the predecessor contract and employment will be terminated because of the award of the contract and expiration of the contract
  • Period of no less than 10 days can be granted for acceptance of offer
  • Furnish as certified list of the names of all service employees working under the contract within the last month of the period of performance
  • Provision flow downs required for subcontractors

SCA Record Keeping, Compliance and Enforcement

Keeping accurate HR, time keeping, and payroll are required to successfully manage SCA contracts. Here's a detailed list of the type of records that will be required:

Recording Keeping

• Records that must be maintained for three years from completion of the work:
• Name, address, and Social Security number of each employee
• The correct work classifications, wage rates, and fringe benefits provided (or cash equivalent payments provided in lieu of fringe benefits)
• The total daily and weekly compensation of each employee
• The number of daily and weekly hours worked by each employee
• Any deductions, rebates, or refunds from each employee's compensation
• Any list of a predecessor contractor's employees showing employees' length of service information

Here's a list of required systems that will be needed to support the record keeping requirements

• Human Resource system: maintaining accurate employee records i.e. name, ssn, address...
• Timekeeping system: tracking hours worked by pay types (regular, overtime, sick and vacation), leave taken and accruals, and carryover balances
• Payroll system: employee payroll records including gross/net pay and tax withholding, as well as the cost of benefits provided during each pay period, and YTD benefit summaries

Be careful to review the timekeeping and payroll system to ensure they can handle the SCA leave accrual and carryover requirements which can be slightly different from those used for regular non-exempt employees.

Compliance

You must maintain adequate time and payroll data to verify you are complying with the following:

• Paying the appropriate wage rate based on the employee's wage determination mapping
• Complying with the vacation and sick leave requirements by maintaining timekeeping and payroll records that can verify hours worked by pay type
• Complying with the H&W rate by maintain payroll records showing the cost of benefits being provided and how they satisfy the H&W requirements.
• If the contract is subject to EO13706, the lower EO H&W rate should be used when determining the H&W amount that must be paid
• If there is a shortfall in the H&W amount you've paid, you will need to provide a "true-up" payment for the difference to a QNEC. If there's a difference in the wage rate ... back pay may be required.

Enforcement

SCA compensation requirements are enforced by the DOL's Wage and Hour Division. Based on a GAO Study,

• DOL conducted more than 5,000 compliance investigations between 2014-2019
• Violations led to more than $220M in back wages for workers

During these investigations - 60 contractors were excluded from receiving new federal contracts for 3 years.

Violation of SCA can include:

• Contract Termination and liability for any resulting costs to the Government - Withholding of contract payments
• Legal action to cover under payments
• Debarment from future contracts for up to three years

Typical Problems

Here a short list of typical problems that contractors encounter when managing SCA contracts.

• Underpayment of service workers due to misclassification
• Erroneously considering workers exempt without regard to the exemptions
• Failure to make timely payment of wages and fringe benefit contributions
• Lack of proper record keeping
• Failure to notify service employees of applicable wage and fringe benefits
• Failure to implement rate increases in a new wage determination in a multi-year contract

Part 3 provides a list of case studies that provide a comprehensive explanation of common SCA problems and solutions.