What Is the Service Contract Act Part 1 - What You Need To Know

Page Summary

The Service Contract Act (SCA) is a federal statute that regulates service contracts between individuals or companies and the government. It mandates fair wages and benefits for service employees working on government contracts, with strict compliance requirements and potential penalties for violations.

In Part 1 of this 3-part series, we provide an overview of the Service Contract Act. In Part 2, we provide helpful tips on managing SCA contracts. In Part 3, we provide a list of case studies that provide common SCA problems and solutions.

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Service Contract Act

The Service Contract Act also referred to as the McNamara-O'Hara Service Contract Act (SCA), is a federal statute that controls the aspect of service contracts entered into between individuals or companies and the federal government, including the District of Columbia, for the contractors to engage "service employees" to provide services for these government agencies.

A "service employee" is an employee, excluding an executive, administrative, or exempt professional employee under 29 CFR Part 541, who is actively working in the performance of service pursuant to a contract covered by the SCA.

The Service Contract Act requires contractors and subcontractors performing services on prime contracts in excess of $2,500 to pay service employees in various classes no less than the wage rates and fringe benefits found prevailing in the locality, or the rates (including prospective increases) contained in a predecessor contractor's collective bargaining agreement. The Department of Labor issues wage determinations on a contract-by-contract basis in response to specific requests from contracting agencies. These determinations are incorporated into the contract.

For contracts equal to or less than $2,500, contractors are required to pay the federal minimum wage as provided in Section 6(a)(1) of the Fair Labor Standards Act.

For prime contracts more than $100,000, contractors and subcontractors must also, under the provisions of the Contract Work Hours and Safety Standards Act, as amended, pay laborers and mechanics, including guards and watchmen, at least one and one-half times their regular rate of pay for all hours worked over 40 in a workweek. The overtime provisions of the Fair Labor Standards Act may also apply to SCA-covered contracts.

Understanding the Service Contract Act

This statute was enacted in 1966, amended in 1976, and is managed by the Department of Labor through its Wage and Hour Division. This statute was enacted to insure that service employees engaged for federal governments are paid as much as the prevailing rates in the location for the same work. The statute can be cumbersome for both old and new companies in the industry. However, a review of the SCA requirements early in the process of contract awards can help avoid later problems.

The Secretary of Labor is tasked with enforcing the provision of the SCA by issuing regulations, orders, conducting hearings, deciding disputes, and taking other actions as appropriate. Wage determinations are specific to each contract. The Department of Labor has made many regulations implementing the SCA into practice. These regulations involve various matters from procedure to compensation and safety standards, all of which can be found in various parts of Title 29 of the Code of Federal Regulations.

For prime contracts exceeding $2,500, contractors and subcontractors performing work are required to pay their employees at least at the wage rate and with the benefits of private employers in the locality at which the work is being performed. If there was a prior contractor with a collective bargaining agreement, the new contractor must pay the rates set forth in that agreement.

If no collective bargaining agreement is applicable, the contract must pay either the rate set by the DOL's wage determination or the minimum wage under the FLSA. A "wage determination" is a procedure as set out in the United States Code, Title 41 which sets the prevailing locality rate of pay.

The SCA has additional reporting requirements regarding fringe benefits.

The SCA applies only to service contracts not exceeding 5 years, and strict compliance with its terms is required. Failure to do so can result in investigations, payment to former employees, and suspension or termination of the contract.

The SCA provides many exemptions from its requirements, including:

• Construction contracts under the Davis-Bacon Act
• Walsh-Healey Public Contracts
• Transportation contracts under published tariffs
• Contracts controlled by the Communications Act of 1934
• Public Utility Services
• Direct services employment contracts
• Postal Service contract offices
• Contracts for services outside the United States
• Contracts exempted under special circumstances by the Secretary of Labor

Refer to FactSheet#17A: Exemption for Executive, Administrative, Professional, Computer & Outside Sales Employees Under the Fair Labor Standards Act (FLSA). Here's a simple set of questions to use when determining whether executive or administrative employees are exempt.

Tests to be met for Executive Employee exemption

• Compensation at a rate not less than $684/week
• Primary duty managing aspects of the organization
• Direct work of at least two or more other full-time employees
• Have authority to hire or fire other employees

Tests to be met for Administrative Employee exemption

• Compensation at a rate of not less than $684/week
• Primary duty in the performance of office or non-manual work directly related to the management or general business operations
• Primary duty includes exercising discretion and independent judgment with respect to matters of significance

Service Contract Act (SCA) Compliance

Contractors under contract for $2,500 or more must pay at least the minimum wage of $7.25 per hour as set forth in the Fair Labor Standards Act . Additionally, contractors are required to pay overtime wages of one and one-half times regular hourly rates for each hour worked over 40 in a week.

Employees are entitled to a notice in writing of wage and benefit information.

In addition to wage and fringe benefit entitlements, employees have a right to work in a safe environment free of danger and unhealthy conditions. The Occupational Safety and Health Administration (OSHA) is a federal agency tasked with inspecting and enforcing workplace safety.

Employee Rights under Service Contract Act

Employees under the SCA are entitled to be paid a minimum wage based on a determination by the Department of Labor of the average rates and benefits for similar work in private industry in the same locale as the service contract.

In addition to minimum wage rates, contractors must also provide their employees with major medical insurance coverage or pay a specified rate for fringe benefits (currently $4.80 per hour or $4.23 for contracts covered by E.O. 13706). This additional hourly compensation must be paid on all hours paid, working hours, paid time off, and holiday pay. Employers will also have to pay employment taxes on payments for fringe benefits which may cause the employer's contract to be non-competitive. Conversely, direct payment to an insurer by the contractor or participation in a group health plan has tax benefits as it could be deducted to pre-tax to reduce the tax costs for both the contractor and employee. If the contractor does contribute to a health plan, these contributions may vary per employee based on that employee's family and employment status. Also, under a direct contribution plan, the average contributions must equal or exceed the specified fringe benefit rate.

Under the SCA, wage, and benefit requirements are applied equally to temporary, part-time, and full-time employees.

The specified rate of fringe benefits or value of contributions made to a health plan is not included in wages for purposes of calculating overtime rates under the Fair Labor Standards Act (FLSA).

A contractor may make required contributions for fringe benefits to a trustee or third-party administrator if it is done pursuant to the establishment and/or management of a "bona fide" retirement or health plan for the benefit of the employees. To the extent this payment is made, the employer's obligations to provide these benefits are met.

The requirements under the SCA concerning compensation and benefits are enforced by the Wage and Hour Division within the Employment Standards Administration. This Administration functions pursuant to assignment by the Secretary of Labor by the Service Contract Labor Standards Act. The Wage and Hour Division is the department to whom service employees would lodge complaints against employers for violation of the Service Contracts Act.

Compliance Assistance Available under Service Contract Act

As the requirements to comply with the SCA are very detailed, the Secretary of Labor, through the Wage and Hour Division of the Employment Standards Administration, assists contractors to learn and navigate the SCA. This assistance consists of publishing brochures and other explanatory literature, copies of which may be found at local Wage and Hour Division offices. The Wage and Hour Division also provides much information on its website. There is also the Wage and Hour Division helpline which is reached toll-free by dialing 1-866-4USWAGE.

The Department of Labor may request reports on the costs of employee pay and benefit per contract so the contractor should keep meticulous records tracking this information so that it is readily produced when requested.

Is your Company Required to Comply with the SCA Requirements?

To answer this, it must first be determined if the contract is one covered by the Service Contracts Act. The easiest way of determining this is to check the solicitation or request for bids which sometimes indicates whether the SCA will apply to a particular contract. If this is unclear, the contract may still be controlled by the SCA if certain factors are met. These factors are:

• The contract is one awarded by the District of Columbia or the U.S. Government.
• The contract is for services primarily which will be fulfilled by the work of non-exempt service employees.
• The contract exceeds $2,500 in payments.
• The work will be undertaken in the United States or a foreign U.S. territory

If the contract is covered under the SCA, absent any exceptions or exemptions that sometimes apply, to perform the contract, your company will need to comply with the SCA. Therefore, in formulating a bid you will need to be aware of the applicable SCA requirements as to wages and benefits required to be paid to your service employees. It would be wise to seek the advice of a consultant (lawyer or CPA) to guide you through that process. In determining the amount of wages and benefits required to be paid for a particular contract, there will be one of two documents; either (1) a Department of Labor wage determination notice; or (2) a collective bargaining agreement (CBA). Under wage determinations, the required pay will be determined by the place where the contract will be performed. In determining the minimum wage and benefits for particular jobs, employers are required to identify job tasks for each employee and match or "map" those to the comparable DOL labor category. Be careful. While the request for bids may give good guidance on the applicable labor category, the employer ultimately bears the burden for any mismatching.

Steps in the SCA Labor Category Mapping Process

Here is how you would embark on the mapping process:

1. Study the contract's work statement and statement of equivalent rates as outlined in the solicitation for contract and other written information regarding job duties.
2. Determine which of your employees under the contract would be "service employees" and which are exempt for purposes of the SCA or FLSA.
3. Review the wage determination and occupational directory published by the Department of Labor to match employees by job category.
4. Provide written documentation of this matching.
5. Ensure compliance by all subcontractors and include an indemnification agreement for a subcontractor's non-compliance.

Considerations in SCA Bid Development - Paying Cash-in-lieu of Benefits

In determining how to price your contract, the following considerations should be made:

• Department of Labor's wage determinations or collective bargaining agreements
• Fringe Benefits are required to be paid under the SCA.
• Allowable deductions from employees' wages.
• Adjustments to wages and contract prices and costs.
• Notice to Employees of their wage and benefit rights under the SCA.
• A strategy for pricing services
• Requirement for fringe benefits unable to be used for SCA compliance.

Penalties/Sanctions for companies who fail to comply with the Service Contract Act

Failure to comply with the requirement of the Service Contracts Act could result in terminating the service contract and payment of the costs associated with the termination to the federal government. The government may also withhold from payments due under the contract a sufficient amount of funds to cover the costs of providing compensation due to service employees because of underpayment by the contractor. The government may also sue the contractor to recover the costs of underpayments and the contractor may be barred from being awarded any future service contracts for a period not exceeding three years.

Upon a finding of a violation under an investigation by the Department of Labor, contractors and subcontractors have a right to appeal the agency determination and request a hearing before an Administrative Law Judge. If the Administrative Law Judge rules against the contractor, this decision can then be appealed to the Administrative Review Board. Final Board decisions may be appealed to the federal courts. Further decisions by the final board not appealed can be enforced by the federal courts.

Even in the duties required to comply with the SCA were outsourced by the company to a third party, the contractor will still be obligated to pay any penalties and underpayments.

To increase enforcement of the provisions of the SCA, the Department of Labor has increased the fees payable to whistleblowers so that non-compliance will hopefully be reported more frequently. Also, the DOL has increased the number of audits it performs to monitor compliance.

Service Contract Act Relationship to State, Local, and Other Federal Laws

In addition to the Service Contracts Act requirements, employers must also continue to follow regulations and rules required by the Fair Labor Standards Act and the Contract Work Hours and Safety Standard Act as they relate to overtime work and pay.

Learn More About AtWork Systems

AtWork Systems' OneLynk platform, provides out-of-the-box supports for SCA contracts. It can import and manage wage determination rates. SCA covered employee can be easily mapped to an employee class associated with the WD wage rates. OneLynk's timekeeping and payroll systems handles the SCA vacation and sick leave requirements. Compliance reports ensure that you are ready for a DOL audit.

AtWork offers SCA compliance consulting services that help our customers meet all the SCA contract requirements. To learn more about AtWork Systems, visit our website at: www.atworksys.com