The McNamara O’Hara Service Contract Act (SCA) () mandates that federal contractors and subcontractors performing services on prime contracts in excess of $2,500 must pay service employees in various classes no less than the wage rates and fringe benefits found prevailing in that specific locality, or the rates (including prospective increases) contained in a predecessor contractor’s collective bargaining agreement.
The U.S. Department of Labor (DOL) issues wage determinations on a contract-by-contract basis in response to specific requests from contracting agencies. These wage determinations are incorporated into your contract. You should be able to read the wage determination to find out what is the minimum wage you must pay to SCA employees performing work under your contract or subcontract.
If you choose to do so, you may pay wages at rates higher than the minimum labor rate set forth in the wage determination, or provide more benefits than the SCA-required minimum. And, of course, you must also comply with any other applicable law, state or federal, there are various other labor laws which can increase the wage rates and/or fringe benefits you are required to pay.
The McNamara O’Hara Service Contract Act SCA fringe benefits provisions are included in federal government contracts. Each prime and subcontractor performing federal contracts must comply with the minimum wage and safety and health standards and must maintain certain records unless a specific exemption applies.
Companies that perform contracts with the federal government and subject to the SCA must comply with the wage and benefit provisions of the contract’s Wage Determination (WD) clause. The WD clause spells out the labor classifications, associated minimum hourly rates, the minimum hourly SCA Health and Welfare (H&W) fringe rate, and the holiday and vacation benefits that SCA employees are entitled to.
Hourly fringe benefit rates listed in each “fixed cost” wage determination are the contractor’s legal obligation and are separate from the hourly cash wage the employees get paid. The SCA employee is not entitled to receive any portion of this fringe rate in cash, although the employer may choose to discharge its obligation by simply paying the fringe rate to the employee in cash.
- SCA Employees are entitled to select which benefits the employer will provide.
When does the Federal Service Contract Act Apply?
The SCA Fringe Benefits do not apply to all federal government contracts:
The SCA does not apply to government construction, repair projects, and alteration work — including repair contracts such as painting and building decorations.
Although another territory is under US jurisdiction, if the location is in a foreign country the Federal Service Contract Act fringe benefits rule does not apply. The Federal SCA also does not apply to work on ships operating in international and foreign waters. See also 29 CFR 4.123(d).
An important point to know is that not all government contracts require Service Contract Act fringe benefits and compensation. The following are examples of government contracts not included in prevailing contract labor and wage-hour determinations that contracting officers should be amicable to.
- Government construction contracts, alteration, and/or repair, including painting and decorating of public buildings or public works;
- Work covered by the Walsh-Healey Public Contracts Act;
- Government contracts for carriage of freight or personnel by vessel, airplane, bus, truck, express, railway line, or oil or gas pipeline where published tariff codes and rates are in effect;
- Federal contracts for the furnishing of services by radio, telephone, telegraph, or cable companies, subject to the Communications Act of 1934;
- Federal contracts for public utility services, including electric light and power, water, steam, and gas;
- Contracts for direct services to a Federal agency by an individual or individuals;
- Government contracts for the operation of postal contract stations; and
- Services performed outside of the geographical scope.
See also Title 29 Part 4 of the Code of Federal Regulations, Section 4.123(d).
SCA Prevailing Wage Determination
The Federal Service Contract Act (SCA wage determination) applies to federal government contracts. It applies to prime contractors as well as subcontractors who are SCA service employees. The goal is for government contractors to comply with minimum wage, safety regulations, and health standards in conjunction with the SCA pay scale. Contractors must also maintain adequate records unless an exemption to the Federal Service Contract Act applies.
Who does the Service Contract Act Fringe Benefits & Wage Determination Rules Apply to?
If a service contract is in excess of 2,500 dollars, then every employee performing services must receive no less than the regulated monetary wages when using the prevailing wage rates by state.
The employer must also provide McNamara O’ Hara Service Contract Act fringe benefits for which local agencies and Secretary of Labor have determined to be prevailing wage in the locality for the classification in which the employee is working or the wage rates and fringe benefits (including any accrued or prospective wage rates and fringe benefits) contained in a predecessor contractor’s collective bargaining agreement. The source document for analysis of a contractor SCA labor category matrix will be in the initial proposal and the clauses incorporated into the contract.
For federal government contracts equal to or less than $2,500, government contractors must pay the federal minimum wage as provided in Section 6(a)(1) of the Fair Labor Standards Act.
If the government did not assign a prevailing wage determination in the contract, then contractor employees must be paid not less than the federal minimum wage provided in section 6(a)(1) of the Fair Labor Standards Act.
Federal Government Contract Clauses
The SCA Wage Determination rates and fringe benefits must comply with the SCA benefits clause incorporated into your contract.
What happens if you violate the wage determination regulations? Government contractors who violate the SCA wage determination regulations can expect the government to withhold funds under the contract for purposes of reimbursing employees. You can also face suspension or debarment from any future federal contract.
41 U.S.C. §6705 states,
“(a) Liability of Responsible Party.—A party responsible for a violation of a contract provision required under section 6703(1) or (2) of this title or a violation of section 6704 of this title is liable for an amount equal to the sum of any deduction, rebate, refund, or underpayment of compensation due any employee engaged in the performance of the contract.”
Further, the contract can be canceled if violations are found, and the contractor may suffer a 3-year prohibition on new contracts, as well. (41 U.S.C. §6705, 6706)
Where can I find wage determinations?
Usually, the applicable wage determination is in your contract. However, that is not the only place you can find wage determinations. DOL has a website, Wage Determinations OnLine.gov, which provides public access to federal wage determinations and related information: https://www.wdol.gov/. This website provides a link to a User’s Guide and other helpful resources, including archived wage determinations, and information on wage determinations, if any, that are due to be revised. To view an archived wage determination, you need the wage determination number. Some parts of the website, in particular the “e98” part, are for Contracting Officer use only, not for the general public or contractors.
Wdol.gov is scheduled to be moved to beta.SAM.gov later in 2019.
What is the current fringe benefit rate?
The Wage and Hour Division of the DOL sets the Service Contract Act Health and Welfare Fringe Benefit rates. For example, effective July 11, 2018, All Agency Memorandum 227 was issued, which set the Service Contract Act Health and Welfare Fringe Benefit rate at $4.48 per hour.
Note that for purposes of calculating an overtime pay rate, fringe benefits are excluded from the basic hourly wage. 41 USC §6707(e)
Do employees get paid sick leave under the Service Contract Act?
Executive Order 13706, Establishing Paid Sick Leave for Federal Contractors, requires parties that enter into covered contracts with the Federal Government to provide covered employees with up to 7 days of paid sick leave annually, including paid leave for family care. Again, All Agency Memorandum 227 requires paid sick leave at a benefit rate of $4.18 per hour.
How can I figure out whether the employees I intend to hire are covered by the Service Contract Act?
The Department of Labor publishes a list of covered occupations, “SCA DIRECTORY of OCCUPATIONS” available on the internet at https://www.dol.gov/whd/regs/compliance/wage/SCADirV5/SCADirectVers5.pdf
The directory contains an alphabetical list of job titles, with classification codes, and job descriptions. This directory is occasionally updated to add new occupations, or provide other changes.
What can I do if I need to hire an SCA covered employee, and that employee’s classification is not in the contract’s wage determination?
The contractor is ultimately responsible for determining the appropriate staffing for the contract. If a classification the contractor considers necessary is not listed in the contract’s wage determination, the contractor must initiate a request for approval of the additional classification, and propose wage and benefit rates for the new classification. The proposal is submitted to the Contracting Officer.
The request is usually submitted on SF-1444. Use of this form is not required, but if the form is not used, the request must contain all the required information. The employee, if present, is required to sign the form, noting their agreement or disagreement with the proposed wage and benefit rate.
This process, submitting a proposal to add an employee classification to a wage determination, is called the “conformance” process. More information about how to submit a conformance can be found at: https://www.wdol.gov/sca_confrmnce.aspx
There are various prohibitions on conformances. For example, the contractor cannot propose new classifications that:
- Combine job duties from two or more existing classifications on the wage determination;
- Perform only part of the duties of an existing classification; or
- Are for a “trainee” or “helper.”
If my government contract is modified to include a new wage determination, is there an easy way to calculate how much the request for equitable adjustment (REA) should be?
There is a patented online calculation tool you can use, PACT, available on https://www.wdol.gov/pact/intro.aspx
It is specifically designed to adjust the price of an SCA-covered contract. PACT can be used to calculate hybrid SCA / Davis-Bacon Act contracts, or, simply, Davis-Bacon Act contracts.
It is helpful for Fixed Price contracts. It is not generally appropriate for use with indefinite delivery, Indefinite Quantity (IDIQ) or Time and Materials / Labor Hour type contracts, if they contain loaded labor rates or unit pricing.
PACT can be used to calculate hybrid SCA / Davis-Bacon Act contracts, or, simply, Davis-Bacon Act contracts.
It does not factor in unemployment taxes or changes to holiday or vacations. Before using PACT, verify that it is compatible with the computer environment that you plan to use (see https://www.wdol.gov/pact/faqpact.pdf)
Challenges to the applicability of a wage determination to a particular procurement should go before the Department of Labor.
It never pays to go to the wrong forum with a legal complaint. According to the Comptroller General, the Department of Labor has the responsibility for interpreting and administering the Service Contract Act. See Northeast Military Sales, Inc.; Fevata’s Bakery, Inc; Tony’s Fine Foods; Military and Deli Bakery Services, Inc.; and Special Markets, Inc.; B-29134 Com Gen (November 20, 2002).
That said, the agency boards, the Armed Services Board of Contract Appeals (ASBCA), and Civilian Board of Contract Appeals (CBCA), and some other forums can hear certain limited types of SCA-related cases.
Why Changing Your Corporate Structure to Avoid Collective Bargaining Agreement (CBA) Rates can be Bad Idea\
Service Contract Act wage determinations are often based on collective bargaining agreement (CBA) rates – union rates. Some firms have found it tempting to try various ways of reorganizing their corporate structures to avoid paying CBA wages or, very importantly, fringe benefits of various types. Recent cases show that courts are taking an increasingly dim view of this approach.
Some recent labor law cases show why it would be a bad idea for any firm to change its corporate structure with the intent to avoid its responsibility to pay CBA fringe benefits (which would appear in a wage determination under an SCA procurement).
Both the Alter Ego Doctrine, and the Successorship Doctrine, can be applied to hold employers responsible for honoring wage and fringe benefits, including pension obligations, in CBAs.
None of the cases discussed below actually involve violations of SCA. Instead, they involve violations of other labor law, for example, the National Labor Relations Act (NLRA) or Employee Retirement Income Security Act (ERISA). The cases are important to understand because SCA wage determinations are so often based on labor rates and fringe benefits derived from CBAs, which are in turn governed by various state and federal labor laws.
The general federal policy is to protect employee benefits. Cases where the courts pierce the corporate veil to force employing entities to honor CBA obligations are often applied in light of that policy.
In Healthbridge Management, LLC v. National Labor Relations Board, 902 F 3d 37 (Aug. 23, 2018), the court found an unfair labor practice where a firm stripped its employees of seniority benefits by first having a contractor hire the employees, then re-hiring them.
The Alter Ego Doctrine
The alter ego doctrine keeps employers from evading their CBA and labor law obligations (such as paying CBA fringe benefits) by making mere technical changes in the structure or identity of the employing entity without making changes to ownership or management.
The alter ego doctrine is equitable. It is used where a corporate shield, if respected, would inequitable prevent a party from receiving what is otherwise due from the entity who created the shield.
To prove that one firm is the “alter ego” of another, a plaintiff must show intent to evade labor law, and substantially identical:
- Business purpose
The whole analysis is somewhat flexible. The plaintiff need not show every factor. Also, there are other factors that can come into play. For example, intent to evade is an important, but not essential, factor in considering whether a company is an alter ego. Courts will look at the facts, for example if the evidence suggests there are ongoing labor violations that track from one entity to the next, or if “non-union animus” is present, this tends to indicate they are one and the same – they are alter egos — even though they are legally separate business entities. The doctrine can apply regardless of the timing of the companies’ creation.
Mark McClesky, et. Al, v. CWG Plastering, LLC 897 F 3d 899 (July 31, 2018)
New Jersey Building Laboreres’ Stetewide Pension Fund and Trustees Thereof v. Richard A. Pulaski Construction, 322 F Supp 3d (May 18, 2018)
Mc Anarney v. Absolute Environmental, Inc., 309 F Supp 3d (April 30, 2018)
Trustees of the Chicago Painters and Decorators Pension Fund v. John Kny Painting & Decorating Inc., 188 F. Supp 3d 760 (May 23, 2016)
Other than paying the mandated wages and fringe benefits, what does a contractor need to do to comply with SCA?
The contractor must provide safe and sanitary working conditions. 41 U.S.C. §6703 (3) and (4) state:
“(3) WORKING CONDITIONS– The contract and bid specification shall contain a provision specifying that no part of the services covered by this chapter may be performed in buildings or surroundings or under working conditions, provided by or under the control or supervision of the contractor or any subcontractor, which are unsanitary or hazardous or dangerous to the health or safety of service employees engaged to provide the services.
(4) NOTICE– The contract and bid specification shall contain a provision specifying that on the date a service employee begins work on a contract to which this chapter applies, the contractor or subcontractor will deliver to the employee a notice of the compensation required under paragraphs (1) and (2), on a form prepared by the Federal agency, or will post a notice of the required compensation in a prominent place at the worksite.”
Also, for follow-on contracts, SCA incorporates Executive Order 13495 Nondisplacement of Qualified Workers Under Service Contracts. Successor contractors, as well as subcontractors, have certain obligations to try to hire service employees (not managerial or supervisory employees) from the contract that expired.
Service Contract Act (SCA) – Key Points:
Some key points to remember when contracting to provide services to the U.S. government include:
- SCA applies to service contracts over $2,500.
- SCA applies to subcontractors, as well as prime contractors.
- SCA establishes minimum wages, and fringe benefits that contractors must pay, as well as health and safety standards.
- SCA-covered contracts have wage determinations. Each contract has its own wage determinations.
- If you are a contractor with an SCA-covered contract, and you want to add a labor category, the labor category may need to be added to the wage determination. Work with your Contracting Officer to handle that.
- If the wage determination is changed during contract performance, the contractor may be able to be compensated for that, through the REA (request for equitable adjustment) or claims process.
- Wage determinations can be based on union collective bargaining agreement (CBA) wages or benefits. It is not a good idea to change your corporate structure to avoid paying union rates or union fringe benefits.
- The U.S. Department of Labor is responsible for most of the regulations associated with SCA.
For immediate help with the McNamara O’Hara Service Contract Act (SCA) and its application to federal contracts call government contracts attorney Cheryl Adams at 720-941-7200