Government Contracting

Service Contract Act: How to maintain compliance.

Service Contract Act: How to maintain compliance. May 02, 2019

The McNamara-O’Hara Service Contract Act (SCA) applies to service contracts between the federal government and individuals and/or companies. This federal statute mandates contractors and subcontracts to employ “service employees” when their contracts meet the service requirements. The SCA was established to create fair business practices among unionized and nonunionized employers. On the one hand, the SCA allows for nonunionized employees to receive compensation and benefits commensurate with unionized employees; on the other hand, the SCA prohibits nonunionized employers from undercutting unionized employers in the bid process. Essentially, the SCA insures that federally procured service contract employees are receiving prevailing rates in the location the contract is being performed.

Staying in line with the regulations may seem a bit onerous for someone who has never been tasked with implementing compliance procedures for the SCA; however, an understanding of the SCA regulations early in the procurement process will establish a sound foundation. The six-step plan below is designed to help ease the burden of maintaining SCA compliance.

1. Determine if SCA Applies to Your Contract

As stated above, the SCA applies to public-private, service contracts, and governs those contracts which meet its criterion. Contractors and/or subcontractors should first look to the solicitation provided by the soliciting government agency to determine if the contract falls subject to the SCA. If the agency intended the contract to be governed by the SCA, then the contract should either incorporate the Federal Acquisition Regulation (FAR) clause 52.222-41 – Service Contract Labor Standards, or explicitly mention the SCA and/or mention prevailing wage determination.
Although the determination is far simpler when the contract explicitly contains one of the above-mentioned clauses, the contractor should examine the following points to accurately determine if the contract is SCA governed:

  1. Was the contract awarded by the United States government, including one of their agencies, or the District of Columbia?
  2. What is the principal nature of your contract? Meaning, is the sole purpose of your contract to provide a service rather than a product or good?
  3. If the principal nature of your contract is for a service, will that service be performed by service employees?
  4. Does the contract exceed or is it expected to exceed $2,500?
  5. Will some portion of the contracted for services be performed within the United States or any of its territories?

If the answer to questions 1,3,4, and 5 is “YES” and the answer to number 2 is “SERVICE”, then the contract is governed by the SCA.

2. Account for Wages and Fringe Benefits

Once it’s determined that the contract is subject to the SCA regulations, the contractor and/or subcontractor must then examine the wages and benefits prescribed under the SCA. The Department of Labor (DoL) sets the wage determination at the prevailing rate of pay for any given location through a set of procedures set out in the United States Code, Title 41. If there is no wage determination set out for a locality, then the contractor and/or subcontractor must pay their service employees minimum wage, as established by the Fair Labor Standards Act (FLSA). However, if there is a collective bargaining agreement in place from a prior employer, then the new contractor and/or subcontractor must abide and pay their service employees according to the collective bargaining agreement.

Employers must also determine what fringe benefits their service employees are entitled to and incorporate that price offset in the bid. An employer should measure this by how much it costs to provide the benefit, rather than the value of the benefit received by the service employee. It’s not enough to simply have vacation benefits, for example; those benefits must also match up with the SCA. Take the vacation benefits for instance, the method an employer uses to account for vacation time must be synonymous with the SCA regulations regarding vacation time and pay. An employer should account for any other benefits required by the SCA and whether they’re going to need to pay their service employees any extra monetary compensation if their current benefits don’t meet the SCA requirements.

After determining the applicable wage determination or collective bargaining agreement, and fringe benefits, employers should conduct a price strategy analysis and evaluate costs for each affected labor category to determine just how much will be spent on service employees. After this, contractors and/or subcontracts will have a much more accurate projection of cost to submit in their bid.

3. Identify Your Service Employees

Under the SCA all persons employed by the contractor and/or subcontractor are considered service employees, excluding executives, administrative personnel, or any professional employee considered exempt under 29 CFR Part 541. An exempt employee essentially is given no legal protection under the SCA and FLSA. For example, an exempt employee is not entitled overtime benefits. Contractors and subcontractors should identify their service employees before work begins. This may sound like an obvious point; however, the statement of work (SoW) should be matched up with the pre-award job descriptions and actual tasks that will be assigned post-award for each employee. Both the employee and employer should understand the scope of the employee’s job duties. Relying on pre-award, generic job descriptions alone may be harmful to the employer, because a nonservice employee may inadvertently be placing themselves in the service employee category.

4. Obtain Your Contracting Officer’s Confirmation

As a safeguard and good practice, the contractor and/or subcontractor should submit their employee classifications and request confirmation from the Contracting Officer. Not only will this step ensure your classifications are proper, but it will also show good faith in compliance to the Contracting Officer.

5. Implement and Utilize Compliance Programs

As is good practice in any business, contractors and subcontractors subject to SCA regulations should keep any and all documents relating to the contract parameters, employee profiles (compensation, benefits per employee, hours worked, deductions, rebates or refunds), jobs (past, current and anticipated), labor categories, and company total wages and benefits. For those who do not wish to take this task on themselves, there is software available that can aid in the maintenance of documentation, or employers may hire outside firms who specialize in efficient fringe benefit plans to manage compliance. Software such as JAMIS Prime ERP is designed specifically with government procurement contracts in mind and can provide a platform to store and manage the information necessary for SCA compliance. This program was tailor for the government contracting industry and incorporates financial management, project accounting, customer-relationship management, distribution management, budgeting & forecasting, and human capital management into a single web-based solution.

Aside from assuring smooth business operations, keeping a current, up-to-date book of record is essential for government procurement contracts. If an employer finds themselves in an SCA audit, they’ll be able to readily provide documents showing their compliance. Most important are documents relating to employee compensation (total and weekly), hour and date logs of hours worked, compensation packages, deductions, and benefits associated with the contract.

6. Monitor Payments and Pay Periods Collectively

If the contract is silent as to the duration of pay periods, the SCA requires employers, at a minimum, to pay service employees semi-monthly. A contract provision may require more frequent pay periods but may not make pay periods longer than semi-monthly. Additionally, employers must pay service employees no later than one pay period after wages were earned.

7. Conclusion

Employers should maintain a sound and up-to-date book of record, make evaluations, and strategize about bid proposals and contract execution plans. Additionally, a contractor and/or subcontractor should seek outside advisement if they find themselves struggling with SCA regulations.

Tags: Government Contracting, Government Contracts, SBA, Small Business Administration (SBA)