THE SERVICE CONTRACT ACT (“SCA”) Presented by Arlene F. Klinedinst November 30, 2010 Vandeventer Black LLP 500 World Trade Center Norfolk, VA 23510 757-446-8600 Offices in Norfolk, Richmond, Kitty Hawk, Manteo/Roanoke Island, Raleigh & Hamburg

Overview of SCA • Was effective January 20, 1966 and amended in 1972 (adding successor contractors) and in 1976 (adding “white collar” workers). • Requires payment of specified wages and fringe benefits to employees working on service contracts and subcontracts with the United States for the principal purpose of furnishing services. • Covers subcontractors at any tier • General contractors held liable for subcontractor’s actions

Relationship to Other Acts • Davis-Bacon Act – construction contracts – Wage Determinations apply – Does apply to parts of SCA contracts • Walsh-Healey – supply contracts – No Wage Determinations apply • Service Contract Act – service contracts – Wage Determinations apply – Doesn’t apply to parts of DBA or WH contracts

Penalties for Non-Compliance with SCA • • • •

Backpay, Interest, Fines Withholding Government Contract Payments Termination of Contract De-barment

Service Employees • Includes any employee working on an SCA covered contract except employees under FLSA (professional, executive, administrative, computer, outside sales) • Includes owners and partners • Contains many exemptions

Other Exemptions to SCA • Construction Contracts • Supply Contracts • Contracts for transportation of people or freight where published tariff rates are in effect • Contracts for communications service • Contracts for public utilities

Other Exemptions to SCA, cont’d • Employment contracts for direct services • Contracts with U.S. Postal Service • Concessions contracts

Conditional Exemptions from SCA • Contracts principally for maintenance, calibration and/or repair of: – Automated data processing (ADP) equipment and office information word processing systems; – Certain scientific and medical equipment; and – Office/business machines serviced by manufacturer/supplier …IF…

IF….. 1. Equipment is regular commercial item; and 2. Services furnished at/based on established catalog or market prices; and 3. Contractor uses same employee compensation for same services provided to commercial customers; and 4. Contractor certifies that it uses same employees and compensation for both commercial and government work.

“ADP” is …………. • • • • •

Computers ancillary equipment software, firmware and similar procedures computer support services “push button” telephones

Still More Conditional SCA Exemptions • • • •

Auto maintenance contracts Financial services Hotels and meals for conferences Transportation of people by common carrier

IF…

COMMERCIAL ITEM EXEMPTION TO SCA ALLOWED IF … 1. 2. 3.

4. 5.

Services sold regularly to non-government customers; and Contract awarded either sole source or pursuant to bid in which price not dominant criterion; and Prices based on established catalog/market prices; and Employees spend less than 20% annual time on the government contract; and Same employee compensation for both government and commercial work.

WH/FLSA or SCA? 1. Remanufacturing Work – Walsh-Healy/FLSA 2. Major Modification or Overhaul – WalshHealy/FLSA 3. Overhaul Work – SCA 4. Repair Work – SCA

“Remanufacturing” = WH/FLSA *Major overhaul of item that is degraded or inoperable, if……… 1. Item required to be substantially or completely torn down to individual components; and 2. Substantially all parts reworked, rehabilitated, altered or replaced; and 3. Parts reassembled to furnish totally rebuilt item; and

Remanufacturing (cont’d) 4. Use manufacturing processes similar to those used to manufacture item; and 5. Disassembled components, if usable, are comingled with existing inventory; and 6. Item overhauled is restored to original life expectancy; and 7. Work performed in facility owned/operated by contractor.

Major Overhaul = WH/FLSA * An item that is wholly/partially obsolete and all of these conditions exist; • Item required to be completely torn down; and • Outmoded parts replaced; and • Item rebuilt/reassembled; and • Results in substantially modified item in usable condition; and • Work performed in facility owned/operated by contractor.

Repair/Overhaul = SCA 1. Repair of autos, trucks, construction equipment, cranes HVAC equipment, motors, etc. ; 2. Repair of computers and office equipment; 3. Inspecting, testing, calibrating, painting, packaging, etc. 4. Lubrication, tune-up or replacement of internal parts 5. Reupholstering, repairing furniture

Installation Support Contracts Both DBA and SCA apply if: • Contract principally for services, but substantial and segregable amount of construction work; and greater than $2,000 construction, SCA snow removal custodian work maintenance service calls (‹ than 32 hrs)

DBA construction alteration renovation painting (>than 200 sq. ft.) repairs

Sub-Contractors • •

General Contractors should require the SCA “flow down” clause in all sub-contracts. 29 CFR §4.6 If flow-down clause not included, general may be liable for subs underpayment with no recourse against sub.

The Fair Labor Standards Act (FLSA) • •

Requires employers to pay a minimum wage and overtime. Violations can subject an employer to substantial liability for back pay and other penalties.

Statutory Exemptions to FLSA • • • • •

Executive, administrative, professional, computer, or outside sale employees (“white collar” exemptions) Certain agricultural employees Employees of certain small newspapers Some domestic workers, not full-time servants or child-care providers Employees of some amusement or recreational establishments

Statutory Exemptions to FLSA, (cont’d) • • • • •



Certain well-paid computer systems analysts, programmers, or software engineers Certain employees of small fire and police departments Certain trainees and apprentices Certain health care employees (partial exemption) “Inside” retail sales employees paid by commission (partial exemption) Certain transportation-related employees

In General, the FLSA requires: • • • • •

Payment of minimum wage Payment of overtime Federal child labor laws Equal Pay Act compliance Payroll and timecard record-keeping requirements

In General, the FLSA does not regulate: •

• • • • •

Number of hours per day or per week that an employer requires an employee to work Severance pay Time of payment of wages after termination of employment Holiday, sick and vacation pay Required time off from work Break, meal and rest periods

FLSA Penalties •



Back wages, liquidated (double) damages for willful violations, interest, attorney’s fees, and civil penalties of up to $1,000 per violation for willful and repeat violations The statute of limitations for FLSA violations is 2 years, or 3 years for willful violations

Field Operations Handbook (FOH) •

FOH available online at http://www.dol.gov.esa.hhd/FOH/index.htm



FOH covers: – – – –

FLSA SCA DBA Other wage and hour laws

What are Wage Determinations? •





A “wage determination” is the listing of wage rates and fringe benefit rates for each classification of employees which the Administrator of the Wage and Hour Division of the U.S. Department of Labor has determined to be prevailing in a given area for a particular type of work. The wage rate listed on the wage determination is the minimum rate that the contractor must pay its employees working on the project. Percentages listed under fringe benefits is to be applied to the “base rate”.

Types of Wage Determinations •

General Wage Determination –



Applicable to work performed in a specific geographic area

Project Wage Determinations –

Applicable to work performed on a specific project.

Wage Determinations (WDs) – Where do they come from? • •



WDs can be accessed online at http:://www.dol.gov. DOL offers users the opportunity to request e-mail notice of future revisions to a wage determination they have selected for a specific period of time, or until a specific date. Inquires may still be directed to (866) 512-1800, toll free, or (202) 512-1800, DC metropolitan area.

Definition of Wages • •

Under SCA, “wage” means the employee’s basic hourly rate of pay Must be paid in cash

Fringe Benefits • •

• •

Bona fide fringe benefits are described in 29 CFR 4.171 Examples include: Life Insurance Health Insurance Pensions Vacations Holidays Sick Leave However, creditable employer payments of fringe benefits must be paid to benefits funds with bona fide plans. A significant problem for contractors is the conversion of such benefits to cash payments or vise versa.

Computing Fringe Benefits Under SCA •



Contributions (except those required by other Federal, State or local laws) the contractor makes irrevocably to a trustee or third party under any bona fide plan or program to provide for medical or hospital care, pensions, compensation for injuries or illness resulting from occupational activity, unemployment benefits, life insurance, disability and sickness insurance, accident insurance, or any other bona fide benefit. Other contributions or anticipated costs for bona fide fringe benefits to the extent expressly approved by the Secretary of Labor.

Computing Fringe Benefits Under SCA (con’t) •

• •

If fringe benefit payments, contributions or costs are incurred other than weekly they may be allocated as part of the weekly payments to the employees, but such payments, contributions or costs must be incurred at least quarterly. Under the SCA, the amount required to be paid in wages is distinct from fringe benefit obligations. Under Davis Bacon, wages and fringe benefits may be paid to employees via a combination of payments, contributions, or costs.

Cash Equivalents for Fringes • •



Fringe benefits required by the WD may include items that are not stated as exact cast amounts, e.g. vacation days. In these cases, the hourly cash equivalent of the cost of these items is determined by dividing the employer’s contributions or costs by the employee’s hours worked during the period covered by the costs or contributions. For example, if a contractor pays a monthly health insurance premium of $112 for an employee who worked 125 hours during the month, the hourly cash equivalent is determined by dividing $112 by 125 hours, which equals $0.90 per hour.

Cash Equivalents for Fringes (con’t) •



As another example, the calculation of the hourly cash equivalent for 9 paid holidays per year for an employee with an hourly pay rate of $5.00 is determined by multiplying $5.00 by 72 (9 days at 8 hours each), and dividing the result of $360 by the number of hours actually worked by the employee during the year. If the interested parties (contractor, contracting officer, and employees or their representatives) cannot agree on the cash equivalent, the contracting officer must submit the question to the DOL Wage and Hour Division for final determination.

Cost Savings from Benefits Instead of Cash Payments As an example, Plus a $4.00 assume that an Fringe Rate Hourly Rate of $16.00 Per Hour

Equals $20.00 Per Hour in Total Compensation

Cost Savings (cont’d)

Cash Wages

Cash Fringe $20.00

Benefits $16.00

Fringe $ to Plan Payroll Burden

$0.00 $5.00 @ 25%

$4.00 $4.00 @ 25%

Total Per Hour

$25.00

$24.00

Hourly Savings

$0.00

$1.00/employee

Annual Savings

$0.00

$2,076/employee

(cost to employer)

Savings/100

$0.00

$207,600

Payroll Requirements •

Payrolls must be submitted to the contracting agency (via the prime contractor) weekly. –

• •

Not more than 7 days after the applicable pay period.

Must certify that all payrolls are accurate and complete. Payrolls must show the following: – – – – – –

Employee name, address and SSN Classification Hours worked (daily and weekly) Rates Paid Deductions (all deductions must be identified) Net Pay

Payroll Requirements (cont’d) • • • •

Fringe benefits should be identified as to those paid in cash or to funds. Ensure a copy of any bona fide plan is on file at the contracting agency. Be able to provide proof of payment to benefits plan. Ensure fringe plans meet the requirement at: 29 CFR 4.171

Nonsubmission •

If the contractor fails to submit copies of its or its subcontractors’ payrolls promptly, the contracting officer must withhold approval on an amount that the contracting officer considers necessary to protect the interests of the employees and the government.

Payroll Record Retention •



The contracting agency must retain contractor payroll records and statements of compliance for 3 years after completion of the contract. Contractors must also retain payroll records for at least 3 years, but it is recommended that records related to contract compliance be retained longer.

Poster •

Every employer performing work covered by the SCA must post a notice, including any applicable WD at the site of the work, in a prominent and accessible place, where it may be easily seen by all employees. – This may require posting in multiple locations – If classifications are added they must be posted.

Contracting Officer’s Role • • • •

Conducts “compliance” checks Requests a “labor standards” investigation if violations appear to have occurred Requests that contractor make restitution of any violations revealed during labor standards investigations The contracting officer is charged to verify that – – – –

Classifications and rates are correct Fringe benefit payments are bone fide and in the correct amount Hours worked reflect appropriate overtime payments Deductions are permissible

Compliance Checks •

The Contracting Officer is charged to make checks and investigations on all contracts covered by SCA as may be necessary to ensure compliance. Regular compliance checks include:

• – – –

Employee interviews On site inspections Payroll reviews



Report comparisons.

Compliance Problems • • •

The failure to comply with fringe benefit obligations is a common problem. This may be the result of an honest mistake, misunderstanding or intentional act. As a result, during government reviews, fringe benefit contributions are closely scrutinized.

Compliance Problems (cont’d) •

Fringe Benefit Problems – – – – – – – –

Not made irrevocably Include non-allowable items, e.g. car allowance, uniforms, tools Holiday, vacation and sick pay or accruals are not made to a non revocable trust or third party Payments or contributions made less than quarterly Failure to actually provide or pay for sick day, holiday or vacation used in calculations Contingent contributions – lack of vesting Employees opting out of plan not considered Unidentified miscellaneous deductions

Compliance Problems (cont’d) •

Other problems include: – – –



Kick backs Record falsification Incorrect labor categorization

Failure to comply can result in substantial back pay requirements, fines, termination of contract, suspension and debarment

Role of Department of Labor Department of Labor

Employment Standards Administration Wage and Hour Division Office of Government Contract Wage Standards

Role of Department of Labor (cont’d) • • •

Conducts surveys to determine rates Surveys required classification of workers and projects In rate determination, DOL considers: – – –

Statements voluntarily submitted by contractors Collective bargaining agreements Wage rates for public construction as determined by legislation and information provided by federal and state contracting agencies

Disputes •

Areas of dispute include – – – –



Classifications Work Hours Rates Withholding

Dispute resolution – – –

Negotiation Appeal through DOL Appeal through Contracting Officer

FAQs •

Is a salaried Superintendent who performs the work of a position listed on the Wage Determination covered by the SCA? –



Yes, if he performs such work more than 20% of the time in a given work week and not FLSA exempt.

How can I determine what classification applies? –

Go to the DOL Dictionary of Occupational Titles at http://www.oalj.dol.gov/libdot.htm

Who to Contact? The Contract Specialist Assigned to Your Contract Richmond District Office US Department of Labor ESA Wage & Hour Division 400 N. 8th Street, Room 416 Post Office Box 10005 Richmond, VA 23240

Phone: 1-866-4-USWAGE (1-866-487-9243) Bruce W. Clark, District Director

VANDEVENTER BLACK LLP

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