The McNamara-O’Hara Service Contract Act (“SCA”) is not an easy federal statute to navigate, and C2’s Payroll and HR personnel frequently get questions from our government contracting clients about whether the SCA applies to them, how to meet the pay requirements, how to find the correct wage determinations, etc. But the two most frequent questions that clients ask concern (1) the proper calculation of the Health & Welfare (H&W) benefits, and (2) how to properly administer vacation usage or payouts.
A. Some Background about the SCA
The SCA is a federal wage & hour law that applies generally to contracts for services (as opposed to goods) between the federal government and private sector contractors. The catch is that only certain service contracts are subject to the SCA.
“The McNamara-O’Hara 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.” (https://www.dol.gov/agencies/whd/government-contracts/service-contracts)
To confuse matters further, not all “service “contracts are subject to the SCA’s requirements. The SCA does not apply to: (1) contracts for construction, alteration and/or repair, including painting and decorating of public buildings or public works; (2) work covered by the Walsh-Healey Public Contracts Act; (3) contracts for the carriage of freight or personnel by vessel, airplane, bus, truck, express, railway line, or oil or gas pipeline where published tariff rates are in effect; (4) contracts for the furnishing of services by radio, telephone, telegraph, or cable companies, subject to the Communications Act of 1934; (5) contracts for public utility services, including electric light and power, water, steam, and gas;( 6) contracts for direct services to a Federal agency by an individual or individuals; (7) contracts for the operation of postal contract stations; and 8) services performed outside of the geographical scope (more exemptions are listed at 29 C.F.R, Section 4.123(d)).
B. Wage Determinations Define SCA Employee Benefits
If you find that your company has a contract that is covered by the SCA, you need to first review the Wage Determination(s) (WD) for your contract. Wage determinations are issued by the DOL (published online here) and list the required minimum hourly wage rate for covered employees, and also lists the required vacation entitlement and the hourly Health & Welfare (H&W) contribution to which each employee is entitled. Wage determinations are issued for each job classification and the wage and benefit levels are based on the job being performed as well as the geographic location where the employees perform the work. Thus, federal contractors need to be mindful at the outset that they correctly identify the wage determination that covers the correct job, as well as the correct geographic location.
The Health and Welfare Component
H&W is the hourly supplement (on top of the base hourly wage) that contractors must pay their SCA employees for each hour that is worked or paid. Whether you pay H&W on “hours worked” or “hours paid” depends on whether your WD number is “odd” or “even.” The WD will indicate the H&W hourly rate that you must pay. The Department of Labor (DOL) annually adjusts the H&W rate for contracts awarded on or after a certain date each year, and releases this adjustment in June or July each year. Here is how DOL explains the difference in H&W calculations:
H&W is either “Fixed cost” which is specified on ODD numbered WD’s, or an “Average Cost” that is specified on EVEN numbered WD’s.
“Fixed Cost” H&W is required to be paid on a “per employee” basis, for all hours paid for up to 40 hours in a work week (2,080 hours per year). This excludes overtime hours, but includes paid leave and holidays.
“Average Cost” H&W is paid on a “group” basis and not by individual. H&W is paid for all hours worked. This includes overtime hours, but will exclude paid leave time and holidays.
Providing SCA Vacation Benefits
Besides the hourly base wage and the additional H&W component, SCA employees also earn annual vacation benefits in an amount determined by the applicable WD. It is not unusual, for example, for a WD to require one (1) week of paid vacation for new SCA employees. The WD lists the amount of vacation that must be provided to SCA employees. The amount of vacation earned each year increases based on the length of time a SCA employee has been employed on the contract (without any breaks in service). This will include time they were employed with previous contractors performing similar functions at the same facility. According to the DOL, this “does not require the contractor to combine two separate periods of employment…Generally, no break in service has occurred if the employee is on leave with or without pay, absent with the employer’s permission for reasons such as illness or injury, or is not performing work due to circumstances beyond their control.”
Vacation is vested and becomes due at the employee’s anniversary date on the SCA contract. Once vacation time is vested, employees may use it. Any unused, vested vacation balance must be paid out to the employee by whichever occurs first:
- The next anniversary date;
- The completion of the contract; or
- The employee terminates employment.
For part-time employees, SCA vacation benefits are earned but pro-rated based on the hours that they actually work. For example, if they work 20 hours out of 40 hours, part-time employees will only receive half of the amount of vacation indicated in the WD.
H&W/Vacation Pay Administration Tips
Under the “fixed cost” benefit requirements (i.e., odd numbered wage determinations), any time an employee uses vacation leave, they must be paid H&W on those vacation hours, as long as it does not exceed the H&W maximum of up to 40 hours in a work week. By contrast, under the “Average Cost” benefit requirements (i.e., even numbered wage determinations), employees do not earn H&W dollars on vacation hours that they utilize. Note however, that H&W dollars are not earned on either contract type when the employer is simply paying out any unused, vested vacation balance for one of the reasons listed above (i.e., next anniversary, completion of contract, or employment termination).
C. Employer Takeaway
Federal contractors must understand the contracts they bid and win, and need to pay particularly close attention to whether the contract qualifies as an SCA contract. Sometimes the government agency’s Contracting Officer will inform you of SCA obligations, and other times the contractor is simply left to its own devices 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. 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.
C2 provides strategic HR outsourcing to clients who want to develop optimal workforce strategies and solutions to allow them to be more competitive and profitable. C2 blog posts are intended for educational and informational purposes only.