Possible Pitfalls in Conforming to the SCA

While federal contracts offer highly attractive opportunities to businesses, it makes good business sense to thoroughly understand the nuances of the Service Contract Act (SCA) before bidding on a federal contract.  Be sure that you can  stay compliant with its tenets. The  core purpose of  the  SCA is to  ensure that service employees are paid the  prevailing wage rates and  applicable  fringe benefits  for their work locations.    These rates are determined by the  Department of  Labor  (DoL).  The scope of the SCA is very broad and covers a wide range of services from manual labor (landscaping,  custodial/janitorial services,  snow removal,  etc.)  to  more sophisticated  services  such as contracts for information  technology  services,  call  center  work, data  collection, processing  or  analysis  services,  and  operation, maintenance or  logistic support of  a  federal facility. Failure to adhere to the SCA rules and regulations could result in substantial financial penalties as well as being prohibited from bidding on or working under government contracts.  Contractors need to be compliant with the SCA to avoid such penalties, and safeguard themselves from risk by not steering clear of some of these common pitfalls:

• In the early stages of the procurement process, contractors need to determine if the SCA applies to the contract.  If so, they must understand  the scope of coverage by the SCA. The DOL  bases this on the precise definitions of the tasks involved in the services as defined in the statement of work.
• In contracts which involve tasks covered by the SCA as well as the Davis Bacon Act – which use different wage rates and fringe benefit rates — it is necessary to seek clarity early on in the procurement process, to ensure statutory compliance on both fronts.
• Contract pricing is impacted by the price adjustment clause of the SCA which allows companies to recover increases to wage rates and fringe benefits from one contract period to the next. A  contractor who, from the outset, paid wages and benefits exceeding the applicable SCA minimum wage and fringe benefit rates may find it a challenge to recover the actual labor costs paid if the request were to be denied. On the other hand, inability  to pay market prices which may be higher than the approved SCA rates could affect the contractor’s abilitiy to hire the required talent.
• The wage categories established in the Directory of Occupations are complex, determining the appropriate categories may require external guidance. Many times there is little or no guidance to contractors, with some of it being of a conflicting nature. But, the burden of proper classification and liability for any misclassification falls squarely on the contractor even for newly emerging categories of services. Employers must also obtain the employees’ agreement on the proposed classification assignment. Seeking guidance from the DOL used to be a time-consuming affair, almost jeopardizing the contractor’ ability to meet agency deadlines. That is changed with the E-98 system, which makes it possible for contractors to revise the wage determination at a later stage, after receiving the DOL’s clarification in the matter.
• Exempt employee determination is another pitfall that could prove costly to a contractor. When a company is granted a federal contract that was previously held by another company, the new contractors may not blindly adopt the exempt/non-exempt categorization of the predecessor contractor, without making their own analysis.
• The SCA requires a contractor to meet their obligations for both the wage rate and fringe benefit payment requirements . Paying higher that required wages does not absolve an employer from the need to pay the specified benefits. Contractors should explicitly list wages paid and all  benefits paid on each employee’s pay stub.
• Wage determination tables are updated annually.  Contractors must apply DOL’s revisions to SCA wage determination for an already awarded contract within specified time frames that meet SCA requirements and are approved by the contracting officer of the government agency that awarded the contract. The contractor will need to be proactive in y engaging the contracting agency to avoid falling foul of the SCA regulations.
• Contractors are liable to the SCA not only for their own actions, but also for the violations of their sub-contractors, making it necessary for the contractor to also actively monitor the wage rates and fringe benefit payments paid by the sub-contractors. The prime contractor shares liability with the sub-contractor for paying any backpay orders issued by the government.
• Contractors need to be aware of the specific fringe benefits which qualify under the SCA. Contractors who provide disability, insurance or vacation plans will need to ensure that they meet SCA requirements.
• Contractors will need to adhere to standard FLSA rules regarding overtime under the SCA and be aware that the DOL will deal very strictly with classifying any workers as ‘independent contractors’.

As a part of its enforcement activities, the DOL fields auditors and compliance personnel to interview employees in order to obtain payroll history and other employment details. This makes it necessary for contractors to adopt the best possible defense against any liability charges by staying compliant, maintaining appropriate payroll records; and monitoring sub-contractor activities from the outset. Let us discuss these aspects in more detail in our next post!