developments service contract act -...

Developments in the Service Contract Act

Presented By:

Rich Wilkinson, Director, Watkins MeeganKiran Pinto, Manager, Watkins Meegan

April 24, 2013

Agenda:Agenda:

• Why Labor Compliance is a concerny p• Service Contract Act Basics• DETOUR! Fair Labor Standards Act Basics• SCA Traps for Federal Contractors• Practical Issues by the Numbersy

1. Wage Determination Changes2. Backpay, Allowability and the Sword of Damocles3. SCA benefits and the Affordable Health Care Act4. SCA and the Successor Contractor RuleR & Q ti• Resources & Questions

2Copyright 2013 Watkins Meegan LLC

Labor Issues Keep CFOs Up at NightLabor Issues Keep CFOs Up at Night

FY2009 Deltek CLARITY Survey Resultsy

Copyright 2013 Watkins Meegan LLC 3

At Least Recently...At Least Recently...

FY2010 Deltek CLARITY Survey Results


And Probably Always Will !And Probably Always Will !

FY2012 Deltek CLARITY Survey Results


Service Contract Act (SCA) BasicsService Contract Act (SCA) Basics

• Purpose (codified at 41 U.S.C. §§ 351)p ( §§ ) Requires that Federal contractors pay the prevailing wage by

category of labor for the locality in which the work is to be performed Requires that contractors provide certain minimum fringe benefits inRequires that contractors provide certain minimum fringe benefits in

two categories:• Paid Time Off defined (separately) as vacation pay and holiday pay• Health & Welfare benefit defined in terms of a specified amount per hour ($3.59/hour for wage determinations issued on or after 17 June, 2011)($ / g , )

• Applicability All Federal contracts over$2,500 performed in the US the primary

purpose of which is to furnish services to the US Governmentpurpose of which is to furnish services to the US Government Implemented by FAR clause to be included in service contracts Clause is NOT a Christian Doctrine clause


SCA HistorySCA History

• Enacted in 1965 to “level the playing field” p y gbetween contractors with collective bargaining agreements and those without

• Never amended in any substantive way despite numerous attempts


Service Contract Act (SCA)Service Contract Act (SCA)

• Key Termsy• Service Employee Any person engaged in the performance of a service

contract that is not otherwise exempt• Prevailing Wage Rate Rate paid to the majority of the workers in a geographic Rate paid to the majority of the workers in a geographic

location for the same type of work on similar projects Wages determined by DOL, Wage & Hour Division Established by DOL Wage Determination in the contract May be modified from time to time, triggering entitlement

to equitable adjustment in contract priceq j p


SCA – How It WorksSCA How It Works

• Contracts with SCA clause must contain DOL‐issued WageContracts with SCA clause must contain DOL issued Wage Determination specifying… The labor rate “floor” for each labor category to be paid to

covered employeescovered employees The PTO entitlements of covered employees The Health and Welfare benefit per hour to be received by

d lcovered employees

• Contractor must classify each covered employee that will charge to the contractcharge to the contract

• Any employee on an SCA contract may complain to DOL and THEY WILL INVESTIGATE


SCA “Covered Employees”SCA Covered Employees

• Exemptions from the SCAp Employees subject to a bona fide collective bargaining agreementg

Employees who are exempt from FLSA coverage

• FLSA?


Fair Labor Standards Act (FLSA)Fair Labor Standards Act (FLSA)

• Purposep Established minimum wage provisions (per hour) Established maximum hours provisions (per week)Established maximum hours provisions (per week) Created labor classifications for the purpose of determining coverageg g

• Applies to Any enterprise involved in interstate commerce andy p With at least $500k annual revenues



Key Terms:y• Hourly Employee Compensated on the basis of hours workedCompensated on the basis of hours worked

• Salaried Employee Compensated via a predetermined amount of pay on aCompensated via a predetermined amount of pay on a “regular basis”

Not subject to reductions based on the quality or j q yquantity of work performed



• Exempt EmployeeExempt Employee One who is not covered by the minimum wage and overtime

requirements of the FLSA Exempt categories include: Exempt categories include:

• Executive• Administrative• Professionalid l $4 k l b i Paid at least $455 per week on a salary basis

• Nonexempt Employee Covered by all FLSA requirements and is eligible for Covered by all FLSA requirements and is eligible for

compensated overtime Overtime is paid at a rate of one and a half times

their normal ratetheir normal rate


FLSA – How It WorksFLSA How It Works

• If employer qualifies as an enterprise ($500K annualIf employer qualifies as an enterprise ($500K annual revenue and involved in interstate commerce), then Every employee of the enterprise is covered by the act unless

th t th lifi ti f f th tithey meet the qualifications for one of the exemptions• Bona fide Executive, Administrative or Professional employee• Paid more than $455 per week on a salary basis

I dditi i d t b id d E t l In addition, in order to be considered Exempt, an employee must be paid on a salary basis

• Any employee can file a complaint with the DOL Wage & y p y p gHour Division if they feel they are not being properly paid

• ALL complaints are investigated and resolved


FLSA Traps for Federal ContractorsFLSA Traps for Federal Contractors

• Treating salaried employees as if they were g p y yhourly, causing them lose their exempt status

• Letting exempt employees lose their exempt status and become covered by the Service Contract Act!


SCA Traps for Federal ContractorsSCA Traps for Federal Contractors

• Classification can be subjective and misclassification can result in a violationj

• Measurement of fringe benefit is tricky and can expose contractor to

inadvertent violation If employer self‐insures, must be measured at the individual level Cash‐in‐lieu of benefit must be paid in any pay period where the actual benefits do

not meet the requirement

• Holiday & vacation pay rules are not like those of many GovCon firms Ten holidays – specified, but substitution is permitted Vacation – 2 weeks after 1 year, 3 after 5 years, 5 after 15 years Time under predecessor contracts for similar work at the same facility counts Substitution between holiday and vacation is NOT permitted

• Loss of FLSA exempt status can bring an employee under SCA


Consequences of SCA ViolationConsequences of SCA Violation

• Back pay and/or benefits including applicable overtimeBack pay and/or benefits including applicable overtime• Payroll taxes, interest and penalties on the back pay or benefits

• A fine (payable to the US Treasury) equal to the back pay or benefits

• Upon a second finding by the Secretary (of Labor) that a firm is in violation, debarment for a period of three years

Th i i i f l There is no provision for appeal There is no provision for “early out for good behavior” This DOES happenpp


Basics and DevelopmentsBasics and Developments

• Basics of the SCA are poorly understoodp y Both compliance issues can result Increased costs can resultIncreased costs can result Contractors often do not ask for price adjustments to which they are entitledy

• After 75 years, new things are (finally) happening The Affordable Care Act is changing complianceg g p The Successor Contractor Rule is changing costs and predictability


Practical Issue #1Practical Issue #1

• A new DOL Wage Determination has been gincorporated into our contract by mod It is effective from this date forward What price adjustment are we entitled to?


SCA Price AdjustmentsSCA Price Adjustments

• SCA “price adjustment” is NOT an “REA”p j• “Fair and reasonable” standard used under FAR 15.404 (REAs) is very different FAR 15.404 allows for general and administrative expense, overhead and/or profit

d l / SCA Price Adjustment clause, FAR 52.222‐43/44, 32 and 29 CFR 4 Subpart D explicitly excludes all three such costs.such costs.

• SCA provides only for actual increase in wages and benefits


SCA Price AdjustmentsSCA Price Adjustments

• The Navy has created a ytool for SCA adjustments

• The Price Adjustment Calculation Tool (PACT) can compute the adjustment underadjustment under certain circumstances

• Tool and user guideTool and user guide available at GovCon360.com


The Adjustment Entitlements – LaborThe Adjustment Entitlements Labor

• Adjustment limited to ACTUAL increase in cost jresulting from new Wage Determination (WD)

• Example Old WD mandated $14.50 per hour for Lab Tech’s New WD raised the minimum rate to $15.10 Contractor is currently paying an average of $14.75

• The adjustment entitlement is $.35 per hour j p($15.10‐$14.75), NOT $.60 per hour


The Adjustment Entitlements – BenefitsThe Adjustment Entitlements Benefits

• Payroll taxes/insurance on the increasey / FICA (SS & Medicare) FUTA/SUTA only if increase is actual (not usually)FUTA/SUTA only if increase is actual (not usually) Workmen’s compensation

• Health & Welfare fringe benefitsHealth & Welfare fringe benefits Adjustment only if the WD increases H&W rate Adjustment limited to actual increase in cost Adjustment limited to actual increase in cost NO adjustment for PR tax/ins on cash‐in‐lieu paymentspayments


The Adjustment Entitlements – OtherThe Adjustment Entitlements Other

• Holidays and vacation (to the extent the WD y (change causes costs to increase)

• That’s it folks... No overhead No G&A No profitp No nothing



• The mod incorporating the Wage Determination p g gwas “effective dated” two months prior to issue Are covered workers entitled to back pay and benefits?

Is the back pay allowable? What about the benefits?


BackpayBackpay

• Backpay is expressly unallowable under FAR 31.205‐6, p y p y ,Compensation for personal services, Paragraph (h), with one exception...

• Backpay may result from a negotiated settlement, order, or court decree that resolves a violation of Federal labor lawsFederal labor laws Backpay (paid pursuant to such an order) resulting from

underpaid work is compensation for the work performed d i ll bland is allowable

All other backpay resulting from violation of Federal labor laws or the Civil Rights Act of 1964 is unallowableg



• For competitive reasons, some contractors elect p ,to pay “cash‐in‐lieu” of benefits

• Beginning in 2014 firms required to provide minimum level of health insurance under the Affordable Care Act (ACA)or pay a penaltyI• Issues Are the SCA‐covered employees exempt from ACA?If not is it an either/or sit ation or “both?” If not, is it an either/or situation or “both?”

If we elect to continue paying cash‐in‐lieu, will the ACA penalty be an allowable Fringe cost?ACA penalty be an allowable Fringe cost?


SCA/ACA ExampleSCA/ACA Example

• Company “A” has 200 employeesp y p y 100 are indirect or commercial 100 work on Government contracts, half SCA‐covered100 work on Government contracts, half SCA covered

• Company A pays Cash‐In‐Lieu to SCA workers• One (1) SCA covered workerOne (1) SCA covered worker Has a household income less than four times the federal poverty levelp y

Receives federal assistance on premium for insurance purchased through an exchange


SCA/ACA Example (Cont.)SCA/ACA Example (Cont.)

• Company A subject to “adequate coverage excise p y j q gtax” (penalty) because It has more than 50 employees, and Does not offer “adequate coverage” to at least 95% of employees

• Penalty imposed If one full time employee went through exchange and received assistance

l l l d l ( )• Penalty calculated at 170 employees (200 – 30) times $2k ($340k)



• The Successor Contractor Rule Arises out of Exec Order 13495issued January 30, 2009y ,

Effective January 18, 2013 Implemented by FAR 22.12 (new)p y ( ) New clause 52.222‐17 (JAN 2013) Far change incorporates DOLFar change incorporates DOLfinal rule published August, 2011


Successor ContractorsSuccessor Contractors

• Must extend “bona fide” job offers to SCA jworkers on predecessor contracts

• Offers must promise to pay the required wages and fringe benefits of the wage determination

• Offers must remain open for at least 10 days• Failure to comply can result in investigation(s)• Violations can result in

k d Backpay retroactive to contract start date Debarrement Workers also have appeal rights Workers also have appeal rights


Successor Contractor Rule NotesSuccessor Contractor Rule Notes

• Nondisplacement rule applies only to “SCA p pp ycovered” workers

• Senior procurement executive of procuring agency empowered to waive some or all requirements written determination required that...

• application would not serve the purposes of the EO, or • would impair the Government’s ability to procure serviceswould impair the Government s ability to procure services

• Predecessor contractor must provide certified list of employees to the contracting officer


ResourcesResources

• DOL Field Ops Handbook, Chapter 14 (SCA)p , p ( ) Regulatory implementation of the SCA

• DOL Prevailing Wage Resource Book Everything there is about Wage Determinations

• DOL SCA Compliance Principles Compliance handbook for contractors Compliance handbook for contractors

• DOD SCA Price Adjustment Guide Instructions for use of the Price Adjustment Calculation Tool (PACT)

• The Price Adjustment Calculation Tool(PACT) – Excel

• SCA Non‐Displacement Final Rule Fact Sheet


Contact UsContact Us

Watkins Meegan LLC8000 Towers Crescent DriveTysons, VA 22182

Rich Wilkinson(703) 847‐[email protected]

Kiran Pinto(703) 847‐4435(703) 847 [email protected]


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