Contractors and Cheddar: Paying Employees under the Service Contract Act

In addition to wage statutes applicable to all employers, government contractors must also abide by other prevailing wage statutes. The two most prominent are the Service Contract Act and the Davis-Bacon Act.

These statutes, most notably, dictate wage rates and fringe benefits–the cheddar–that contractors must pay covered employees. But they also dictate some other important requirements.

Here, we’ll provide a brief overview of the Service Contract Act, which is now known in the U.S. Code as the Service Contract Labor Standards. So, for ease here, we’ll refer to the Act as the “Labor Standards.”

Application

The Labor Standards apply to all service contracts over $2,500 performed in the U.S. (contracts performed outside the U.S. are not covered). Whether a contract is a service contract depends on its principal purpose. If the contract’s principal purpose is to furnish services in the U.S. using non-exempt employees, then it’s a service contract. Notably, how an agency classifies a contract isn’t necessarily determinative.

Subcontractors preforming under a prime service contract (over $2,500) must also abide by the Labor Standards.

Certain contracts are specifically exempted from the Labor Standards. Among these are construction contracts, supply and material contracts, and certain transportation contracts.

Wage and Fringe Benefit Requirements

The Labor Standards’ core and most well-known requirement mandates the payment of minimum wage rates and fringe benefits. To satisfy this requirement a contractor must either: (1) pay employees no less than the wage rates and fringe benefits that prevail in a locality, which are outlined in DOL wage determination, or (2) if applicable, it must pay at least the wage rates and fringe benefits contained in a bona fide collective bargaining agreement entered into by the predecessor contractor.

There’s much that we could say about this wage rate and fringe benefit requirement. But here are a few key points:

• The Labor Standards set a compensation floor; contractors are free to pay workers higher wages and fringe benefits (and, in fact, the market might command higher amounts).
• Contractors can pay fringe benefits in kind or in cash (i.e., contribute to a health plan or pay workers money to buy their own health insurance).
• DOL wage determinations are prepared for a certain locality–e.g., a county in a given state. So, the minimum wages and fringe benefits required in one area may be different than those required in another area.
• Contracting officers should attach the applicable wage determination (one drafted by the DOL or a CBA) to a solicitation. DOL wage determinations can also be accessed at beta.sam.gov.
• The Labor Standards apply at the subcontract level, too. This can present headaches to prime contractors, especially if a subcontractor fails to pay its employees the minimum amounts. So, make sure that your subcontracts address this point.

Exempt Employees

The Labor Standards do not apply to individuals who are properly considered as executive, administrative, or professional employees. Here’s a nutshell description (these categories are the subjects of significant regulatory development) of each:

• Executive: Compensated at least $684 per week; primary duty is the management of an enterprise or a recognized department or subdivision of the enterprise; regularly directs the work of two or more employees; and has the authority to hire and fire.
• Administrative: Compensated at least $684 per week; primary duty is the performance of office or non-manual work directly related to the management or general business operations of the company or its customers; primary duty includes the exercise of discretion and independent judgment on significant matters.
• Professional: Compensated at least $684 per week; primary duty is performing work that (1) requires knowledge of an advanced field of science or learning usually acquired by a prolonged course of specialized intellectual instruction, or (2) requires invention, imagination, originality or talent in recognized field or artistic or creative endeavor.

Other Labor Standards Requirements

Notification: Contractors must notify service employees about the minimum wage rates and fringe benefits they are owed under a given contract. Contractors must also post Publication WH 1313 in a prominent and accessible place at the work site.

Safe and Sanitary Working Conditions: Contractors may not permit service employees to perform in buildings or under working conditions provided or supervised by the Contractor that are unsanitary, hazardous, or dangerous to the health and safety of service employees.

Record Keeping: Contractors must keep records, for three years after the work was performed, of service employees and the wage rates and fringe benefits paid, the daily and weekly hours performed by each employee, and the deductions, rebates, or refunds from each employee’s daily or weekly compensation.

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It’s very important to ensure compliance with the Labor Standards because the penalties for non-compliance can be very stiff. A three-year debarment is even a possibility.

If you have any questions about the Labor Standards or compliance with any other labor statutes applicable to federal contractors, give us a call at 913-354-2630.