Service Contract Labor Standards (SCLS) Basics and Beyond

At a glance

• The main takeaway: The Service Contract Labor Standards (SCLS), more commonly known as the Service Contract Act (SCA), sets the minimum wages and fringe benefits for service employees on covered contracts.
• Impact on your business: Noncompliance with the SCLS requirements can result in back wages due to current and/or former employees, a DOL investigation, contract termination, or debarment.
• Next steps: Aprio’s Government Contracting Consultants offer comprehensive solutions tailored specifically to government contractors for the service contract labor standards. If you need help with managing the SCLS requirements, contact us today.

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The full story:

The Service Contract Labor Standards (SCLS), more commonly known as the Service Contract Act (SCA), sets the minimum wages and fringe benefits for service employees on covered contracts. Since its inception, there have only been two amendments to the SCLS. The first in 1972, which protected collective bargaining agreements and required the Department of Labor (DOL) to issue wage determinations. The second in 1976, which defined the term “service employee.”

Covered Contracts

The SCLS requirements do not apply to all contracts. SCLS applies to contracts that are:

• With the United States federal government;
• Performed in the U.S., its territories, and possessions;
• Principally for services (>50% of the contract effort);
• Performed through the use of service employees; and
• In excess of $2,500.

Covered Employees

SCLS applies to “service employees” working on covered contracts. A service employee is defined as “any person engaged in the performance of a covered contract except those who qualify for an exemption as bona fide executive, administrative, or professional employees.” 29 CFR 4.133(b) SCLS coverage is primarily based on the job duties and secondarily the salary test so it is important to have a good understanding of the actual job duties for each position. This will also help determine an appropriate mapping to the DOL Directory of Occupations. SCLS does not make any distinction between temporary, part-time, and full-time employees. The SCLS required wages and fringe benefits also apply to nonexempt temporary and part-time employees working on covered contracts.

Required Wages

The DOL is responsible for issuing wage determinations (WDs). The WDs set the minimum wages for different job classifications across various geographic regions. In addition, Executive Order (EO) 14026 sets a minimum wage, updated annually, for federal contractors working on or in connection with covered contracts. SCLS employees must be paid the minimum wage per the WD incorporated into the contract OR the federal contractor minimum wage per EO 14026 — whichever is higher. Payroll records should segregate pay types, e.g., SCLS regular and overtime wages, non-SCLS regular and overtime wages, leave, H&W cash in lieu of benefits, etc.

Health & Welfare (H&W)

The WD also includes two H&W rates. Although the SCLS does not provide any sick leave benefits, Executive Order (EO) 13706 — which establishes paid sick leave for federal contractors — may apply under some contracts. If EO 13706 applies to the contract, follow the lower of the two H&W rates. On the other hand, if EO 13706 does not apply to the contract, follow the higher of the two H&W rates.

The most common type of WD is considered an “odd” WD, ending in an odd number. For odd WDs, the H&W rate applies to all hours paid up to 40 hours per week. Contractors have various options to discharge the H&W requirements, including:

• Eligible employer cost of benefits. Examples include medical, dental, vision insurance, life insurance, accidental death and dismemberment insurance, and contributions to a health savings account or flexible spending account.
• Leave in excess of the SCLS requirements. Excess wages may not be credited toward the H&W requirements.
• Cash payments in lieu of fringe benefits. Payments must be made on the regular pay date and segregated from other pay types.
• Fully vested employer 401(k) contributions. Contributions must be made no less than quarterly.

Vacation

The required vacation varies based on the WD and the employee’s anniversary date. The anniversary date is determined based on the date in which the employee was hired by the contractor OR the date the employee started working on the contract, whichever is earlier. SCLS employees do not earn vacation benefits until their anniversary date. Some contractors may choose to allow their SCLS employees to accrue vacation, but it is not actually earned until the anniversary day. Any unused, earnedvacation benefits must be paid to the employee before the next anniversary date, termination of employment, or completion of the current contract. Part-time SCLS employees are entitled to a proportion of the full-time vacation benefit.

Holiday

Holidays also vary based on the WD. Some WDs may have more than the standard eleven federal holidays. SCLS employees who worked (or received paid sick leave or vacation) in the work week in which a holiday occurs are entitled to the SCLS holiday pay. Part-time employees are entitled to a proportion of the SCLS required holiday benefit.

Pricing for SCLS Contracts

It can be costly to comply with the SCLS so having the right strategy from the proposal phase will help your company be successful. The first step is to recognize if the contract will be SCLS covered and identify any applicable wage determinations. If you are unsure of coverage or the WDs, ask during the question and answer phase of the procurement process. It is important to bid to the WD to ensure all costs of compliance are covered. Using your firm-wide fringe rate may put your quote out of the acceptable range. Conversely, you could be pricing yourself too low and thus failing to cover your costs, directly impacting your profit margin.

The DOL issues new WDs throughout the year, but it does not automatically trigger a price adjustment on your contract. A price adjustment can only be triggered when a new WD is incorporated into your contract. New WDs should be incorporated at each option, extension, substantial change in scope of work, or no less than every two years for multi-year contracts. Once the new WD is incorporated into the contract, you have 30 days to request any eligible price adjustments. Adjustments are limited to actual increased wage and H&W costs, and applicable FICA, unemployment taxes, and workers compensation. It does not allow for general and administrative (G&A) costs, overhead (OH) costs, and/or profit.

The bottom line

The SCLS requirements are complex making compliance difficult. Noncompliance can result in back wages due to current and/or former employees, a DOL investigation, contract termination, or debarment. Performing periodic compliance reviews for both contractor and subcontractor employees can help identify and mitigate long-term issues that can be costly.

If you need assistance with managing the Service Contract Labor Standards requirements, schedule a consultation with us today.

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