The Service Contract Act can be costly
We've talked about the Service Contract Act (the "SCA") before, but the basic idea is that for service contracts and for certain labor categories, government contractors have to pay people within those labor categories a "prevailing wage".
The way it works is that the Department of Labor's Wage and Hour Division makes "wage determinations" of prevailing wages in a given location for a list of labor categories, and then the contractor has to "map" their employees to the list of labor categories and work with DOL and the contracting officer to do "conformance" for those labor categories.[1]
If this sounds like kind of a compliance pain, you'd be mostly right. And, apparently, contractors are pretty bad at complying with the SCA? Here's what GAO said last year:
The Department of Labor (DOL) completed over 5,000 Service Contract Act (SCA) cases in fiscal years 2014 through 2019 according to available data. For many, this resulted in awarding of back wages to federally contracted security guards, janitors, and other service workers. DOL enforces the SCA, which was enacted to protect workers on certain types of federal service contracts. DOL found SCA violations—primarily of wage and benefit protections—in 68 percent of cases. Employers across a range of service industries agreed to pay around $224 million in back wages. Sixty cases resulted in debarment—a decision to prevent an employer from being awarded new federal contracts generally for 3 years.
68%?! A 68% non-compliance rate is a pretty bad number![2] And $224 million in back wages is arguably a lot of money.[3] Companies can be, and are, debarred!
To make matters worse from a compliance perspective, the SCA is an obligation that "flows down" to subcontractors under FAR 52.222-41. So contractors not only have to ensure prevailing wages for their employees, they're on the hook for all of their subcontractors' employees' prevailing wages.
Which makes sense if you think about it. It'd be pretty messed up if a government contractor could get around paying a security guard a prevailing wage simply by hiring a security guard that is technically employed by a subcontractor. So, SCA compliance is usually a flow-down requirement.
Anyway. This happened and made the rounds in #govcon circles:
The U.S. Department of Labor has recovered more than $3.1 million in back wages and fringe benefits for more than 3,100 workers at a California subcontractor that provided enrollment and dental and vision benefits support to federal employees, retirees and their dependents.
An investigation by the department’s Wage and Hour Division determined that Alorica Inc. in Irvine incorrectly paid workers prevailing wage rates and fringe benefit amounts less than those required by the McNamara-O’Hara Service Contract Act. The wage shortages occurred between January 2017 and March 2022.
***
Long Term Care Partners LLC, now operating as Fed Point, contracted with the U.S. Office of Personnel Management to provide benefits enrollment and other customer services for federal employees. The Portsmouth, New Hampshire, company – which engaged Alorica as a subcontractor – paid $3,193,839 in back wages and fringe benefits to 3,174 employees to resolve the violations. Alorica agreed to audit its pay practices and computed the resulting prevailing wage and fringe benefit deficiencies owed its workers.
Throughout the course of the investigation, LTCP cooperated and ultimately paid all back wages and benefits owed to its subcontractor’s employees.
Ouch. That's about $1,000 per employee in back wages and fringe benefits... And to be fair to LTCP and Alorica, a quick scan of the Wage and Hour Division's press release page can find similar examples. But there's definitely a certain irony to the idea that the company responsible for federal employees' benefits was also denying its own employees (or its subcontractor's employees anyway) sufficient benefits. Not a good look. Not a good look at all.
But I especially enjoyed this quote:
“Violations under the Service Contract Act can be costly, as this case illustrates, but they are preventable with knowledge and due diligence,” explained Wage and Hour Division Regional Administrator Mark Watson in Philadelphia. “We strongly encourage federal contracting agencies and their service contractors to consult our extensive online resource materials and contact the division to answer any questions they may have about the Service Contract Act’s requirements.”
Yes, indeed. SCA violations, even those of your subcontractors, can be costly.
I have to admit, though, that I'm fairly skeptical that the solution to improving on compliance rates for service contractors is checking out Labor's "extensive online resource materials". But, hey, if I'm wrong, the good news is that there's even more online content coming.
So, service contractors, consider yourself warned and plan to do some mapping!
[1] These wage determinations are published on SAM and here's an example of what they look like. A nice thing to say about them is that they're not published as PDFs? There, I said a nice thing about them.
[2] Also, my math[2A] suggests that 1-2% of non-complying entities get debarred! Yikes![2B]
[2A] 60 debarments / (5,000 cases * 68% non-complying rate) = 60 debarments / 3400 non-compliant cases) = 0.017 = 1.7%. QED.
[2B] But also, a 68% non-compliance rate and the debarment rate are likely nonrepresentative of the total population of contractors because a majority of those 5,000 cases originate from complaints and the rest are WHD-initiated cases. In other words, it is not a random sample and the sampled population is very likely to skew toward non-compliance. There, I said another nice thing!
[3] Arguably not though? Again with the math... In that same period, the GAO reported "$720 billion on service contracts covered under the SCA". So, $224 million is about 0.03% of all wages.