Businesses contracting or subcontracting with the federal government should verify their worker classification, pay and benefit practices comply with applicable federal prevailing wage, benefit and other requirements to avoid incurring expensive lesions like the one Crystal Enterprises Inc. is learning after a U.S. Department of Labor Wage and Hour Division (“WHD”) investigation determined its practices violated the McNamara-O’Hara Service Contract Act (“SCA”).
SCA Prevailing Wage & Fringe Benefit Mandates
SCA contract clauses require contractors and subcontractors performing services under federal prime contracts in excess of $2,500 to pay service employees in various classes no less than the local prevailing wages and fringe benefits for corresponding work on similar projects in the area or the rates (including prospective increases) contained in a predecessor contractor’s collective bargaining agreement. The SCA also requires these businesses to ensure they apply proper job classifications, rates of pay, benefits and prerequisites when paying workers on their federal contracts and keep appropriate documentation to prove compliance.
The SCA generally applies to contracts entered into by federal and District of Columbia agencies that have as their principal purpose furnishing services in the U.S. through the use of “service employees.” The definition of “service employee” includes any employee engaged in performing services on a covered contract other than a bona fide executive, administrative, or professional employee who meets the exemption criteria set forth in 29 CFR Part 541.
However, the SCA does not apply to certain types of contract services. The contracts exempt from SCA coverage include:
- Contracts for construction, alteration, or repair, including painting, and decorating, of public buildings or public works (these are covered by the Davis-Bacon Act);
- Work required in accordance with the provisions of the Walsh-Healey Public Contracts Act;
- Contracts for transporting freight or personnel where published tariff rates are in effect;
- Contracts for furnishing services by radio, telephone, telegraph, or cable companies subject to the Communications Act of 1934;
- Contracts for public utility services;
- Employment contracts providing for direct services to a federal agency by an individual or individuals;
- Contracts for operating postal contract stations for the U.S. Postal Service;
- Services performed outside the U.S. (except in territories administered by the U.S., as defined in the Act); and
- Contracts subject to administrative exemptions granted by the Secretary of Labor in special circumstances because of the public interest or to avoid serious impairment of government business.
SCA Violations Costly
Violations of the SCA can trigger costly consequences. Violations can result in liability to workers for unpaid wages and benefits as well as the withholding of contract payments in sufficient amounts to cover wage and fringe benefit underpayments, contract termination and liability for any resulting costs to the government, legal action to recover the underpayments, and debarment from future contracts for up to three years.
The Crystal Enterprises enforcement action illustrates one of these costly surprises that businesses violating these rules can incur. Crystal Enterprises is paying $109,127 in back wages employees to resolve exposures from a WHD investigation that concluded it failed to pay required prevailing wage and health and welfare benefits to 55 employees working at a U.S. Air Force training center dining facility on Eglin Air Force Base in Florida under a subcontract to perform full food services at the training center dining facility on the Base. The investigation found by doing so, WHD also concluded Crystal Enterprises also paid workers lower rates of pay for holidays and sick leave and vacation time used.
Federal Services Contractors Must Manage Compliance
Federal contractors subject to the SCA should take documented efforts to verify compliance and avoid common mistakes including:
- Underpayment of service workers due to misclassification;
- Erroneously considering workers exempt without regard to 29 C.F.R. Part 541 rules;
- Failure to make timely payment of wages or fringe benefit contributions;
- Lack of proper recordkeeping when cash payments are made to satisfy fringe benefit requirements;
- Failure to notify service employees of the applicable wage and fringe benefit requirements, or failure to post the “Notice to Employees Working on Government Contracts” at a prominent and accessible place at the worksite;
- Failure to use the conformance procedure for unlisted classes of employees;
- Failure to segregate and keep records on hours spent on contract work and non-contract work for employees who do both; and
- Failure to implement rate increases (if any) in a new wage determination in a multi-year contract subject to annual appropriations.
If you have questions about or need SCA compliance assistance or defense, contact the author of this update, Cynthia Marcotte Stamer.
More Information
We hope this update is helpful. For more information about the these or other legal, management or regulatory concerns, please contact the author Cynthia Marcotte Stamer via e-mail or via telephone at (214) 452 -8297.
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About the Author
Management attorney and operations consultant Cynthia Marcotte Stamer uses a client objective oriented approach to help businesses, governments, associations and their leaders manage people, performance, risk, legislative and regulatory affairs, data, and other essential elements of their operations.
Recognized by her peers as a Martindale-Hubble “AV-Preeminent” (Top 1%) and “Top Rated Lawyer” with special recognition LexisNexis® Martindale-Hubbell® as “LEGAL LEADER™ Texas Top Rated Lawyer” in Health Care Law and Labor and Employment Law; as among the “Best Lawyers In Dallas” for her work in the fields of “Labor & Employment,” “Tax: ERISA & Employee Benefits,” “Health Care” and “Business and Commercial Law” by D Magazine, Cynthia Marcotte Stamer is a practicing attorney board certified in labor and employment law by the Texas Board of Legal Specialization and management consultant, author, public policy advocate and lecturer widely known for 35+ years of workforce and other management work, public policy leadership and advocacy, coaching, teachings, scholarship and thought leadership. As a part of this experience, Miss Stamer has experience assisting clients with auditing, compliance, investigation and defense SCA, Davis-Bacon, Fair Labor Standards Act and other pay, benefits, compensation and fringe benefit concerns.
A Fellow in the American College of Employee Benefit Counsel, Vice Chair of the American Bar Association (“ABA”) International Section Life Sciences and Health Committee, Past Chair of the ABA Managed Care & Insurance Interest Group, Scribe for the ABA JCEB Annual Agency Meeting with HHS-OCR, past chair of the ABA RPTE Employee Benefits & Other Compensation Group and current co-Chair of its Welfare Benefit Committee, Ms. Stamer’s work throughout her 35 year career has focused heavily on working with government contractors, health care and managed care, health and other employee benefit plan, insurance and financial services and other public and private organizations and their technology, data, and other service providers and advisors domestically and internationally with legal and operational compliance and risk management, performance and workforce management, regulatory and public policy and other legal and operational concerns. As an ongoing component of this work, she regularly advises, represents and defends businesses on Guideline Program and other compliance, risk management and other internal and external controls in a wide range of areas and has published and spoken extensively on these concerns.
Ms. Stamer also is widely recognized for her decades of pragmatic, leading edge work, scholarship and thought leadership on workforce, compensation, and other operations, risk management, compliance and regulatory and public affairs concerns.
For more information about Ms. Stamer or her health industry and other experience and involvements, see www.cynthiastamer.com or contact Ms. Stamer via telephone at (214) 452-8297 or via e-mail here.
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