Wages are a hot topic these days with the post-COVID economy and hybrid work environment now prevalent in many industries. It's important for contractors providing services to the Federal government to familiarize themselves with the Service Contract Labor Standards (SCLS). These standards govern labor requirements for certain service contracts awarded by the federal government. You may see the SCLS also referred to as the McNamara-O’Hara Service Contract Act (SCA) or “Act”, particularly by the Department of Labor, since it is the originating statute of the SCLS; they are all one and the same.
How do I know if my contract is a covered contract? The Government will determine if the contract is covered by the SCLS, based on the scope of services. The SCLS typically applies to contracts–
valued over $2,500,
entered into by the Federal Government, and
the principal purpose of which is to furnish services in the U.S. through the use of service employees. (NOTE: The SCLS applies to the 50 states, DC, Puerto Rico, the Virgin Islands, Outer Continental Shelf lands as defined in the Outer Continental Shelf Lands Act, American Samoa, Guam, Wake Island, Eniwetok Atoll, Kwajalein Atoll, Johnston Island, Canton Island, and the Northern Marianas.)
If the services of the contract are covered by the SCLS, the contract will contain the FAR Clause 52.222-41, Service Contract Labor Standards, and a Department of Labor (DOL) Wage Determination will be provided as part of the contract, based on the location of performance.
What types of services are typically subject to the SCLS? The following examples, while not definitive or exclusive, illustrate some of the types of services that have been found to be covered by the Service Contract Labor Standards statute (see 29 CFR4.130 for additional examples):
Motor pool operation, parking, taxicab, and ambulance services.
Packing, crating, and storage.
Custodial, janitorial, housekeeping, and guard services.
Food service and lodging.
Laundry, dry-cleaning, linen-supply, and clothing alteration and repair services.
Snow, trash, and garbage removal.
Aerial spraying and aerial reconnaissance for fire detection.
Some support services at installations, including grounds maintenance and landscaping.
Certain specialized services requiring specific skills, such as drafting, illustrating, graphic arts, stenographic reporting, or mortuary services.
Electronic equipment maintenance and operation and engineering support services.
Maintenance and repair of all types of equipment, for example, aircraft, engines, electrical motors, vehicles, and electronic, office, and related business and construction equipment, with some exceptions found at FAR 22.1003-4(c)(1) and (d)(1)(iv).
Operation, maintenance, or logistics support of a Federal facility.
Data collection, processing, and analysis services.
Are any services excepted from the SCLS or any industries excluded? Yes, they include:
Contracts outside the U.S. The term “United States” excludes any U.S. base or possession within a foreign country. Work performed outside the geographic limits of the U.S., even if pursuant to a contract for services that are performed in part in the U.S., is not subject to the requirements of the SCLS.
Contracts performed exclusively by bona fide professional employees. The Fair Labor Standards Act (FLSA) sets parameters for the exclusion of employees that perform certain executive, professional, administrative, or other duties such as IT or outside sales duties. However, if the contract involves any covered work outside of those areas, the performance of that work must still comply with the SCLS requirements.
Construction, alteration, or repair of public buildings or public works, including painting and decorating services;
Services for transporting freight or personnel by vessel, aircraft, bus, truck, express, railroad, or oil or gas pipeline where published tariff rates are in effect;
Furnishing services by radio, telephone, or cable companies subject to the Communications Act of 1934;
Public utility services;
Employment contracts providing for direct services to a Federal agency by an individual or individuals; and
Services to operate postal contract stations for the U.S. Postal Service.
The Secretary of Labor has also exempted from the SCLS statute the following service contracts and subcontracts in which the primary purpose is to provide the following, under certain circumstances.
Automobile or other vehicle (e.g., aircraft) maintenance services (other than contracts or subcontracts to operate a Government motor pool or similar facility).
Financial services involving the issuance and servicing of cards (including credit cards, debit cards, purchase cards, smart cards, and similar card services).
Hotel/motel services for conferences, including lodging and/or meals, that are part of the contract or subcontract for the conference (which must not include ongoing contracts for lodging on an as-needed or continuing basis).
Maintenance, calibration, repair, and/or installation (where the installation is not subject to the Construction Wage Rate Requirements statute, as provided in 29 CFR 4.116(c)(2)) services for all types of equipment where the services are obtained from the manufacturer or supplier of the equipment under a contract awarded on a sole source basis.
Transportation by common carrier of persons by air, motor vehicle, rail, or marine vessel on regularly scheduled routes or via standard commercial services (not including charter services).
Real estate services, including real property appraisal services, related to housing Federal agencies or disposing of real property owned by the Government.
Relocation services, including services of real estate brokers and appraisers to assist Federal employees or military personnel in buying and selling homes (which shall not include actual moving or storage of household goods and related services).
It's important to note that the applicability of the SCLS depends on the specific terms and conditions of each federal service contract. Not all service contracts will be considered “covered contracts” nor may all services under a covered contract require compliance with the SCLS.
What are the Minimum Wage Requirements for SCLS-covered Contracts? The SCLS requires contractors pay their covered employees no less than the prevailing wage rates and fringe benefits, as determined by the DOL and found in the DOL Wage Determination incorporated as a material part of the contract and provided to the contractor. These rates are specific to various job classifications and geographic areas. It's crucial to review the wage determinations applicable to your contract to ensure compliance. The first few pages of wage determinations look like this:
You'll see the employee job classification (as defined in the DOL SCA Directory of Occupations at https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/SCADirectVers5.pdf). Employers should review the Directory and classify each non-exempt employee. The prevailing wage for the position is also shown and is based on a DOL survey of wages for the performance location annotated on page one. In the absence of a wage determination, the minimum wage set forth in the Fair Labor Standards Act must be paid.
What are Fringe Benefits? In addition to the basic hourly wage, contractors are required to provide certain fringe benefits to covered employees. These benefits may include health insurance, retirement plans, vacation and holiday pay, and other provisions. The exact fringe benefits are specified in the applicable wage determinations (illustration shown below).
Fringe benefit obligations may be discharged by furnishing any equivalent combination of cash or bona fide fringe benefits (see below). If the contractor furnished a lesser amount of the fringe benefit called for by the applicable wage determination, the contractor must furnish the employee with the difference between the amount stated in the wage determination and the actual cost of the fringe benefit which the contractor provided. The contractor may make up the difference in cash to the employee, or furnish equivalent benefits, or a combination thereof.
No contribution toward fringe benefits made by employees, or deducted from their wages, may be included or used by an employer in satisfying any part of any fringe benefit obligation under the SCLS. A contractor cannot offset an amount of fringe benefits paid in excess of the fringe benefits required under a wage determination in order to satisfy its minimum monetary wage obligations, and vice versa.
The cost incurred by a government contractor’s insurance carrier (or third-party trust fund) in its administration and delivery of benefits to service employees can be credited toward the contractor’s fringe benefit obligations under an SCLS wage determination. But, contractors may not take credit for any benefit required by federal, state, or local law such as workers’ compensation, unemployment compensation, and social security contributions.
Bona Fide Fringe Benefit Plans. To be considered bona fide for SCLS purposes, a fringe benefit plan, fund, or program must constitute a legally enforceable obligation that meets certain criteria. The primary purpose of a fringe benefit plan under the SCLS must be to provide systematically for the payment of benefits to employees on account of death, disability, advanced age, retirement, illness, medical expenses, hospitalization, supplemental employment benefits, and the like. Supplemental unemployment plans and prepaid legal plans are considered bona fide fringe benefits for purposes of the SCLS. However, unfunded, self-insured fringe benefit plans under which a contractor allegedly makes out-of-pocket payments to provide benefits for employees as costs are incurred, rather than making irrevocable contributions to a trust or other funded arrangements, are not normally considered bona fide plans or equivalent benefits except for plans to provide paid vacation and holiday fringe benefits.
What Recordkeeping is Required for SCLS Compliance? Contractors must maintain accurate records of their employees' hours worked, wages paid, and fringe benefits provided. Contractors may choose the fringe benefits to be provided, whether an employee accepts or refuses the fringe benefits offered. If an employee desires cash payments or benefits other than those chosen by the contractor, that is a matter for discussion and resolution between the employee and the employer. Records must be kept for a specified period, usually three years (unless otherwise indicated in the contract), and be available for inspection by authorized representatives, such as the Contracting Officer, Contracting Officer’s Representative (COR), or DOL.
Do I Need to Notify My Employees? The SCLS mandates contractors to inform their employees of the applicable wage rates and fringe benefits. This can be accomplished by prominently displaying the applicable wage determination at the worksite. Additionally, contractors must provide each covered employee with a wage statement detailing the hours worked, wages paid, and fringe benefits provided.
Are SCLS-covered Contracts Subject to Compliance Monitoring? The DOL's Wage and Hour Division (WHD) is responsible for enforcing the SCLS. They may conduct investigations, audits, or interviews to ensure compliance with SCLS. It's essential to cooperate with WHD representatives and provide them with the requested information during compliance assessments. Non-compliance with the SCLS can result in penalties, including back wages, liquidated damages, and potential contract termination. In severe cases of willful violations, contractors may be debarred from future federal contracting opportunities.
What about Subcontracts? If you subcontract any portion of the work covered by the SCLS, you are responsible for ensuring that your subcontractors comply with the labor standards. It's important to include appropriate clauses in your subcontracts that reflect the SCLS requirements and monitor subcontractor compliance.
Where Can I Find Out More? To ensure compliance with the Service Contract Labor Standards, it's advisable to seek guidance from legal counsel or consult the resources provided by the DOL. Here are a few comprehensive references for service contractors to have at hand:
DOL’s WHD Compliance Assistance Webpage: https://www.dol.gov/agencies/whd/compliance-assistance
DOL McNamara-O’Hara Service Contract Act (SCA) site: https://www.dol.gov/agencies/whd/government-contracts/service-contracts
Frequently Asked Questions on SCLS (SCA): https://www.dol.gov/agencies/whd/government-contracts/service-contracts/faq
Fair Labor Standards Act (FLSA): https://www.dol.gov/agencies/whd/flsa
Watch FedSubK for future installments of this series that will cover the SCA Directory of Occupations, Fair Labor Standards Act (FLSA) exemptions for bona fide professional services, and more! And as a subscriber, you'll receive exclusive notification when they are available!
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