FedSubK Feature: Service Contract Labor Standards (SCLS) - Payment of Wages and Fringe Benefits (Part 3 of 3)

Updated: May 4, 2024

In this last installment of our three-part series on the Service Contract Labor Standards (SCLS, formerly known as the Service Contract Act (or SCA)), we are going to talk about the payment of fringe benefits and recordkeeping. This is an area where there is much discussion related to what constitutes an employee’s wage versus a fringe benefit payment, what constitutes a “fringe benefit”, and the timing or frequency of payments. Fringe benefits are separate from wages and salary and must be tracked as such.

Knowledge Baseline. For this topic, keep in mind–

• SCLS applies to contracts entered into by the U.S. or the District of Columbia (DC), the principal purpose of which is to furnish services in the U.S. through the use of service employees.
• Contractors performing on Federal service contracts in excess of $2,500 must observe minimum monetary wage and safety and health standards, and maintain certain records. (These are known as “covered contracts”.)
• Service employees on covered contracts must be paid not less than the monetary wages and fringe benefits contained in wage determinations issued by the Department of Labor (DOL) Wage and Hour Division (WHD) for the contract work. Wage determinations will be incorporated as a material part of the contract to ensure compliance.
• DOL wage and fringe benefit determinations may reflect what has been determined to be prevailing in the locality or may reflect the wage rates and fringe benefits contained in the predecessor contractor’s collective bargaining agreement (CBA), if any, as allowable under the SCLS.
• DOL wage and fringe benefit determinations also apply to subcontractors at all tiers.
• The SCLS makes no distinction, with respect to its compensation provisions, between temporary, part-time, and full-time employees, and the wage determination minimum monetary wages and fringe benefits apply equally to such service employees engaged in SCLS-covered work, absent an express limitation.

Payment of Wages

Specific things to keep in mind that apply to the payment of wages are:

• Monetary wages specified under the SCLS must be paid to employees promptly and in no event later than one (1) pay period following the end of the regular pay period in which such wages were earned or accrued.
• The duration of a pay period under the SCLS may not be longer than semi-monthly.
• Wages must be paid free and clear and without subsequent rebate, or kickback on any account, except deductions permitted by law.
• If participation in a fringe benefit plan requires a contribution from the employee’s wages, whether through payroll deduction or otherwise, the employee’s concurrence is necessary before such payroll deduction can be made.
• The contractor must comply with the highest of all applicable wage requirements. Executive Order 14026 Minimum Wage states that contractors must pay the highest of all applicable rates (federal minimum wage, state minimum wage, or DOL wage determination). NOTE: Compliance with one law does not excuse non-compliance with another law.

Contractors 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, (see also info on payment of fringe benefits below).

Example: The employee was paid $2.36 more in wages per hour and the employer credited that wage payment toward its fringe benefit obligation, in violation of the SCLS.

Wage Determination/Hr: Employee Paid/Hr:

Wage $10.25 Wage $12.61

Fringe $ 4.80 Fringe $ 2.44

Total $15.05 Total $15.05

The contractor still owes the employee the difference between the fringe in the wage determination ($4.80) and the fringe benefit paid ($2.44) for each hour worked.

Employees That Do Work Subject to Different Rates. Employees must be paid either (1) the highest rate for all hours worked; unless (2) the employer’s payroll records or other affirmative proof shows periods spent in each class of work.

Work on SCLS-covered and Non-SCLS-covered Contracts in the Same Workweek.

If such a contractor has employees who spend a portion but not all of their workweek in performing work on SCLS-covered contracts, it is necessary to accurately identify in its records, or by other means, those periods when SCLS-covered work and non-SCLS-covered work was performed. When contractors are not exclusively engaged in SCLS-covered contract work, and there are adequate records segregating the periods in which work was performed between SCLS-covered and non-SCLS-covered work, the SCLS wage rate does not need to be paid for hours spent on non-SCLS-covered work. However, in the absence of such records, all employees working in the establishment or department where such covered work is performed shall be presumed to have worked on or in connection with the contract during the period of its performance, unless affirmative proof to the contrary is provided. Similarly, in the absence of such records, an employee performing any work on or in connection with the contract in a workweek shall be presumed to have continued to perform such work throughout the workweek, unless affirmative proof to the contrary is presented.

How are Hours Computed? The computation of hours is determined under the FLSA pursuant to 19 CFR Part 785 (link: https://www.ecfr.gov/current/title-29/subtitle-B/chapter-V/subchapter-B/part-785). Hours included must count all periods in which the employee is “suffered or permitted” to work. Hours subject to the SCLS wage determination are those performed on SCLS-covered contracts. Employees must be paid for all work, including work that is unauthorized such as working through a lunch or starting work early. While this may violate company policy, the employer may discipline the employee in accordance with such policy but cannot withhold wages for the time worked.

Payment of Fringe Benefits

It is the contractor’s responsibility to satisfy the fringe benefit obligations set forth in an SCLS wage determination for all occupations listed. The fringe benefits will be specified in the applicable wage determination included in the contract documents. In the wage determination, fringe benefits information is found following the list of SCLS-covered job titles and wages.

Example:

Fringe benefits must be paid in cash per hour or put toward a bona fide fringe benefit plan. Specific things to keep in mind related to the payment of fringe benefits are:

• Any administrative costs (e.g., recordkeeping costs associated with payroll administration) directly incurred by a contractor in providing fringe benefit plans are considered business expenses of the firm and not contributions made on behalf of the employees. As such, administrative costs cannot be credited toward meeting the fringe benefit obligations of the applicable wage determination.
• However, the cost incurred by a Contractor’s insurance carrier (or third-party trust fund) in its administration and delivery of benefits to covered employees can be credited toward the Contractor’s fringe benefit obligations required by an SCLS wage determination. However, adequate recordkeeping is required to show the costs incurred and credited.
• 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.
• Fringe benefit obligations may be discharged by furnishing any equivalent combination of cash or bona fide fringe benefits.
• The terms “equivalent fringe benefit” and “cash equivalent” mean equal in terms of monetary cost to the Contractor.
• 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, it must be resolved as part of the employer-employee relationship.
• If a Contractor furnishes a lesser amount of the fringe benefit than 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 provided. This difference can be made up in cash to the employee, or furnish equivalent benefits, or a combination thereof. Cash payments in lieu of fringe benefits must be paid on a regular pay date.
• Stop loss insurance payments that provide coverage in the event that claims paid from an unfunded self-insured plan exceed specified limits both in the individual and the aggregate can be credited against the fringe benefit obligations.
• 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 as a fringe benefit payment.

For contracts subject to a wage determination with fIxed cost per employee health and welfare, paid vacation, and holiday benefits, service employees employed by a single employer are entitled to fringe benefit payments only up to a maximum of 40 hours per week, regardless of the number of contracts on which they work, unless otherwise specified by the applicable wage determination. However, service employees who work for a single employer on multiple contracts which may have other requirements, such as collectively bargained fringe benefits or an “average cost” health and welfare fringe benefit, may be entitled to fringe benefit payments in excess of 40 hours per week. (Dantran, Inc. v. U.S. DOL, 171 F.3d 58 (1st Cir. 1999).)

For fringe benefit requirements under successor contracts, the terms of the Collective Bargaining Agreement (CBA) will dictate eligibility requirements and the amount and extent of such fringe benefits. Since a successor contractor’s obligations are governed by the terms of the CBA, any interpretation of the wage and fringe benefit provisions of the CBA where they are unclear must be based on the intent of the parties, provided that such interpretation does not violate the law. A contractor that is not a signatory to the CBA does not need to provide the specific fringe benefits stipulated in the CBA, but can provide any equivalent combinations of fringe benefits or by making equivalent or differential payments in cash.

What is a “Bona Fide Fringe Benefit Plan”? To be considered “bona fide” for SCLS purposes, a fringe benefit plan, fund, or program must constitute a legally enforceable obligation which meets certain criteria. The plan, fund, or program must be compliant with the Employment Retirement Income Security Act (ERISA), laws and regulations enforced by the Internal Revenue Service (IRS), and state insurance laws, and contributions must be made irrevocably to a trustee or third person pursuant to an insurance agreement, trust, or other funded arrangement. 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. While not specifically identified in the regulations, supplemental unemployment plans and prepaid legal plans are considered bona fide fringe benefits for purposes of the SCLS. Bona fide fringe benefits must also be communicated in writing to employees and contain a definite formula for determining the amount of contribution and benefits provided to constitute a legally enforceable obligation. Payments into bona fide fringe benefits plans must be made no less often than quarterly.

NOTE: 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. Under certain conditions, a contractor may request approval by the Administrator of an unfunded self-insured plan in order to allow credit for payments under such a plan in meeting the fringe benefit requirements of the SCLS. The purpose of seeking advance approval is to avoid situations involving unfunded plans where monies allegedly allocated by a contractor to provide fringe benefits are used for other purposes or are recouped without actually furnishing any benefits. This procedure is not intended to prohibit self-insured plans where irrevocable payments are made pursuant to a trust or other funded arrangement and other conditions are met.

Vacation Fringe Benefits. Vacation fringe benefits count as a fixed cost fringe benefit and are vested and become due after the employee’s 12-month anniversary date of employment. These benefits do not need to be paid immediately after the anniversary but the entire vacation amount must be made available to the employee before (1) the next anniversary date; (2) the completion of the contract; or (3) the employee terminates employment, whichever occurs first. Payout of unused vacation fringe benefits should be made in cash. Wage determinations may require an accrual of vacation fringe benefits.

Example: Joe starts work on 7/01/2017. His 12-month anniversary is 6/20/2018. On 7/1/2018, Joe is entitled to vacation fringe benefits.

Holiday Fringe Benefits. Employees are entitled to holiday pay if they work in the holiday workweek, even if not all days are worked. A paid holiday can be traded for another day off if this is communicated to the employee. An employee is not entitled to holiday pay if the holiday is not named in the wage determination, such as a government-proclaimed closure, etc.

Part-Time Employees and Fringe Benefits. Part-time employees are entitled to a proportionate amount of fringe benefits. For example, a part-time employee who works 20 hours per week is eligible for a one-half week of vacation and one-half day of holiday pay but must receive the full amount of health and welfare fringe benefit.

Recordkeeping

Contractors must record and retain wage and fringe benefits payment records for three (3) years from the completion of the work containing the following information:

• Name, address, and social security number of each employee;
• Correct classification(s);
• Rate(s) of monetary wages paid and fringe benefits provided;
• Rate(s) of fringe benefits paid in lieu thereof;
• Total daily and weekly compensation of each employee;
• Number of daily and weekly hours worked by each employee;
• Any deductions, rebates, or refunds from the total daily or weekly compensation of each employee;
• List of monetary wages and fringe benefits for those classes of service employees not included in the wage determination attached to the contract but for which such wage rates or fringe benefits have been conformed (if applicable);
• List of predecessor contractor’s employees which had been furnished to the contractor (if applicable).

When health and welfare fringe payments are made in cash, this must be noted on payroll separately (i.e., separate base hourly rate and separately stated cash for fringe benefits). Bona Fide Fringe Benefit Plan payments must also be noted separately. These details should also be listed on the employee's pay stub.

Employee Notifications.

Each employee working on an SCLS-covered contract must be notified of the wage rates and fringe benefits required to be paid for work performed on the contract. WH Publication 1313 (as found on the DOL Wage and Hour Division website) and the applicable wage determination should be used for this purpose. The notice can be delivered to each employee or posted in a prominent and accessible place at the worksite, per SCLS guidance.

Where Can I Find Out More? Here are a few great references for service contractors to have at hand in case the need arises:

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

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