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Service Contract Act: The Foundation

We are blowing the lid off of the Service Contract Act (SCA) in this Series.  For the past three months we have been working with the United States Department of Labor’s Wage and Hour Division (DoL WHD), the Internal Revenue Service (IRS), the US Government’s Wage Determination OnLine which is an Integrated Acquisition Environment, one of the E-Government initiatives in the President Obama’s Management Agenda; a collaborative effort of the Office of Management and Budget, Department of Labor, Department of Defense, General Services Administration, Department of Energy, and Department of Commerce and and a veritable army of Sources within the Property Preservation Industry (PPI).  We want to thank the Sources for providing the detailed information, which covered over a decade, as it will now allow for a proper US Government investigation of this issue.

What most Contractors DO NOT know is that the Prime Vendors are on the hook for SCA violations.  Additionally, as not a single Contract issued by the United States Department of Housing and Urban Development (HUD) has ever dealt with the reflection in both bid and payment to Contractor with respect to both SCA and the Davis – Bacon Act (DBA) the litigation will begin and end with the Prime Vendors.  In theory the liability will be in the BILLIONS OFDOLLARS and is legally entitled to extend all the way back to 1965.  The DoL e98 Website was extremely helpful in our initial work!

I also want to stress that SCA and DBA do not just deal with prevailing wage.  They deal with cross craft work, the mandatory award of heath care benefits, paid time off (calculated yearly not ongoing) and a plethora of other financial benefits which have NEVER been paid.  We saw the successful pursuit of PK Management Group’s employees pursue their case against PK Management to the tune of $64,000+!  We also saw Les Sternberg attempting to get Contractors to provide data, on their OWN time, to PK Management in an attempt to head off SCA issues.

This Weekend’s Article on the SCA and DBA Violations is something Prime Vendors, Contractors and their Subcontractors and HUD need to pay very close attention to!  As a matter of fact, we are going to CLOSELY examine the upcoming rounds of HUD Solicitations with respect to these provisions.

Baker Tilly Virchow Krause, LLP is an independent member of Baker Tilly International, the world’s 8th largest accountancy and business advisory network.  Below is an Article from their Website to better explain what is coming down the pike VERY soon!  We have worked LONG and HARD to break this Story.  Finally, the US Government is beginning to take notice!

What Contractors Need to Know About DOL’s Increased Service Contract Act Oversight

As the Department of Labor (DOL) sharpens its focus on enforcement of labor laws, government contractors are increasingly finding themselves in DOL’s crosshairs. Compliance with the Service Contract Act (SCA) is receiving more attention than ever from DOL’s Wage and Hour Division (WHD). During the past two years, the WHD has moved away from its compliance assistance functions and reinvented itself as, essentially, an SCA compliance police force. In its most recent budget request, WHD defined its top strategic budget priority as obtaining “compliance by conducting effective investigations that bring employers with violations into compliance.”

WHD’s commitment to investigations is underscored by aggressive hiring of new investigators, who now constitute 60% of WHD’s workforce. These investigators are expected to complete 36,220 compliance actions in FY 2013, a 45% increase from 24,922 completed in 2009. As an additional force multiplier, WHD recently established its “ABA-Approved Attorney Referral System,” which permits WHD to refer certain employee complaints to private-practice attorneys thereby allowing WHD to focus its resources on SCA matters where employees have no right of private action against their employers.

Consequences of SCA Noncompliance 
Historically, SCA audits have been triggered by employee complaints. Recently, however, DOL has been initiating SCA compliance audits on their own accord. Offenders now find themselves targeted for follow up audits and exposed to more additional penalties if corrective actions fail to yield strict compliance.

Where WHD identifies a noncompliance, the contractor will be required to make whole each harmed employee, meaning that any historical underpayments of both salary and fringe benefits must be corrected. Other potential penalties for noncompliance may include:

  • Withholding of payments on any active federally funded contracts
  • Contract termination and payment of the government’s related reprocurement costs
  • Personal liability for corporate officials
  • Debarment for 3 years from all government contracts

Debarment is the most severe penalty for non-compliance. As the sole enforcer of the SCA, the decision to debar lies in the hands of the DOL, not the PCO, the ACO or the Head of the Agency who issued the contract. To avoid debarment, the contractor must show “unusual circumstances” under a multi-pronged test spelled out in 29 CFR 4.188. In this regard, DOL considers:

  1. Whether the violation was deliberate, willful or the result of deliberate neglect
  2. Whether the contractor cooperated with the investigation, repaid moneys owed, and assured on-going compliance
  3. Previous investigation/compliance history and
  4. Seriousness of the violation

Contractors must remember that DOL has established no minimum monetary threshold for debarment and DOL has debarred contractors for dollar amounts that may seem small in comparison to other matters for which debarment has occurred within other agencies. It is not uncommon for DOL to initiate debarment proceedings against contractors with SCA-related back pay amounts of less than $100,000!

Even if a contractor cooperates with DOL’s investigation, promptly resolves noncompliances, and has no previous investigation history, DOL may still determine that debarment is appropriate if it believes the noncompliances were deliberate. In 2009, the Administrative Review Board affirmed a contractor’s debarment because the contractor failed to solicit guidance or clarification from the DOL despite having four contracts with wage determinations (see Charles Igwe and KSC Tri-Systems, USA, 2009 WL 4324725).

Recent cases also highlight the severe consequences of noncompliances when WHD partners with a contracting agency’s oversight function. In United States v. Barbara Ruffner, WHD collaborated with the US Postal Service-OIG on an investigation into Ruffner’s failure to pay $69,567 in SCA-related minimum wages, while nevertheless charging the Government for these wages. In July 2011, Ruffner was sentenced to 3 years probation and six months house arrest under the False Claims Act in addition to being ordered to pay restitution for noncompliances that were over a decade old.

What can you do to avoid these costly consequences? 6 Steps to Ensuring Compliance

  1. Train your employees
    Training for human resources and back office staff is important; but as important, if not more so, is training for supervisors and SCA-covered employees so understand their roles and responsibilities under the rules. The value of an accurate timesheet reflecting correct labor categories cannot be understated. Employees and their supervisors must understand their primary labor classification and the job duties covered within it. They must also understand what to do if they perform work not covered by their primary labor category. For example, if an order filler also operates a fork lift during a portion of his day, this employee must understand that it is his responsibility to segregate and report his time correctly between these two labor categories. Supervisors must understand and consider these same when reviewing and approving employee timesheets. Provide this training during the new hire on-boarding process and at least annually thereafter.

    Additionally, employees should be encouraged to ask questions and raise concerns regarding wage and fringe matters. Employers should welcome these questions and provide timely, diligent responses. Treating employees otherwise will create an environment of mistrust, thus increasing the likelihood of employees contacting DOL as a means to obtain satisfaction about their concerns.

  2. Understand the particulars of your Wage Determinations 
    Does your contract have odd or even Wage Determination? Both? How many paid holidays are included? Is work performed in multiple locations? Don’t make the mistake of assuming all Wage Determinations are the same. It’s important to read each one thoroughly and understand the requirements because there can be variations in holiday, vacation and fringe benefit payments.

    Odd numbered wage determinations, the most common type, require employers to provide a fixed fringe amount for each hour PAID, up to forty hours per week. However, even numbered wage determinations allow the contractor to comply with the fringe benefit requirement based upon the average cost of their fringe benefit plan calculated on the entire service workforce. Contributions under even numbered wage determinations are based upon total hours WORKED, excluding paid time off but including overtime.

    Geography also plays a role. Not only do wages vary by location, but fringe benefit requirements can also vary. For example, wage determinations in Hawaii require a lower fringe benefit contribution. In addition, the number of vacation and holidays to be provided can vary by location.

  3. Review your vacation policies 
    The vacation requirements of the Service Contract Act are inconsistent with the common components of many employers’ vacation policies. First, under the SCA, employees “earn” vacation in a lump sum at the end of a year of service instead of accruing it throughout the year. After each year of service, the employee is entitled to their entire vacation allotment so a policy in which an employee accrues vacation would not be compliant. In addition, SCA vacation cannot be lost under a use-or-lose policy. Upon employee termination, at contract conclusion or at the next anniversary date, all unused vacation must be paid out. SCA vacation cannot be carried over from year to year.

    Finally, the SCA makes no differentiation between full-time, part-time, or temporary employees. Vacation (and paid holidays) must be provided to part time and temporary employees, proportional to the number of hours worked by the employee. Because the requirements under the Service Contract Act vary from standard vacation policies, many employers find it easier to establish separate vacation plans for SCA employees.

  4. Review your break and relief policies 
    Recently, contractor break and relief policies have come under scrutiny. At issue, is when an employee is truly on break and thus not entitled to compensation. There are no hard and fast rules on this matter, but contractors can establish their own practice through a clearly documented and unambiguous policy. When evaluating these policies, contractors should closely examine (and then define) whether their employees are free to do as they please during break or if there are restrictions. For example, a security guard who cannot leave his location during his break because he carries a gun may be entitled to pay during that break.
  5. Know before you bid 
    As a part of the bid and proposal process, it’s critical to identify whether the contemplated contract will be SCA-covered. Few things are worse than winning a contract and then discovering later that systems are not designed for the nuanced administration of SCA payroll and benefits. Even worse is discovering that labor costs were bid at a rate less than SCA wage determinations, greatly crimping contemplated profit margins.
  6. Perform a self-assessment 
    As with any government regulation, it’s always best to self-identify any issues before the government shows up on your door step. A consistent good-faith effort and periodically assessing compliance can mitigate the impact of inadvertent noncompliances. Of course, the term “good-faith” is subjective and achieving consistent compliance is complicated by the number of employees who play important roles in SCA compliance. A robust compliance review will include a review of policies and procedures, time cards and payroll records, a mapping of labor categories to DOL job descriptions and a review of fringe benefits provided.

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