SCA Compliance: The Cost of Getting It Wrong

For federal contractors, winning a Service Contract Act (SCA)-covered contract is only the beginning. Maintaining compliance throughout contract performance requires ongoing attention to wage determinations, employee classifications, health and welfare benefits, payroll practices, timekeeping, record retention, and subcontractor oversight.

A seemingly small payroll or recordkeeping mistake can become a much larger problem when repeated across multiple employees and multiple pay periods.

Under the McNamara-O'Hara Service Contract Act, contractors and subcontractors performing covered federal service contracts generally must pay service employees no less than the wages and fringe benefits required by the applicable Department of Labor Wage Determination.

But paying the correct hourly wage is only one part of SCA compliance.

One of the most frequently underestimated areas of SCA compliance is recordkeeping.

Contractors must maintain records supporting employee classifications, wage rates, fringe benefits, hours worked, compensation and other required information. Department of Labor guidance generally requires applicable SCA employment records to be maintained for three years following completion of the work.

Health and Welfare (H&W) benefits require particular attention. When an employer uses cash payments to satisfy an H&W obligation, the records must distinguish the amount paid toward the employee's regular wages from the amount paid to satisfy the fringe benefit requirement. The Department of Labor specifically warns that failure to maintain this separation can result in a finding that some or all of the required fringe benefit was not paid.

This means that an employer may believe it paid an employee correctly and still have difficulty establishing compliance if its payroll and supporting records do not properly document the payment.

Timekeeping presents another significant area of exposure. When employees perform both SCA-covered and non-covered work, contractors should accurately identify and segregate the time spent performing covered contract work. Where adequate records do not exist, Department of Labor rules can create unfavorable presumptions regarding which hours were SCA-covered.

Some of the most common issues identified by the Department of Labor include:

• Incorrect employee classifications or use of the wrong Wage Determination
• Failure to pay required wages or fringe benefits
• Improper or untimely fringe-benefit payments
• Payroll records that fail to distinguish wages from cash H&W payments
• Failure to properly track SCA-covered versus non-covered hours
• Improper treatment of employees as exempt from SCA requirements
• Failure to use the required conformance process for classifications not included in the Wage Determination
• Inadequate employee notification and required postings

These are not merely administrative deficiencies. They can create substantial financial and contractual exposure.

SCA violations can result in the withholding of federal contract payments to cover wage and fringe-benefit underpayments, recovery of back wages, contract termination, liability for resulting costs to the Government, and debarment from future federal contracts for up to three years.

The financial impact can become significant very quickly.

In one Department of Labor investigation, a government subcontractor paid more than $1.5 million in back wages to 209 employees after workers were classified and paid as computer operators when their actual duties corresponded to a higher-paying SCA classification.

In another enforcement action involving hurricane-recovery services in Puerto Rico, Department of Labor investigations resulted in the recovery of approximately $5.58 million in back wages and benefits for 993 employees. The violations involved nine subcontractors and included failures involving required SCA fringe benefits and worker classifications.

Other cases have resulted in three-year federal debarments.

The lesson is straightforward: SCA mistakes scale.

A relatively small hourly shortage multiplied by dozens — or hundreds — of employees, over months or years of contract performance can become a substantial liability.

Prime contractors should pay particular attention to subcontractor compliance.

SCA requirements apply to covered contractors and subcontractors, and applicable SCA contract clauses must be flowed down to covered subcontractors.

For a prime contractor, simply inserting the required language into a subcontract should not be the end of the compliance process.

A strong SCA compliance program should include procedures for verifying that subcontractors are actually meeting their contractual obligations.

That can include reviewing:

• Wage Determinations and classifications to confirm employees are mapped to the appropriate labor categories and geographic Wage Determination
• Payroll and timekeeping records to verify employees are receiving the appropriate wages and that hours can be reconciled to payroll
• Health & Welfare calculations to ensure H&W obligations are being satisfied correctly and properly documented
• Vacation and holiday requirements to verify required benefits are being administered according to the applicable Wage Determination
• Cash-in-lieu practices to ensure payments are calculated, paid and recorded correctly
• Subcontract flow-down provisions to confirm required SCA clauses have been incorporated into applicable subcontracts
• Ongoing compliance reviews rather than waiting until an audit, employee complaint or Department of Labor investigation identifies a problem

One of the best opportunities to prevent SCA problems occurs before contract award.

Business Development, Finance, Payroll, Human Resources and Contracts teams should understand the applicable Wage Determination before finalizing pricing.

A proposal that underestimates wages, H&W obligations, vacation, holidays, payroll taxes or other applicable labor costs can create a problem that does not disappear simply because the contract was priced incorrectly.

Once the contract is awarded, HR and Payroll must then ensure that what was proposed and what the contract requires are translated correctly into employee classifications, offer letters, payroll codes, benefits administration and timekeeping practices.

SCA compliance therefore should not belong exclusively to HR or Payroll.

It is an organization-wide government-contracting responsibility.

Bellatrix HRM works with government contractors to help establish and maintain practical SCA compliance programs before problems become costly.

Our support can include:

SCA Compliance Audits — Review payroll, employee classifications, Wage Determinations, H&W calculations, vacation and holiday practices, timekeeping and supporting documentation.

Subcontractor Compliance Reviews — Independently review subcontractor SCA practices and supporting records to help primes identify potential exposure within their subcontractor network.

Wage Determination & Classification Reviews — Evaluate labor classifications against actual job duties and applicable Wage Determinations.

H&W and Payroll Reviews — Examine how fringe-benefit obligations are calculated, paid and documented within payroll systems.

SCA Pricing Support — Assist Business Development and Finance teams in identifying SCA-related labor costs before proposal submission.

Policies, Procedures & Recordkeeping — Develop practical processes for HR, Payroll, Contracts and Operations teams to maintain appropriate documentation throughout contract performance.

Training — Provide SCA compliance training tailored to HR, Payroll, Finance, Contracts, Business Development and operational leadership.

For prime contractors, Bellatrix can also establish a subcontractor SCA compliance review program, providing an additional layer of oversight designed to identify issues before they become findings.

SCA compliance is considerably easier — and typically far less expensive — to correct proactively than after a Department of Labor investigation, employee complaint, contracting officer inquiry or payroll audit.

The question government contractors should be asking is not simply:

"Are we paying our SCA employees correctly?"

It should be:

"Could we prove that we and our subcontractors have been compliant for every employee, every pay period, throughout the contract?"

If the answer is uncertain, it may be time for a compliance review.

Bellatrix HRM Inc. provides government contractors with SCA compliance audits, subcontractor reviews, HR and payroll compliance support, training, and federal contracting workforce solutions.

This article is provided for general informational purposes and is not legal advice. Contractors should consult qualified legal counsel regarding specific legal or regulatory matters.