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Government Contracts Monitor

DOL Increases SCA Minimum Health & Welfare Fringe Benefits Rate to $4.41/hr, Effective August 1, 2017

August 3, 2017

The U.S. Department of Labor (DOL), Wage and Hour Division recently issued All Agency Memorandum No. 225, increasing the basic minimum Health and Welfare (H&W) fringe benefits rate applicable to service contracts under the Service Contract Labor Standards statute (formerly known as, and hereinafter referred to as, the Service Contract Act (SCA)) to $4.41/hr vs the former $4.27/hr -- i.e., an increase of $0.14/hr.  DOL also has established a new benefits rate applicable to contractors in Hawaii who are separately providing health benefits under Hawaii law.

These increased rates are now being reflected in all new Wage Determinations ("WDs") issued starting August 1, 2017. Of course, and as you may know, new WD wages and benefits rate increases are not self-implementing.  Contractors therefore should not pay increased rates until new WDs, incorporating the increased rates, are incorporated into the respective contracts.  Such incorporation will obligate the Government, under the SCA Price Adjustments clause (FAR 52.222-43), to reimburse the contractor for the higher associated costs.  Of course, as a contractor's various contracts are renewed via option exercises or otherwise, the contractor should be sure to notify the respective Contracting Officers as to the new rates so that they remember to incorporate updated WDs with the new rates up-front.  This enables the contractor to avoid painful and time-consuming after-the-fact back pay adjustments.  Contractors also should keep an eye on any new SCA-covered solicitations as to which they may be bidding, to ensure that the solicitations include updated WDs incorporating the new rates, and submit Q&As, or otherwise notify the procuring agencies as to any needed WDs updating.

In an interesting and unexpected twist, the All Agency Memorandum also establishes a new, lower, $4.13/hr H&W rate for contracts subject to the new Paid Sick Leave requirements, which kicked in for contracts under new solicitations issued after January 1, 2017 (see our prior discussions here, here and here). Executive Order 13706 and the implementing regulations at FAR Subpart 22.21 provide that the costs of the new paid sick leave benefits are in addition to and may not be offset against existing SCA benefits obligations.  This effectively meant double-paying for sick leave, since sick leave was always a component of the H&W benefits.

In a surprise twist, DOL has recognized this redundancy, and professing a need to "comply" with the Executive Order, has established a new, lower, H&W rate deleting the sick leave component for contracts incorporating the new paid sick leave requirement. This makes logical sense, and is something that likely could happen only under a Trump Administration, but is of questionable legality and certainly does not appear to be necessary to "comply" with the Executive Order.  Importantly, should a company that had already been providing paid sick leave and paying the current $4.27/hr actually reduce its H&W payments under the new WDs, such could have two adverse impacts: (1) employees receiving cash in lieu would notice a "pay" reduction and be unhappy, and (2) the contractor might be subject to a downwards contract price adjustment.  Keeping in mind that SCA-specified benefits are "minimums," it might be easier and simpler to maintain the current higher $4.27/hr benefit for any such employees until a higher rate kicks in somewhere down the road.

The bottom line is that contractors need to be aware of the announced new H&W rates, and ensure that updated WDs incorporating such rates are properly incorporated in current service contracts at the time of any future renewals, and that new solicitations on which the company may be competing incorporate these new rates as appropriate.

 Hopewell Darneille is responsible for the contents of this Article.
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