Service Contract Act: Wage Determinations and Compliance Requirements

The Service Contract Act (SCA) of 1965 (41 U.S.C. 6701-6707) requires contractors and subcontractors performing services on federal contracts exceeding $2,500 to pay service employees no less than locally prevailing wages and fringe benefits.

Purpose of SCA:

• Protect service workers from substandard wages
• Ensure fair competition (contractors can't win by underpaying workers)
• Maintain local wage standards for federal work

When SCA applies:

• Prime contracts and subcontracts for services
• Contract value exceeds $2,500
• Principal purpose is furnishing services through service employees
• Services performed in the United States

When SCA doesn't apply:

• Contracts for construction (Davis-Bacon Act applies)
• Contracts for supplies/manufacturing
• Professional/administrative employees exempt from FLSA
• Contracts with individuals (no employees)
• Work outside the U.S.

Who is covered:

"Service employees" — workers engaged in performing the contract work, excluding bona fide executives, administrators, and professionals exempt under the Fair Labor Standards Act.

The Department of Labor (DOL) issues wage determinations (WDs) that specify minimum wages and fringe benefits by job classification and geographic area.

Types of wage determinations:

Area-wide WDs:

• Cover specific geographic areas
• List occupations common to many contracts
• Updated periodically
• Most common type

Contract-specific WDs:

• Issued for specific contracts
• May include unique occupations
• Requested when area-wide doesn't cover needed classifications

Finding wage determinations:

Available at SAM.gov Wage Determinations (formerly WDOL.gov).

Using wage determinations:

• Match job classifications to WD occupations
• Pay at least the listed hourly rate
• Provide at least the listed fringe benefits (or cash equivalent)
• Apply correct geographic area

When WDs change:

New WDs apply to:

• New contracts
• Contract renewals/extensions
• Option exercises (may incorporate new WD)

Existing contracts generally use the WD in effect at award, unless options incorporate updates.

SCA requires not just minimum wages but also minimum fringe benefits — currently $4.98/hour (as of 2024, adjusted annually).

What counts as fringe:

• Health insurance
• Retirement/pension contributions
• Life insurance
• Vacation and holidays
• Sick leave

Providing fringe benefits:

You can satisfy the fringe requirement by:

1. Benefits in-kind — Actually providing health insurance, retirement, etc. valued at required amount
2. Cash equivalent (H&W) — Paying additional cash equal to fringe requirement
3. Combination — Mix of benefits and cash

Health and Welfare (H&W) rate:

If you don't provide benefits worth $4.98/hour, you must pay the difference as additional wages. Many contractors pay the full H&W amount as cash, especially for low-hour employees.

Calculating fringe value:

• Employer contribution to health insurance (per hour worked)
• Employer 401k match
• Paid leave value
• Other qualifying benefits

Documentation:

Maintain records proving you provide required fringe value. DOL audits verify both wages and fringes.

Matching employees to WD classifications:

Each WD lists job classifications with corresponding wages. You must:

• Match each employee's actual duties to the appropriate classification
• Pay at least the listed rate for that classification
• Not artificially classify employees in lower-paid categories

When classifications don't match:

If your workers don't fit any WD classification, request a conformance:

1. Identify the job duties not covered
2. Request DOL add a classification
3. DOL determines appropriate wage rate

Conformance process:

• Submit request through contracting officer
• Provide job description and proposed rate
• DOL reviews and issues determination
• Until approved, pay closest comparable rate

Common classification issues:

• Using generic titles that don't match WD language
• Misclassifying skilled workers as lower-level
• Failing to account for actual work performed

Multiple classifications:

If an employee works in multiple classifications, pay the higher rate when performing higher-classified work. Track time by classification.

Impact on labor rates:

SCA sets a floor, not a ceiling. Your pricing must account for:

• SCA minimum wages (may exceed your normal pay for some positions)
• Fringe benefit requirements (H&W rate)
• Paid sick leave requirements (Executive Order 13706)

Common pricing mistakes:

• Using company rates lower than WD rates
• Forgetting H&W fringe requirement
• Not accounting for paid sick leave mandate
• Ignoring geographic rate differences

SCA price adjustments:

FAR 52.222-43 provides for contract price adjustments when:

• DOL issues a new or revised WD
• Changes affect your actual labor costs
• Adjustments must be requested

Don't assume automatic adjustments — you must track WD changes and request increases.

Competitive considerations:

• All compliant bidders face same SCA minimums
• Competition occurs above the floor
• Efficiency and productivity differentiate
• Underbidding SCA costs is a compliance trap

Required contract clauses:

SCA contracts must include FAR 52.222-41 (Service Contract Labor Standards). This clause:

• Incorporates the wage determination
• Establishes compliance obligations
• Provides for enforcement

Contractor obligations:

• Pay required wages — At least WD rates for each classification
• Provide fringe benefits — H&W rate through benefits or cash
• Post the WD — Conspicuously at the worksite
• Maintain records — Payroll records for 3 years
• Submit payrolls — If required by contract
• Flow down to subs — Subcontracts must include SCA requirements

Record-keeping requirements:

• Employee name, address, SSN
• Job classification
• Wage rate and fringe benefits
• Hours worked daily and weekly
• Deductions
• Total wages paid

Posted notice:

Display WH-1313 (Notice to Employees Working on Government Contracts) at work sites.

Who enforces SCA:

The Department of Labor's Wage and Hour Division investigates complaints and conducts audits.

Investigation triggers:

• Employee complaints
• Random audits
• Competitor complaints
• Contracting officer referrals

Penalties for violations:

Back wages:

• Pay employees the difference between what was paid and what was owed
• Plus interest
• Can cover multiple years of underpayment

Contract remedies:

• Withholding of contract payments
• Contract termination
• Funds held for back wage payment

Debarment:

Repeated or willful violations can result in debarment — exclusion from federal contracts for 3 years.

Criminal penalties:

Intentional violations can result in fines and imprisonment.

Common violation findings:

• Underpayment of required wages
• Failure to pay H&W fringe
• Misclassification of employees
• Inadequate record-keeping

Successor contractors:

When you take over an SCA contract from another contractor, you may be required to offer employment to predecessor employees at rates no less than they were receiving (successor contractor provisions).

Executive Order requirements:

Additional requirements beyond basic SCA:

• EO 13706 — Paid sick leave (1 hour per 30 hours worked)
• EO 14026 — Minimum wage ($17.20/hour in 2024, adjusted annually)

These apply to SCA-covered contracts and may exceed WD rates.

Exempt employees:

Bona fide executives, administrators, and professionals may be exempt from SCA. Tests for exemption:

• Salary basis test (currently $684/week minimum)
• Duties tests (must perform exempt-type work)

Don't assume exemption — misclassification is a common violation.

Part-time and temporary workers:

• All hours worked count for SCA purposes
• Fringe benefits apply (including to part-time)
• No exemption for short-term employment

Subcontractor compliance:

You're responsible for ensuring subcontractor compliance. Flow down requirements and monitor their compliance.