Vacation Pay and the Service Contract Act — Are You Compliant?
The McNamara-O’Hara Service Contract Act (SCA) requires contractors and subcontractors performing services on federal contracts valued in excess of $2,500 to pay their contract employees no less than the wage rates and fringe benefits found prevailing in the locality for the employees’ positions. The U.S. Department of Labor (DOL) issues wage determinations (and periodic updates) that spell out the hourly wage and fringe benefit rate for various classes of employees, along with identifying other required benefits, such as vacation and holidays. C2 routinely helps clients administer their HR function under SCA contracts, so it was no surprise when our team got a call from an ecstatic client who had just won its first SCA contract and would need to hire over 100 employees who were serving as incumbent staff for the predecessor contractor. Our client thought they had struck gold: winning a contract AND being able to simply transition existing staff to their payroll. If only it were that easy! The SCA presents a host of compliance pitfalls for unwary contractors — not the least of which is the proper management of employees’ benefits.
Getting Started
SCA contracts differ administratively from your “run of the mill” government contract. Did you know, for example, that Executive Order 13495 requires winning contractors (with limited exceptions) to provide the predecessor’s incumbent staff with first right of refusal to keep their position on the new contract before hiring new workers? Did you also know that the wage determinations for each SCA covered position are supposed to be attached to the contract by the agency contracting officer? (You would be surprised how often that fails to happen.) Are you aware that you have to post a specific DOL poster regarding the SCA in a conspicuous place and post copies of the applicable wage determination(s)? Do you know the difference between and Odd and an Even wage determination? And this is just the beginning. Once you onboard your SCA employees, you then have to figure out how to administer their benefits….one of which is vacation.
Anniversary Date and Vacation Accrual
Vacation benefits are tied to an employee’s contract anniversary date or length of service on the contract. An employee’s yearly vacation allotment is given in one lump sum on the employee’s contract anniversary date. Service dates on SCA contracts include all of the time that the employee supported the contract, regardless of the contractor(s) for whom the employee worked. As part of the contract award process, the predecessor contractor has ten (10) days to provide the winning contractor with the incumbent staff’s service dates (29 C.F.R. 4.6(l)(2)). But what if the predecessor fails to do this; does the successor have an obligation to honor the original service date even if they have no way to validate it? The answer is yes. Pursuant to 29 C.F.R. 4.173(d), a contractor is obligated to provide vacation benefits…even if it cannot obtain accurate service dates from the predecessor or the government client. In that case, contractors may ask the employees directly for their original hire date or service date on the contract and do their best to accurately estimate the employee’s anniversary date. Contractors that hire the predecessor’s incumbent staff are also obligated to provide a full year’s vacation accrual on the employee’s anniversary date — regardless of when the employee began work for the new contractors. For example, an employee who previously performed contract work for the predecessor at the same facility was first hired on March 1, 2014. March 1st becomes the employee’s anniversary date. The predecessor’s contract ended February 15, 2016, but the employee continued working on the contract for the successor. On March 1, 2016 the employee is entitled to their full annual vacation benefit; and the successor contractor would be liable for the full amount of the employee’s yearly vacation benefit, even though the employee had only been working for the successor for a few weeks.
Prior to awarding the vacation balance, the contractor must also cash out the employee’s unused vacation balance from the prior year, because an SCA employee’s balance may not exceed their annual accrual amount (29 C.F.R. 4.173(c)-(d)). And if all this is not enough of an administrative nightmare, contractors must also consider service regulations related to temporary interruptions of service. For example, a contractor experiences a reduction in force (RIF) on their SCA contract, and the contractor therefore releases a certain number of employees from the contract. Three weeks later, a staff member who was retained during the RIF voluntarily resigns. The Project Manager decides to recall one of the recently RIF’d staff members back to the contract. How is the service anniversary date of the employee affected? Under the Federal Acquisition Regulations (section 52.222.41), an employee who was separated from the contract due to a lack of work or layoff must have their service date maintained if they are recalled and have been separated from the contract for less than sixty (60) days. Additionally, if the employee was on layoff at the time of their anniversary date and is later recalled within that sixty (60) day window, the contractor must deposit the annual vacation amount into their bank upon reinstatement.
What About Part-Time and Temporary Employees?
Part-time employees are entitled to receive Health and Welfare dollars even if they are not eligible for benefits. Although part-time employees may not be eligible for your company sponsored benefits such as medical, dental, vision or other lines of employer sponsored coverage, the SCA (29.C.F.R. 4.165(a)(2)) makes no distinction between temporary, part-time, and full-time employees. Therefore, wage and fringe requirements would apply to all SCA employees working on the contract, regardless of their full or part-time status.
However, part-time and temporary employees only receive benefits proportionate to the hours worked on the contract (29 C.F.R. 4.176). The calculation of vacation hours requires the contractor to look back to the year preceding the vacation deposit into the employees paid time off bank. For example, a part time employee who works an average of 20 hours per week after one year of continuous service is entitled to 50% of the annual accrual since they worked 50% of the available working hours. Therefore, if a full-time employee working forty (40) hours per week receives forty (40) hours of vacation annually, the part-time employee working an average of twenty (20) hours per week would receive twenty (20) hours of vacation annually.
Paid holidays identified in the Wage Determination for the contract must also be provided to all employees in support of the contract, whether full-time, part-time or temporary. The number of holiday hours paid for the part-time and temporary employees are also determined by looking back at the hours worked during the workweek preceding the holiday. The average number of hours worked in a day in the preceding work week would be the number of holiday hours the part-time or temporary employee would be entitled to receive (29 C.F.R 4.176(a)(3)).
Needless to say, our client’s head was spinning when we got through discussing these issues. But as we told them, SCA contracts are nothing to fear — you just have to know how to administer them. Most of the relevant SCA information will be outlined in the contract at award by the agency and/or provided by the predecessor contractor (or your prime contractor, if you are a sub). However, at the bid and procurement stage of the process, contractors may have to dig a little to find out this information, but the extra work can be well worth it. Making accurate cost projections with respect to your workforce can be critical in not only winning an SCA contract, but being able to turn a profit, and maintaining compliance with SCA pay and fringe benefit requirements that differ (often markedly) from other government contracts and the private sector.
C2 provides strategic HR outsourcing to clients who want to develop optimal workforce strategies and to allow them to be more competitive and profitable. C2 blog posts are intended for educational and informational purposes only.
Originally published at https://www.c2essentials.com on August 9, 2016.
