The Government Contractor’s Guide to Service Contract Act (SCA) Compliance

Government Contracting Today = Difficult

Being a government contractor has always been complicated, but in the last few years, it seems as though the government is almost determined to make it harder than ever. 

In recent years, as much as, 78% of contractors audited by the DOL were found to be non-compliant. It is no wonder that random audits (which almost never happened before) are now nearly half of all the audits that take place.

Contractors must remain vigilant about their compliance by regularly assessing internal systems/processes and staying up-to-date with current government rules and regulations.

In order to help contractors get a better understanding of Service Contract Act (SCA) compliance, AXIM Fringe Solutions Group created this compliance guide.

Would You Be 100% Compliant if Audited by the DOL?

Do you know exactly how your compliance system works?

How often do you periodically check (self-audit) your compliance?

If you do your compliance internally, regular inspections every 3-6 months is a good idea.

Also remember, when it comes to compliance reporting, making a mistake isn’t necessarily wrong, but not fixing it is. When you find errors, correcting them right away will save you in the long run.

Labor Categories: Are Your Workers Correctly Classified?

Labor Categories are a way to determine how much a worker is to be paid on a job. By classifying the different types of workers and their corresponding wages, the government can outline what each level and type of worker will be paid on that job.

However, it is not as straightforward as it seems. Employees can work multiple labor categories in a day, and not every job may have an easily identified category. Contractors are left having to guess what should be paid and hope it’s correct.

If you cannot prove the different hours an employee worked for each different labor category the government will make you pay ALL the hours at the highest wage rate. It’s similar to losing your ticket on a tollway, you end up paying the largest toll because you cannot prove otherwise. These fines can add up quickly.

Base Wages: Are You Paying Proper Wage Rates?

There are a number of tricky factors that go into figuring out the base wage, Contractors need to pay particular attention to it as the DOL focuses heavily on base wages during an audit/investigation.

Despite the fact they consider base wages to be so important, the DOL doesn’t make it easy. Who is the employee and do they have specific trade certification or license? What type of equipment are they using? All of these are factors in determining the correct base wage for an employee.

*A Note About 'Place of Performance'

Base wages are calculated on the idea that a worker’s pay should reflect the cost of living in that area. So changing locations can complicate things. In some situations, there are even “invisible borders” within cities that will change wage rates on top of county and state lines.

Taking that one step further, if your company adds a new office, a new warehouse or an employee starts working from home… that changes their location and thus, their base wage could change as well.

Make sure you stay on top of changes as DOL auditors tend to look closely at base wages.

Is You Fringe Rate Up-to-date?

A common mistake contractors make regarding fringe rates is that they believe it’s “locked in” (static) by the contract. The SCA guidelines are VERY clear about this. Contractors should almost always be paying whatever the current fringe rate is.

The only way a contractor wouldn’t need to update their contract is if they were given expressed written permission (DOL). Without the contract officer’s go-ahead, paying a lower fringe rate is unacceptable. Furthermore, in re-bidding situations, if you’re not paying current fringe rates… that’s the kind of thing that gets held against you. It might even prevent you from keeping your contract.

The rate is often changed right around July but can be changed at any time. Make sure that you are paying the current fringe rate. The cost of tracking down and employees and pay them what you owe (fringe dollars), sometimes years later, is much more costly than it seems.

*A Note About 'Subcontractor Compliance'

In govcon, using subs is almost as unavoidable as death and taxes. However, smart contractors know using subs can help speed up projects, perform intricate tasks, or simply do the things that you don’t want to do yourself. Not to mention the fact it’s a great way to save on costs.

The Service Contract Act (SCA) states it’s the responsibility of the prime contractor to ensure that “every single worker” that set foot on the job (including subcontractors) were paid the correct wage and fringe rate as set by the contract regardless of who the employee works for.

We know many prime contractors who love everything about working with their subs, except for their compliance. Government compliance is difficult enough with one party doing it, let alone two.

If a subcontractor is found to be in non-compliance (DOL audit), the prime contractor is at fault. They take the performance record hit along with back wages and/or additional penalties. In other words, prime contractors better ensure their subs are compliant because it’s their butts on the line.

There’s also the additional administrative burden on your staff to review the subcontractor’s compliance ensuring it’s been done properly. What we hear from government contractors all the time is that their compliance is the worst part of using them as a sub.

The best strategy is to work with subcontractors that perform quality work and take government compliance seriously. Be sure to examine their compliance before putting them on the contract.

Cash-in-lieu of Benefits = Competitive Disadvantage

Cash fringes are an “easy way” to handle your compliance reporting compared to providing fringe benefits. It takes little time and resources on behalf of the contractor.

However, they pay a lot for that simplicity and ease. Cash-in-lieu of benefits also increases a contractor’s tax burden (FICA, Workers Compensation, and other taxes). A simple, but an expensive solution in a landscape where profit margins are shrinking.

Being outbid on a contract or renewal is not the only negative impact of using cash fringes.

*A Note about Cash-in-lieu of benefits & the ACA

While the Department of Labor allows contractors to provide cash-in-lieu of benefits on SCA contracts. That very same cash fringe could become an issue under the Affordable Care Act (ACA).

For example, let’s say you provide cash fringe instead of benefits and one of your employee’s purchases health care coverage on their own. You may be found in non-compliance for not providing the correct minimal amount of health care coverage under ACA guidelines.

It gets worse. What you might not know is that a small ACA violation can lead to a full DOL investigation/audit of all your contracts. While cash fringes meet SCA compliance requirements, it might not work for ACA compliance.

The government is “strongly encouraging” contractors to start providing benefits for their fringes. The good news is that contractors now have new fringe benefit options that solve a growing problem.

Maximizing Fringes to Build Better Rates & Win More Bids

Through new bidding regulations, the government is forcing contractors to be more efficient.

Did you know compliance reporting and fringe benefit administration is considered a “bona fide” fringe benefit?

Don’t feel bad, most contractors aren’t aware.

By using fringe dollars to pay for compliance and fringe administration, contractors can lower their overhead and G&A cost. This in turn yields increased contract profitability and more competitive bidding/pricing.

Attracting & Retaining Skilled Workers

For most contractors today, good help is hard (if not impossible) to find. Many in the SCA space are struggling to find skilled workers and raising wages to combat the rising tide.

This is where a better benefits package can truly help. Your fringes, properly managed, can deepen your offering of benefits to your employee. Accident and disability coverages among other premium benefits are strong recruiting and retention tools.

AXIM saw a critical need to diversify the benefits that contractors could offer their employees. So we made it possible to give employees coverages like Accident, Life, Disability, Critical Care, and even supplement their Tri-Care coverage. Premium benefits- paid for by fringes.

Best of all the employees have a choice in which benefit they select to be their fringe. Allowing them to customize benefits to suit their needs, and have a say in their own compensation.