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Time for a pulse-check: How healthy is your compliance with SCA?

While seemingly simple on its face, contractor compliance with the Service Contract Labor Standards, formerly known as the Service Contract Act (SCA), is often more challenging than anticipated. (At Baker Tilly, we are old school and prefer the simplicity of “SCA”, so we are sticking with it.) The intent of the SCA regulation is simple, pay service employees a federally mandated minimum wage and benefit amount. However, the reality of complying with the SCA is anything but simple; it requires fluid collaboration between accounting, finance, contracts, human resources, operations and legal departments.

When Congress created the SCA in 1965, the service contracting environment looked very different than it does today. In 1965, service contractors were dedicated to a single contract and typically a single location. Technological influences have changed the landscape. There are more opportunities for SCA employees to work remotely and on different types of work. SCA employees often work on multiple contracts, some of which may not be SCA covered. Each of these factors complicate contractor compliance.

Consequences of non-compliance can be harsh, ranging from issuing employee back payments, to contractor suspension or worse, debarment. In 2019, the Wage and Hour Division (WHD) reported back pay amounts specifically related to SCA noncompliances to be $64.9 million, more than double the amount reported five years ago. In addition to federally enforced consequences for non-compliance, a company must also consider their public perception. A contractor caught not paying their employees federally mandated minimum wage and benefits will quickly fail the front-page news test.

What are contractors who are subject to a complex regulation, which is receiving increased audit attention to do?

Responsible contractors should first perform a self-review of current practices as a preventative measure. By looking closely at their policies, procedures, and workflows contractors will highlight risk-prone areas. The cornerstones of an SCA self-review are identification of covered contracts and identification of covered employees. Seem easy? Not so fast…

Identify covered contracts. A contract is only subject to SCA if both the FAR clause 52.222-41 and at least one wage determination (WD) is referenced or attached within the award. All too often, contractors in an attempt to be responsible, utilize the most recent WD found on the website. However, in reality the mechanics of the SCA require the contracting officer (CO) to include the appropriate WD within the contract. Meaning, the only WD applicable to a contractor is the one included in their contract. WDs can be updated multiple times during the year, identifying WDs proactively creates an administrative nightmare. It also creates financial disincentives for contractors who can only process contract price adjustments when the contracting officer modifies their contract. Depending on the size and makeup of the SCA employee population, this could have a massive impact on the bottom line.

Identify covered employees. Not every employee who works on a covered contract is automatically subject to the SCA. Contractors must understand which employees are covered and which are exempt. Best-practices dictate the maintenance of a master mapping file, which maps all internal job positions to either an SCA exemption or SCA job position. Mapping internal labor positions to the U.S. Department of Labor's (DOL’s) Directory of Occupations is an art, not a science. Maintaining documentation related to the determination of employee coverage and labor category assignments significantly reduces risk, should DOL come knocking.

Identification of covered contracts and covered employees is only the foundation of a thorough self-review but it’s a good start. Once contractors understand their coverage and SCA exposure, they can design processes and procedures to maintain compliance and limit risk. Deep dives and remedial action plans may be needed for specific practices, policies, procedures, or communications. SCA compliance takes a village and a thorough internal review is a good start toward minimizing risk. If you are concerned about your SCA compliance, contact us and let’s talk about how we can help.

Concept: business strategy, leadership
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