Service Contract Act Part 3 - Common SCA Compliance Problems & Solutions

Lack of clear understanding SCA holiday and H&W requirements

• Paying more than required wages DOES NOT offset the H&W fringe benefit requirement or vice versa
• Extra vacation days earned by employees DOES NOT count towards the required holidays

Taking credit for benefits that do not satisfy the H&W fringe benefit requirement

• Ineligible benefits include payments such as FICA, worker's comp; paid / sick leave required by CBA, WD, or applicable law
• Eligible benefits include health, dental, life, AD&D, disability, vision, 401(k) plan employer contributions, ESOP, severance pay plans, cash paid in lieu of benefits

Not providing H&W to temporary or part-time employees

• ACA may not require medical coverage to be offered i.e., for employees working less than 30 hours a week
• Employer must provide H&W based on hours earned including (vacation, accident, critical illness, military leave, etc.); retirement and cash are common

Not providing proportionate fringe benefits

• Managing different fringe rates and different full-time hours
• $4.23/hr vs.$4.80/hr combined with hours difference (i.e. 32 weekly hours vs 40 weekly hours) creates need for plan flexibility in providing a proportionate benefit
• Medical premiums are fixed regardless of full-time hours, but an SCA employee's hours vary

Not implementing a proper timekeeping & payroll recordkeeping system

• Captures original contract hire date, and company hire date to handle complex SCA requirements, especially if:
  • Employees frequently move between SCA and non SCA projects
  • Employees work in more than one location with varying H&W rates
  • Employees change pay rates or positions during the year

Not funding the H&W fringe benefit on a timely basis

• Cash payments in lieu of fringe benefits must be paid within one payroll period of being earned
• Payments into bona fide fringe benefit plans , such as, 401(k) plans must be made no less often than quarterly

Not amending retirement plan

• Modify retirement plan to permit prevailing wage contributions if employer contributions will be made into the retirement plan; qualified non elective contributions (QNECs) subject to prevailing wage

Failing to manage multiple rates on multiple contracts and annual adjustments correctly

• DOL adjusts H&W fringe rate annually
• Some contracts have escalation clauses; some don't
• Employer responsibility to know which and to handle appropriately

Failing to manage employees subject to executive order (EO) on sick leave properly

• DOL provides two H&W fringe rates
  • Lower rate for employees subject to EO on sick leave; and
  • Higher rate for employees not subject to sick leave
• If employees are subject to sick leave, AND the employer uses the higher rate, the employer may NOT deduct sick leave from the H&W fringe

Crediting employee's seniority based on when company "won" contract vs. how long employee has been on the contract

• Contract hire date is used for vacation and seniority
• Company hire date is used for EEOC reporting

Failing to continue employer sponsored payments during a qualified Family Medical Leave (FMLA) event

• Employers are required to continue paying the employer portion of benefits paid by the H&W when an employee goes out on FMLA
• The employer may NOT recoup any payments from future H&W earnings, nor may the employer use future employee deductions to recoup any payments; this is a financial business risk of SCA
• H&W used to pay for employer sponsored coverage is considered an employer contribution

Believing a collective bargaining agreement (CBA) overrides ACA, and CMS

• Secondary payer rules still apply (see SCA vs. Medicare)
• No CBA provision can waiver requirements of the ACA
• Cash-in-lieu
  • Many CBAs require or stipulate that cash in lieu is offered
  • Affordability penalty of ACA still applies
  • CMS restrictions for Medicare eligible employee still apply

Not Handling eligibility requirements correctly

• ACA states 30 hours or more per week is considered full time
• All full-time employees must be offered qualifying AND affordable coverage
• Many CBAs define fulltime with a different hour requirement
• That is acceptable for accruing vacation, sick time, pay increases, etc.
• That is NOT acceptable for ACA eligibility

Scenario

• 200 person IT technology firm
• Bidding on DOE contract, 100 FTEs, 50% FTEs are covered by SCA.
• 90% of incumbent SCA staff from previous contract will be retained
• All SCA staff will work on the client's site

Challenge

• No prior experience pricing SCA contracts
• Two existing benefit plans (Exempt & Nonexempt) ... No existing SCA benefit plan
• Inadequate timekeeping system to handle sick leave accrual and vacation grants on employee anniversary date

Solution

• Map staff to the appropriate WD labor categories. Utilize the WD wage rates to estimate salaries for proposal pricing
• Implement SCA fringe benefit package designed to meet the H&W
• Implement vacation and sick leave policy in timekeeping system for incumbent SCA staff based on length of service (LoS). Adjust LoS for previous DOE contract service.
• Use client-site overhead rate to compute billing rate for pricing SCA labor categories
• Review timekeeping and payroll system to ensure they can track hours and H&W information needed to verify compliance.

Outcome

• Submitted a very competitive price and won the contract

Scenario

• 100 person IT technology firm
• Awarded a 5-year SCA subcontract (39 FTEs).
• Existing benefit plans for Exempt and Non-Exempt

Challenge

• Unclear about compliance requirements (WD wage rate and H&W requirements)
• Paying some employees more than the WD wage rate
• No SCA specific benefit plan in place
• Inherited employees from prior contract with carryover vacation balances
• Previous contractor accrued vacation rather than comply with vacation grants
• Contract contains FAR Clause EO 13706 regarding sick leave

Solution

• Setup appropriate timekeeping system to accrue sick and provide vacation grants based on employee length of service using adversary date
• Resolve the issue with carryover vacation ... providing incumbent one-time payout
• Communicate with the employee how vacation will be handled on new contract
• Establish SCA benefit plan to meet H&W requirement ... use EO H&W rate for compliance verification.
• Perform quarterly compliance verification (exclude cost of sick leave) in benefit calculation
• Develop plan to handle employee being paid more than the WD wage rate (re-classify to new job categories, transition to non-SCA work, or transition out)

Outcome

• Loss money on SCA work during the 1^st & 2^nd year of performance ... once the SCA benefit plan in place and executed plan to handle employees being paid more than WD wage was profitable in 3 ^rd year.

Scenario

• 700-person services firm.
• 68 SCA employee on 5 contracts
• Provide cash-in-lieu and company sponsored benefits with employer contribution
• No SCA specific benefit plan

Challenge

• Offered SCA the same benefit package as non-SCA
• Company never calculated the profitability impact on the contract
• Complete cost analysis and determine they were paying $225k more than required H&W amount
• Worker compensation costs were an extra $75k a year
• The contract was unprofitable as a result

Solution

• Eliminate cash as an option
• Create benefit plan for SCA employees
• Develop communications plan to sell new SCA plan

Outcome

• Saved $320K annually across all 5 contracts

Scenario

• 158-person services firm providing warehousing support
• 60 employees on a SCA contract ... on 3 contracts
• 50% of SCA covered employees working between 32-40 hours per week
• Provided cash-in-lieu and company sponsored benefits with an employer contribution

Challenge

• Benefits costs exceeded actual H&W allowance earned between $12,270-14,725 monthly
• The company never calculated the financial implication

Solution

• Create benefit plan for SCA employees
• Eliminate cash as an option, contribute excess fringe to a QNEC
• Customize communications and FAQ for employees

Outcome

• Stop losing money due to exceeding H&W

Scenario

• 500-person technology firm
• 280 employees on 5 SCA contracts
• Provided cash-in-lieu
• Allowed any person to opt out for any reason

Challenge

• Employee needed H&W rate paid as cash to pay bills
• Less than 200 employees took the medical plan
• Insurer decline to quote due to low participation of less 50%

Solution

• Improve communications during open enrollment period
• Implement automatic enrollment plan ... employee action required to opt out

Outcome

• 1^st year - enrollment increased to 75%
• Create ability to offer more diverse benefit package, include one specially for SCA

Scenario

• 2000-person government firm
• Mix of executive, professional, SCA, hourly (non-SCA)
• 1500 full-time & 500 part-time (most retired military with health insurance)
• Variable hours, variable H&W

Challenge

• Tracking hours and H&W benefits
• Providing different benefit packages to different employee class (Exempt, Hourly, SCA...)

Solution

• Created customized RFP for PEO Providers based on key client criteria (benefit packages, price, employee portal, administrative service)
• Provided RFP to PEO providers (ADP, PayChex, JustWorks, TriNet, Insperity )

Outcome

• Down selected to top 3 for final selection
• Final PEO selection based on client criteria