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

Written by Ron Lewis | Feb 2, 2023 12:45:00 PM

Self-Assessment Checklist

Answer a few questions to see if you are correctly and efficiently handling your SCA employees.

Page Summary

Understand common problems and solutions related to managing Service Contract Act (SCA) contracts, including issues with understanding compliance requirements, benefit plans, employee hours, and more. Review case studies highlighting challenges and solutions when bidding on, managing, and pricing SCA contracts.

In Part 1 of our series on the Service Contract Act (SCA) we provided a high-level overview to help you understand basic SCA requirements. We covered when the SCA is applicable and what needs to be put in place when managing SCA covered employees.

In Part 2, we provided tips for bidding and managing SCA contracts. In this final blog, we provide a list of common SCA problems and solutions as well as "real-life" business scenarios that describe issues faced by other organizations, the actions taken to resolve them, and the outcome achieved. If you are bidding your first SCA contract, or starting up your first SCA contract, or managing multiple SCA contracts the case studies can serve as a reference that will help you identify potential problems and implement solutions that will improve your chances of success.

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Common SCA Compliance Problems and Solutions

Managing SCA Contracts can be challenging. SCA contracts come with unique requirements around what covered employees must be paid as well as how vacation and sick leave must be handled. If your company has existing hourly (non-exempt) employees, you may be inclined to take a business-as-usual approach. This can be a big mistake with costly ramifications. While many of the non-exempt requirements apply to SCA covered employees there are sight differences that you need to be aware of and make sure they are handled properly. Many of the business scenarios described in this blog, provide a context to help you understand the issues you could encounter when managing SCA contracts, including:

Things you need to consider when bidding on SCA contracts
Handling vacation and sick leave properly for SCA covered employees.
Providing appropriate notices to SCA covered employees.
Maintaining accurate records to verify compliance with wage and health and welfare requirements.
Developing competitive pricing strategies i.e., creating (SCA vs. non-SCA) benefit plans

The Department of Labor (DOL) will conduct audit to ensure compliance and non-compliance can have costly implications. The table below provides a summary of common problems you might encounter when managing SCA contracts. We also included an explanation and potential solution.

Common Problem	Explanation & Solution
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

Business SCA Scenarios

Below is a list of case studies based on "real-life" business scenarios. Each scenario provides:

Scenario - description of the business use case

Challenge - description of the challenges face by the organization
Solution - action implemented to overcome the challenges
Outcome - description the outcome that was achieved

Case Studies #1: Bidding on First SCA Contract

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

When bidding on an SCA contract, you want to take direct labor out of the pricing equation. The first things that must be done is the map staff to the appropriate WD labor categories and plan on paying salaries based on the WD wage rate. You must avoid paying more than the WD wage rate as it could lead to an uncompetitive overall price. If possible, implement a SCA specific fringe benefit package to avoid pricing more than the H&W rate. Just utilizing an existing benefit package for existing hourly (non-exempt) employees may cause you to pay more than the H&W rate. Finally, review your timekeeping and payroll system to ensure they can track hours and H&W information needed to verify compliance.

Case Studies #2: Managing First SCA 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.

Managing the first SCA contract can be difficult. You must understand the SCA compliance requirements (WD wage and H&W rate) and configure the timekeeping and payroll system properly to verify compliance. In this case, the prior contractor should have paid the existing employees for all outstanding vacation when the contract ended. Because this is a 5-year contract putting in place a SCA specific benefit plan can help you avoid paying more than the required H&W rate.

Case Studies #3: SCA Contract Cash-In-Lieu of Benefits, Not Profitable

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

Offering SCA covered employees the same benefits as non-SCA employees can result in the overall benefit cost being considerably higher than can be recovered through the contract. This results in the contract being unprofitable. During contract pricing, before finalizing the benefits pricing, carefully analysis the total cost of the benefits that will be provided based on satisfying the H&W rate ... there are NO rewards for overpaying.

Case Studies #4: SCA Contract Losing Money, Unsure Why

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

H&W Rate	32 hours	36 hours	40 Hours
Weekly Hours
$4.23	$135.36	$152.28	$169.20
$4.41	$141.12	$158.76	$176.40
$4.80	$153.60	$172.80	$192.00
$2,945 annual difference between 32 hours and 40 hours Between 50-60 employees impacted each month $12,270 - $14,725 shortfall each month

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

Employers should calculate the actual cost of the benefits they plan to provide. Since the actual annual fringe benefit costs represents a fixed total payment. This cost should be compared to the amount of the H&W that needs to be provided to ensure that not more than the required H&W is being paid based on assumptions about the average hours worked per week. Keep in mind, the benefit cost does not change based on the number of hours worked by the SCA covered employee, but the amount of H&W required does vary based on hours worked. If the covered employees are working less than 40 hours ... having the option to put the excess fringe into a QNEC is a way to receive credit towards the H&W. Doing this requires putting in place a specific SCA benefit plan.

Case Studies #5: Failure to Implement SCA Fringe Benefit Package, Low Employee Participation

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

If the employee participation in benefit plans is too low, this can create a real problem with offering affordable benefits to SCA covered employees. Finding ways to increase participation allows more flexibility in providing an affordable benefit plan that meet the H&W requirements.

Case Studies #6: Selecting a PEO Provider for SCA Contracts

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

Outsourcing the administration of employee benefits to a PEO provider can offer the flexibility to remain competitive when pricing SCA contracts. PEO can offer affordable customized benefit package to meet the H&W requirements of the SCA. PEOs also provide several advantages for small business owners and their employees. One significant benefit is that you can offer affordable health insurance benefits to your employees that you might not be able to access otherwise. Most PEOs technically have thousands of employees, so they can receive discounted rates. Similarly, PEOs can offer your employees disability and life insurance plans, retirement plans, transportation reimbursement, and other fringe benefits they may want. Offering competitive benefits like these makes you more desirable as an employer, helping you attract and retain top talent.

Another appealing quality of PEOs is their reputable administrative services, which are particularly helpful for small business owners who already wear many hats and don't have time for all the necessary paperwork. Since PEOs are experienced in managing human resources and administrative tasks, you can focus on other aspects of your business and rest assured that your employees are properly managed and supported. PEOs also help you comply with current payroll tax regulations, provide unemployment insurance and workers' compensation coverage, and offer workplace training for your staff.

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