Contractor Agrees to Reimburse Employees for Back Wages after Cited SCA Violation

An investigation conducted by the U.S. Department of Labor’s (DOL) Wage and Hour Division for compliance with the McNamara-O’Hara Service Contract Act (SCA) and the Contract Work Hours and Safety Standards Act (CWHSSA) revealed that CH, Inc. violated the provisions of these two statutes by underpaying 35 employees $268,899 in fringe benefits and overtime which, under the statutes, those employees were entitled to receive. 

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The contractor failed to pay SCA stipulated fringe benefits of up to $3.59 per hour to part-time employees; application of SCA fringe payment applies to all employees and does not distinguish among temporary, part-time, or full time employees.  The DOL also found that CH, Inc. did not accurately reimburse employees for overtime worked within the CWHSSA guidelines. 

CH, Inc. agreed to pay the back wages to the employees for services performed, ostensibly in the form of retroactive adjustments to prior period salaries, and the question arises among contractors whether back wages, in this scenario, are allowable under the FAR 31.205-6 “Compensation” cost principle.

Backpay is expressly unallowable under FAR 31.205-6(h), with an exception pertinent to the CH, Inc. scenario:  if back wages are owed as required by a “negotiated settlement, order, or court decree”, and the underpayment is clearly tied to “actual work performed”, back pay is clearly an allowable expense

Given that a government agency (DOL), through an investigative process, rendered the contractor in violation of two federal statutes (and implementing contract clauses), moreover having calculated specific underpaid wage amounts directly linked to the violation, any contractor facing this scenario should be able to support back wages as an allowable expense billable to the applicable government contract to which those employees worked.  Although our source for this news item does not expressly note in what context a settlement was reached between CH, Inc. and the DOL, it is obvious that an agreement was executed between the two parties requiring the contractor to pay the back wages as a function of compliance with the applicable statutes and contract provisions. 

Government auditors and procurement officials, however, differ in application of the FAR 31.205-6(h) criteria when back wages are allowable, whether arising from a federal investigation with a clear mandate to retroactively restore affected contractor employees, or from a self-initiated contractor internal review requiring retroactive pay adjustments to employees (as a matter of complying with federal regulations) without a negotiated settlement, order or court decree.  Most often, federal auditors and procurement officials have not recognized any back wages as allowable unless there is documented “negotiated settlement, order, or court degree”, which implicitly suggests that a government or employee initiated evaluation and/or litigation process must have been in play preceding a written mandate for payment of back-wages.  Hence, contractor self-disclosure of wage underpayments whereby contractors voluntarily restore employees’ salaries, even if arising due to inadvertent circumvention of federal statutes or employee contracts, will not necessarily fulfill the expectations for asserting back pay as allowable without a documented settlement of some nature.

If you have Service Contract Act requirements and need assistance in interpreting the regulations, please do not hesitate to contact us.

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Written by Darryl Walker

Darryl Walker Darryl Walker is a Senior Director for Government Compliance with Redstone Government Consulting, Inc., and formerly served as an Owner and Technical Director for the Beason & Nalley Government contract consulting group for over ten years. He provides content for our Government Insights Newsletter, provides training courses to government contractor and business community leaders, and consults with government contractors regarding a vast range of issues including cost proposals and presentations, internal controls, proposal preparation, compliance with the FAR and Cost Accounting Standards, litigation support, specialized claims, defective pricing issues, liaison with procurement and DCAA audit officials, and accounting and management systems compliance. Prior to joining Redstone Government Consulting, Darryl worked with the Defense Contract Audit Agency (DCAA) for almost 34 years in a variety of technical and management capacities. During his tenure with DCAA, Darryl provided audit services to a wide range of government agencies, including the Department of Defense, NASA, Department of Energy, Department of Interior, General Services Administration, and Department of Justice. During his experience with DCAA, Darryl audited over 3,000 government contractors throughout the Southeastern United States, Europe, and the Middle East. Education Darryl is a graduate of Texas Wesleyan College with a major in accounting and minor in economics.

About Redstone GCI

Redstone Government Consultants are a team of the most senior industry veterans and the brightest new talent in the industry. Many have held senior government positions including leadership roles in the DCAA. Our new talents bring significant accounting and software experience along with fresh perspectives, inspiration and energy to our team. Through our leadership and combined experience, we provide a unique perspective, bringing both government and contractor proficiencies to bear and ensuring rock-solid government compliance for our clients.

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