Understanding Health and Welfare Under the Service Contract Act (SCA)

The McNamara-O’Hara Service Contract Act (SCA), aka Service Contract Labor Standards (SCLS), requires contractors and subcontractors on covered contracts to provide specified wages and fringe benefits to covered employees (i.e., “service employees”). While that may sound fairly straightforward, there are many nuances and complexities that can cause great concern and angst when working toward compliance with the SCA. At the top of the list of these administrative burdens is the appropriate distribution of Health and Welfare (H&W).

What is Health and Welfare (H&W)?

H&W is a specified dollar amount that the contractor must use to provide benefits which are not otherwise required by law to the service employee. H&W is separate from and in addition to minimum wage, vacation, holiday and other SCA-related requirements. Contractors may meet their H&W obligation by providing (and paying for) bona fide benefits, cash, or a combination of bona fide benefits and cash. It is the employer’s decision as to how H&W is discharged on behalf of the employee. Still, the contractor needs to ensure H&W is discharged in compliance with the regulations.

How Do I Know What the Health and Welfare (H&W) Rate is?

The applicable H&W is found on the Wage Determination (WD) incorporated in your contract. There are two H&W rates listed on the WD,[1] with the lower of the rates being relevant to contracts that include the requirement to provide Paid Sick Leave pursuant to EO 13706.

Utilizing survey data from the Bureau of Labor Statistics, the Department of Labor (DOL) typically updates the H&W rate each summer and revised WDs are released with the new H&W. It is important to note that these changes are not self-executing. The new H&W rate does not apply until a new WD is modified into your contract, which should normally occur at Option Year.  

How Do I Calculate the Amount of Health and Welfare (H&W) Due to the Employee?

There are two methods for H&W calculation:

• The fixed calculation includes all hours paid up to 40 in a week or 2080 in a year.
  • This method is used with an odd WD.
  • Calculation is performed per individual.
• The average calculation includes all hours worked, with no cap.
  • This method is used with an even WD (note that even WDs are being phased out by DOL).
  • The calculation is performed as an average of all service employees on the contract.

What is a Bona Fide Benefit?

29 CFR 4.171 describes “a ‘bona fide’ fringe benefit for purposes of the Act, a fringe benefit plan, fund, or program must constitute a legally enforceable obligation which meets the following criteria”:

• It must be communicated in writing.
  • Contributions must be pursuant to the terms of the plan.
  • Any employee contribution to the plan (i.e., deduction from wages) must be voluntary, and these dollars may not be used toward the contractor’s H&W obligation.
• It must provide systematically for payment of benefits.
• It must contain a definite formula for determining contributions and benefits provided.
• The contractor’s contribution must be paid irrevocably to a trustee or third person pursuant to an insurance agreement, trust, or other funded arrangement.
• It must comply with the criteria set forth by ERISA, FLSA, and IRS.

Payments to the bona-fide plan must be made no less frequently than on a quarterly basis. If a contractor chooses to provide cash-in-lieu of benefits or as differential payment, such payments must be made on the regular payday for wages. Cash-in-lieu must be identified separately from wages on the pay statement.

Common bona fide benefits include health insurance, life and disability insurance and employer contributions to retirement plans. The regulations state that the following are not bona fide benefits:

• Unfunded self-insured plans may not comply and require additional scrutiny (i.e., self-insured medical plans require a trust or DOL approval).
• Benefits required by federal or state law (i.e., worker's compensation, unemployment insurance).
• Benefits provided for the benefit or convenience of the employer (i.e., relocation, professional club memberships).
• Contributions for social functions or parties.

Importance of Recordkeeping

If audited, you will need to be able to clearly show that each service employee received the required H&W for each workweek in which they worked on the covered contract. Records must be maintained for three years following completion of the work. If managing internally, ensure that you are calculating correctly and storing these records in a manner that is easily accessible if needed. Whether managing internally or through a third party, a routine review is strongly suggested.

The Redstone GCI HR Team specializes in the complex requirements of federal government contractors, including the Service Contract Act. Whether in need of a full assessment of processes and policies or for answers to specific questions, we are here to support you and your team.

[1] There are additional considerations if a Collective Bargaining Agreement is in place.