FEDERAL CONTRACT LAW

Watch out for new service wage determinations

Karen Powell

The Service Contract Act of 1965 (SCA) requires government contractors to pay their nonexempt employees working on service contracts no less than the prevailing wage and fringe benefit rates applicable in the locale where the work is performed. Unionized work forces must be paid consistent with any applicable collective bargaining agreement.

The act does not cover executive, administrative or professional employees. There are narrow exceptions for various software-related occupations and for certain ADP contracts. But SCA issues can still pose problems for government IT contractors.

New developments in the method used to calculate prevailing wages will have important consequences for contracts subject to the act.

The Labor Department's Wage and Hour Division issues wage determinations to implement the act's requirements. This process has been stalled since 1996, when the Bureau of Labor Statistics discontinued regional, nonunion wage surveys. Finally, the Wage and Hour Division in July completed its update of prevailing wage determinations.

Outdated wage determinations permitted employers to pay less than the prevailing wages to service personnel, and that thwarted the act's purpose. Yet contractors trying to win contracts were disadvantaged if their competitors could base their price on substandard wages.

Setting SCA wage rates has always been more art than science. The act requires wage determinations that are based on the actual prevailing rates in an area. Raw survey data used by Labor can fluctuate dramatically from job to job, region to region and year to year.

For the system to work, wage determinations must yield a consistent salary structure for all employers. This means new determinations cannot significantly increases wages in one job classification wihtout increasing wages for similar jobs.

Labor also tries to be responsive to the needs of other federal agencies. Under the Federal Acquisition Regulation's SCA-related clause, contractors can claim compensation for some increases in labor costs stemming from a new wage determination. Agencies do not want to see frequent or large changes in prevailing wage rates because they eat into program budgets and interfere with procurement planning.

In fact, a number of agencies challenged Labor's last attempt to issue new wage determinations for the Seattle metropolitan area. Wages for some job classifications rose 90 percent. Labor's Administrative Review Board upheld the computation in that case.

But Labor has since shown it will be more mindful of the impact new wage determinations have on agencies. In January it announced that future increases would be limited to 15 percent regardless of what survey data for an area showed.

Labor also issued a final rule in January amending the SCA exemption for ADP contracts. The proposed rule, published last summer, had broadened the exemption in some respects but narrowed it in others. For example, Labor proposed amending the regulation to refer to IT and expanding exempted contracts to include installation services. But the proposed rule generally subjected commercial item subcontracts for IT services to SCA.

The final regulation differed in several ways from the July proposed rule. Ironically, commentators on the proposed rule had applauded the change from ADP to IT as a much-needed expansion of the exemption for the entire sector. In response, Labor withdrew this portion of the change because it had not intended to exempt the entire industry. But the new coverage for commercial subcontracts remained. The new rule became effective March 19.

Karen Powell is an attorney with the Washington law firm of Petrillo and Powell PLLC. E-mail her at kdp@petrillopowell.com.

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