Service Contract Act Health and Welfare (H&W) -- Why Are There Two Methods?
“Many of the younger generation know my name in a vague way and connect it with grotesque inventions, but don't believe that I ever existed as a person. They think I am a nonperson, just a name that signifies a tangled web of pipes or wires or strings that suggest machinery.”
-- Rube Goldberg
Regulations require that Service Contract Act (“SCA”) wage determinations (“WDs”) have two different fringe benefit require levels: a so-called "low-level" benefit (employee-by-employee) benefit; and different a "high-level" health and (average welfare cost) benefit. The Wage & Hour Division (“WHD”) determines compliance with the low-level benefit on an individual employee by employee basis (requiring payment for all hours paid up to 40 hours per week) and determines compliance with the high-level benefit based on the contractor's average employee fringe basis (requiring payment for all hours worked, including overtime, but not including leave periods). The two kinds of WDs can be distinguished by the WD number -- the “odd” numbered WD is the low-level method, while the “even” numbered WD is the high-level method.
When I first started practicing law in 1983, the low-level benefit was something like 39 cents an hour (hence the designation as “low) and the high level benefit was “permanently” fixed at $2.56 an hour. The rationale for two benefit levels was that there were really two worlds of service contracting. The first world included highly technical services involving nationwide competitors, large businesses and OMB A-76 privatization conversions. This world was populated by large business contractors who paid higher fringe benefits. Then there was the “other America” -- the contractors who were mostly small businesses, who worked on janitorial, motor pools, security guard or similar low-skilled contracts, and paid much lower fringe benefits. DOL decide early on to have two SCA H&W levels to deal with this disparity.
In 2004, when the fixed high-level rate of the $2.56 was about to be exceeded, WHD that the announced in All Agency Memorandum 197 that both that the high-level and low-level H&W benefits would converge in dollar amount, but the different SCA fringe benefit methodologies would continue to be utilized.
Now let’s leave the history lesson and skip to current events. Currently, for SCA-covered contracts awarded on or after July 11, 2018 and not subject to Executive Order 13706 (the “Sick Leave E.O.”), the new H&W benefit rates are as follows: (a) $4.48 per hour, $179.20 week or $776.53 per month, per employee, for hours paid for up to 40 hours per week; or (b) $4.48 per hour, based on the contractor’s average fringe benefit cost for hours actually worked by all employees on the contract, including overtime, but not leave time. All Agency Memorandum (“AAM”) No. 227, at http://www.wdol.gov/aam/aam227.pdf . The applicable WD will specify which formula applies.
If a contract does require sick leave pursuant to the Sick Leave E.O., the applicable fringe benefit rate will be $4.18 per hour, $167.20 per week, or $724.53 per month.
For SCA-covered contracts in Hawaii, where state law requires most employers to provide health insurance and WHD traditionally sets lower SCA H&W rates to offset the state mandate, the H&W rate is $1.91 per hour, $76.40 per week, or $331.07 per month for all employees on whose behalf the employer provides benefits pursuant to the Hawaii Prepaid Health Care Act. For those employees not receiving such benefits, the applicable rate is $4.18 or $4.48 per hour, as noted above.
Note that the new benefit levels are not self-executing; they apply to a particular contract, and then only if and when the contracting officer modifies the contract to require the new levels -- typically, when an option is exercised, or not less often than every two years on multi-year funded work. See 29 C.F.R. 4.162(b). Accordingly, just because WHD fiddled with the H&W rates and issued a new AAM, that doesn’t mean a contractor must pay those rates. The new WD with the updated H&W rates must first be added to the government contract.