Why is the Accrual of SCA Vacation Benefits on a Pay Period Basis a Bad Idea?
“No man needs a vacation so much as the man who has just had one.”
― Elbert Hubbard
In previous blogs we discussed some of the different benefits that are required under the Service Contract Act (“SCA”) in addition to the minimum wage requirements such as paid vacation time which is one of the three mandatory prevailing benefits. https://www.awrcounsel.com/blog/2019/2/6/getting-paid-service-contract-act-vacation-benefits-when-not-working?rq=vacation; https://www.awrcounsel.com/blog/2018/8/8/the-service-contract-act-vacation-benefit-requirement-no-take-backs?rq=vacation. The paid vacation time, just like the minimum wage, is calculated based on the employee’s job and locality and is updated in accordance with the wage determinations.
Here are some of the requirements and compliance suggestions for the structuring of SCA vacation benefit requirements:
1. Vacation benefits accrue on every anniversary of an employee’s original employment date.
SCA vacation benefits vest on the anniversary of an employee’s original employment date. This means that if a new SCA covered employee is hired on July 21, 2019, then on July 21, 2020 the employee must be able to use the statutory amount of vacation days earned from that prior year of service. In the case of a predecessor contract, the original employment date is carried over to the successor’s relationship with the employee. Thus, someone hired by the predecessor contractor 10 years ago keeps their original anniversary date of employment if hired by the successor contractor. And they end up having an anniversary date of employment in the first year of the successor contractor’s reign. This is a cost that needs to be accounted for in a successor’s fixed priced procurements prior to submitting an offer. The employees’ vacation time vests on their anniversary so, even though the successor employer was not in the saddle the whole year before the employee ostensibly earned their time, the employee gets a new grant of vacation on their individual anniversary date. And the employer gets no price adjustment for that base year cost, unless the contract is cost-reimbursement.
In addition to this requirement, the SCA requires employers to cash out any unused vacation time at the end of the anniversary year. This rule also places the burden on a predecessor contractor to cash out any vested but unused vacation time once their contract has ended. This is the case even if the employee had less than the full year to use the benefit. 29 C.F.R. 4.173(c)(2).
Many employers also mistakenly allow workers to carry forward their unused SCA vacation benefits beyond their anniversary date. This is a classic no good deed goes unpunished situation. The employer ends up furnishing too much vacation in one year and too little in another. The result being that DOL may try to pocket the excess benefits with no credits in the year the worker takes the vacation, but still demand that the employer make up the value of the leave benefit deficit in the year the worker deferred taking the vacation.
2. Can employers use an accrual method for conferring SCA vacation time?
Yes, but it is difficult. As we explained earlier, on the anniversary of the employment date the employee must have the statutory minimum of vacation days available to them. And they must get to use the accrued vacation over the next year. This creates an issue if the employer elects the accrual method and the employee uses the accrued vacation days that were earned at some point in the prior anniversary year period. Typically, this happens with entirely new employees who are not entitled to any vacation under the SCA but are furnished vacation benefits anyway in each pay period during their first year. When the next anniversary comes up, some of the vacation account will have depleted thereby forcing the employer to confer more vacation days to “refuel” the account. Because of the timing issues that this accrual policy creates, employers need to understand that DOL likely would consider the vacation days accrued and used in the prior year as an excess benefit under the SCA that would not be credited towards the statutory amount owed on the next anniversary of employment. The employer is just deemed to have furnished more fringe benefits than the minimum SCA requirements in that prior year.
Another issue that arises is the mismatch in maturity for the employees inherited from the predecessor contractor and the employees hired under the new contract. Some employees doing the same job will accrue and use vacation days in different ways. This could be difficult from a Human Resources and payroll perspective. HR has trouble timing the true up of the vacation benefit. And payroll may be challenged by carry forward or cash out requirements for vacation benefits.
3. So, what are the employer’s options?
The first and easiest option is to do away with the vacation pay period accrual method. Just convert SCA-covered employees to plans and policies that involve lump sum vesting of vacation on their anniversary dates of employment. The lump sum method is administratively easier, and it is absolutely allowed under the SCA. It may require some HR and/or payroll staff hours to administer. But this is what most large SCA covered employers do.
The second option is to continue any current accrual policy including those which furnish extra vacation days beyond the statutory minimum that accrue in the same year that they are earned. You could then try to transition to a lump sum plan at a convenient time. When the anniversary date for the employee arrives, the employer can furnish the statutory vacation minimum in a lump sum supplement and announce the end of the accrual method. For new employees to whom the employer wants to provide an interim benefit, the employer could, for example, furnish vacation on an accrual basis until their next anniversary date, and then convert them to the lump sum vacation benefit. If the minimum vacation benefit under the SCA is two weeks, then the employee could accrue one week of vacation time over the course of a year, and two weeks would be conferred on their anniversary date for a total of three weeks of vacation time. This is allowable under the SCA and allows employers to recruit using the accrual method. Bear in mind, this option involves the furnishing of extra paid vacation.
A third option would be to allow unpaid vacation time to accrue separately from paid vacation time. This entails giving new employees unpaid leave, and holding the paid vacation benefit until they have one year of service, which is when the SCA vacation benefit ordinarily kicks in. The SCA does not require unpaid vacation, but when given a choice of unpaid time off or no leave whatsoever, employees often want to spend time with their families despite losing the day of pay. This allows them the flexibility to take time off in their first year of employment for their families while not costing the employer any money. Then on the anniversary date, the full statutory minimum of paid vacation days will vest in accordance with the SCA.
Finally, a fourth option would be to contractually arrange the accrual method with the employees so that they understand that the accrued vacation time is a pre-payment of benefits. It is possible that the clear understanding of the employees will give the DOL reason to allow this pre-payment or advanced payment type of arrangement, while giving the employer credit for the prepaid vacation time.
None of these options are perfect, but they reflect the compromise that employers make to balance their recruiting efforts with the requirements of the SCA. Employers should seek counsel before going forward with a new vacation benefit plan to confirm it is compliant with the SCA.