Trees Don’t Grow to the Sky: New Service Contract Act Health and Welfare Levels Are Finally Set
"Trees don't grow to the sky."
--a German proverb that is translated from "Bäume wachsen nicht in den Himmel."
On June 27, 2023, the U.S. Department of Labor (“DOL” issued its annual All Agency Memorandum (“AAM”) No. 243 that sets the health and welfare (“H&W”) fringe benefit rates for Service Contract Act (“SCA”) covered contracts. I have been searching for the new AAM for more than a week and could not find it at sam.gov or the DOL website or using the google browser. In my view, although I am not the most IT proficient, DOL totally flubbed the rollout. The AAM says: “On or about June 27, 2023, the Wage and Hour Division (WHD) will publish updated wage determinations reflecting the new SCA health and welfare benefit rates….” . But only yesterday, at my request, did my colleague Howard Wolf-Rodda finally found the AAM published at the DOL website. What good is an update without an effective communication plan, especially one meant to go into effect immediately?
The new update went into effect upon its issuance and is supposed to be incorporated immediately into new DOL Wage Determinations (“WDs”) and pending solicitations. “Pen-and-ink changes” to existing solicitations are authorized.
Before you take any action to reset your H&W, please read your contract(s). The new benefit levels apply to a particular contract only if and when the contracting officer modifies the contract to add an updated WD that requires the new levels. This typically occurs when a new contract is awarded, or an option is exercised, or when a contract extension is made, or, not less often than every two years for multi-year funded contracts. See 29 C.F.R. 4.162(b).
So here are the new rates:
For contracts requiring sick leave under Executive Order 13706, the new H&W rate is $4.57 per hour (up from $4.41,) which on a 40-hour workweek basis works out to $182.80 per week or $792.13 per month
For contracts not covered by the sick leave requirement the new H&W rate is $4.98 per hour (up from $4.80), which on a 40-hour workweek basis works out to $199.20 per week or $863.20 per month.
For contracts that have WDs for employees covered by the Hawaii Prepaid Healthcare Act, the rate is $2.15 per hour (or $86.00 per week, or $372.67 per month for employees who work 40 hours per week).
For contracts that have WDs for employees covered by the Hawaii Prepaid Healthcare Act and are subject to the EO 13706 sick leave requirements, the rate is $1.74 per hour (or $69.60 per week, or $301.60 per month for employees who work 40 hours per week).
How do you know which rate applies? The rate that will be applicable to the lion’s share of contracts is the $4.57 rate. This is because many contracts have been awarded, extended or options exercised since the sick leave requirements of EO 13706 went into effect for new awards, options, etc. on or after January 1, 2017. The lower rate is intended to give employers credit for providing the mandated sick leave, which they previously were able to take credit to satisfy the H&W requirement.
Bear in mind that all WDs list both H&W rates and make reference to the EO 13706 sick leave mandate. So don’t just look at your WD—read your contract. The sick leave mandate only applies if the contract contains FAR Clause 52.222-62 Paid Sick Leave Under Executive Order 13706. If that clause is not in your original contract or it hasn’t been added in a later contract modification, you’re likely not required to provide paid sick leave and presumably the $4.98 rate will apply.
Now that you’ve figured out what rate applies to you, a contractor’s obligation, in the vast majority of cases, is to furnish fringe benefits (or a cash equivalent) to each employee in an amount that’s equal to or greater than the applicable hourly (or weekly or monthly) rate for all hours paid (including leave) to each employee up to 40 hours per week. In a few cases, a contractor will be required to provide benefits at the hourly rate based on its average fringe benefit cost for hours actually worked by all employees on the contract, including overtime, but not leave time. The applicable WD will specify which formula applies.
The Hawaii rates apply to contracts where services are performed by workers in Hawaii. There, state law requires most employers to provide health insurance and DOL sets lower H&W rates to offset the state mandate. The requirements are applied in the same manner; only the rates are different.
Last year, the SCA H&W increases were about 4%. This year’s increase is about 3.75% or so. Before these two years, the fringe benefit rate had languished in even lower sums, including no increase for one year. Clearly, the H&W rates set here in mid-2023 is lagging the 5% or 6% generalized inflation and thus are not a leading factor in the increased inflation rate being felt in the broader economy.
To decide what rate it will use, WHD looks to the Employment Cost Index (“ECI”) issued by its sibling DOL agency—the Bureau of Labor Statistics. As WHD states in the wage determination section of its Prevailing Wage Sourcebook, it looks at the ECI “summary of Employer Cost for Employee Compensation.” The objective is for the rate to “reflect the total cost for private employers to provide all bona fide fringe benefits ([that are] not legally required) other than vacations and holidays.” Plainly, WHD does some behind-the-scenes computations because you won’t find these rates published anywhere, but the ostensibly they should be tracking similar private sector indexes.
For more information, see All Agency Memorandum no. 243. https://www.dol.gov/sites/dolgov/files/WHD/AAM/AAM243.pdf