Dispute Over SCA Coverage? Read this Case with Care
You come in here with a skull full of mush; you leave thinking like a lawyer.
- Professor Kingsfield (from The Paper Chase)
Those of us who made the questionable decision to become lawyers should recall the joys of issue spotting inflicted on us by law professors. A recent decision of the Armed Services Board of Contract Appeals (“ASBCA”) presents a fact pattern the likes of which would rival the finest of law exams.
This mess all arose out of a contracting agency’s failure to include the Service Contract Act (“SCA”) clauses in a contract. See Innovative Technologies, Inc., ASBCA Nos. 61686, 62185 (July 26, 2023). If you place too much stock in this decision, you may bring your SCA dispute to the wrong forum and you might leave some money on the table. Handle it with care.
First, a little background. The SCA applies to a contract which “has as its principal purpose the furnishing of services….” 41 U.S.C. § 6702(a). If it applies, a Contracting Officer is obligated to incorporate the applicable SCA contract clauses, namely Federal Acquisition Regulation (“FAR”) clauses 52.222-41 SERVICE CONTRACT LABOR STANDARDS and 52.222-43 FAIR LABOR STANDARDS ACT AND SERVICE CONTRACT LABOR STANDARDS-PRICE ADJUSTMENT (MULTIPLE YEAR AND OPTION CONTRACTS). If the contracting officer determines the SCA applies, they usually will incorporate these clauses by reference in the list of clauses made applicable to the contract (look at your contract’s Section I).
If the contracting agency fails to apply the SCA’s terms or a wage determination to a service contract, the Department of Labor’s (“DOL”) regulations grant DOL authority to immediately remedy the error, “whether before or subsequent to a contract award.” 29 C.F.R. § 4.5(c) (emphasis added). Upon the DOL’s determination, the contracting agency must then modify the contract to include applicable SCA clauses and/or wage determinations” Id. FAR 52.222-41(t) requires disputes about labor standards to be resolved pursuant to DOL’s procedures and not the FAR disputes provisions. This includes questions about whether the SCA applies to a given contract or whether a particular Wage Determination should be incorporated into a contract. DOL’s regulations state this even more pointedly: “The Department of Labor (and not the contracting agencies) has the primary and final authority and responsibility for administering and interpreting the Act, including making determinations of coverage.” 29 C.F.R. § 4.101(B).
When the Government adds the SCA clauses or a new wage determination after the award of a contract, the Government is required to equitably adjust the contract price. See 29 C.F.R. § 4.5(c)(1) & (2) (“the contracting officer shall pay any necessary additional costs. . . [and] include in the contract any wage determination); see also FAR 22.1015 (the Government “shall equitably adjust the contract price to reflect [the] changed cost of performance resulting from incorporating a wage determination”). Such an equitable adjustment should make the contractor whole for any increased costs it incurs and, like any other equitable adjustment, this necessarily includes the direct cost of the wages, fringe benefits and payroll taxes. In addition, the contractor is further entitled to increased overhead, G&A costs, and a reasonable profit. Whether the contractor is entitled to more money is a contracting agency issue and it’s not DOL’s business to resolve.
With this in mind, let’s look at the case. Innovative Technologies, Inc. (“ITI”) was awarded an “engineering services contract” that, according to the decision, called for the provision of a range of services to the Defense Media Activity. The specific kinds of services were not detailed in the decision. Although this was denominated as a services contract, the contract did not incorporate the two most pertinent SCA clauses. To be precise, the contract did not include the commercial products and services FAR clause that basically is a checklist in which the Contracting Officer is supposed to check off which requirements apply. Had it been there and had the Contracting Officer ticked the right boxes, we likely wouldn’t be here.
After several years, DOL began an investigation of ITI’s pay practices after receiving some complaints from ITI’s workers. After all was said and done, DOL determined that ITI had misclassified a number of workers resulting in their not receiving overtime or being paid at the correct rates of pay. It also determined that ITI had not furnished sufficient fringe benefits, among a number of other violations. Some, but not all of these problems, seem to have arisen out of the fact that the contract did not have the required SCA clauses. In any event, DOL directed DMA to add the SCA clauses and incorporate the applicable WDs. ITI later submitted a request for equitable adjustment to recover its increased costs of complying with the SCA once it had been added. A key dispute related to whether the SCA should have applied to the contract at all before it was incorporated.
Now we arrive to the reason why I want you to pay attention to this case.
The Board determined in this case that the SCA applied to this contract by operation of law. Specifically, it stated that:
ITI’s “engineering services contract” plainly fell within the purview of the SCA . . . DMA’s omission of the SCA clause and other administrative lapses, however negligent, did not alter the fundamental nature of the contract, nor the applicability of the SCA. Thus, as a matter of law, the SCA’s requirements and the wage determination process applied to both parties from the contract’s inception. Alutiiq Com. Enter., LLC, 20-1 BCA ¶ 37,506 at 182,199 n.7 (“SCA provisions will apply to a government contract even where they were left out of the solicitation or the contract.” (quoting Miller’s Moving Co., ASBCA No. 43114, 92-1 BCA ¶ 24,707 at 123,325-26)); see Christian & Assocs. v. United States, 312 F.2d 418, 427 (Ct. Cl. 1963) (mandatory contract clause expressing a significant public procurement policy will be incorporated into the contract by operation of law). For this reason, the fundamental premise of ITI’s claim, that the SCA did not apply to the contract or ITI prior to the SCA clause’s incorporation in 2012, is without merit.
Opinion at 15-16 (emphasis added).
Wait a minute! Not so fast here. One could argue that the SCA does apply to service contracts by operation of law and that may even be correct in this case. However, the Service Contract Act clauses are not required by operation of law unless it is a contract which has “as its principal purpose the furnishing of services.” That’s a threshold determination that must be made by the Contracting Officer. And if he or she is wrong, DOL will be pleased as punch to correct the error. Let it be said that the ASBCA may be absolutely correct that the SCA applies to ITI’s contract. However, there is no question that SCA coverage was in dispute. When that’s the case, DOL is supposed to make the call. I would submit that’s the case even if the argument about SCA coverage is as weak as the Board suggests.
Hence my admonition… If you are embroiled in a dispute with a Contracting Officer over whether a contract should be covered by the SCA or whether a particular WD should be attached to the contract, you very well may need to take this dispute to DOL. Then, if DOL finds the contract should be covered by the SCA or that a WD needs to be added, you have a contract matter on your hands if you need monetary relief. Then, you’d submit an REA, and pursue an appeal if necessary. I commend another of our blog posts that recounts the tale of a case that first went to the Civilian Board of Contract Appeals, which later reversed itself and held that the dispute over labor standards should have been handled by DOL.
A lot of effort went into this case and the opinion even states that the Board “considered [a number of] arguments advanced by the parties, whether discussed here or not.” So, as I said at the outset, this case was quite complicated. That’s why I was not surprised to find a couple of other glitchy items in this case. For instance, the Board stated:
There is no entitlement under FAR 22.1015, or any other law or legal precedent of which we are aware, that DOL assessments against the contractor for misclassification, nonpayment of overtime, and insufficient fringes can or should be reimbursed by the government.
Opinion at 18. Part of that is just plain wrong. If DOL tags a contractor for not furnishing fringe benefits, holiday benefits or vacation time and those benefits were not required due to the absence of a wage determination or because the contract was not properly made subject to the SCA, that “assessment” absolutely may be the subject of an equitable adjustment if the addition of the SCA or WD resulted in increased costs for furnishing such benefits if none were required to begin with. Once again, the outcome might be correct, but the overarching statement could be misleading out of context.
It is quite conceivable that a deep dive into the record of this case would support that this indeed was an SCA-covered contract. And the record might demonstrate that the contractor was not entitled to certain elements of its claim. However, there are enough red flags in the decision that you should take care to avoid putting more weight on this case than it deserves.