Can I Please Have Some More, Sir -- Advancing Vacation Benefits Under the Service Contract Act
"It takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!"
-- Alice in Wonderland, Lewis Carrol
Under the Service Contract Act (“SCA”) and applicable law, employees are entitled to paid vacation time as specified in the prevailing wage determination (“WD”) attached to the US Government service contract. Typically, these WDs specify one or two weeks of vacation after one year of service with the contractor or any predecessor contractor, and sometimes more vacation benefits are provided in the WD for additional years of service. This ordinarily means that new employees (i.e., those who have just been hired to work on the SCA covered contract and who were not employed by the predecessor contractor), or employees who recently had a break in service, are not entitled under the SCA to any vacation benefits, or any pro-rated portion thereof, until they complete one full year of employment, the entire benefit vesting on the anniversary of their employment date. The absence of any paid vacation benefit for these workers in their first year of employment can work a hardship upon the employee.
Of course, the newly hired workers can be offered leave without pay. Or employers can simply furnish fringe benefits above and beyond the minimum requirements of the SCA. This is what many employers do likely because it is necessary to attract employees in a competitive job market. Thus, many service employers give a vacation benefit to the worker immediately on hiring, even if that is not necessarily a great idea. See https://www.awrcounsel.com/blog/2019/5/29/why-is-the-accrual-of-sca-vacation-benefits-on-a-pay-period-basis-a-bad-idea?rq=Advanced%20payment.
Such a policy departs from the specified minimum SCA rules, where vacation benefits traditionally accrue in a lump sum on the individual employee’s anniversary date of hiring by either the contractor or the predecessor contractors. The employee becomes vested in a vacation benefit on his anniversary date, ordinarily after one year of service, and must be allowed (pursuant to a benefit plan or policy) to take the vacation during the following next year or be paid the balance if not taken. There is no explicit right of carry over. DOL wants employers to cash unused leave out annually because large leave banks are just contingent obligations (there is no out of pocket cost just to accrue it in an account) that may end up being forfeited in bankruptcy or by other actions of the employer. In that event, the DOL fear is that the employee would not actually receive the SCA vacation benefit. So DOL wants employers to true up the books annually on this otherwise unfunded benefit. Take a look at 29 C.F.R. 4.173(c)(2) which states in part:
However, the required vacation must be given or payment made in lieu thereof before the next anniversary date, before completion of the current contract, or before the employee terminates employment, whichever occurs first.
The impact of these annual vesting and payout rules is that simply furnishing vacation benefits (in say year one of employment) can be just a benefit in excess of the SCA and hence simply exceed the minimum SCA fringe benefit requirements for the year it is used. In that event, the employer is not be able to claim that excess paid in the prior year for the accrual due the next option year. Since new employees working on contracts covered by the SCA are only entitled to vacation upon the anniversary date of their employment, many service contractors, as a result of these rules, only grant vacation only upon the anniversary date of employment. Those new employees, accordingly, ordinarily are deprived of paid vacation during their first year of employment. Those workers only receive their vacation benefits after one year of employment.
Not all service employers follow this practice. As noted above, some give vacation in payroll increments starting immediately on hiring. But paying a vacation benefit in excess of the SCA has some consequences for the employer. First, they have a higher cost structure, and thus are less price competitive in the Government’s eyes. And second, if they offer the new employees a vacation benefit in year one, they are precluded from getting a price adjustment for the same benefit in the first option year and beyond, because they were no longer required by the new wage determination to make the payment since they were already voluntarily doing so. See https://www.awrcounsel.com/blog/2019/10/16/a-short-wage-and-hour-primer-for-contractors-submitting-service-contract-proposals-nbsp?rq=Price%20adjustment. As always in wage and hour, no good deed goes unpunished.
Another option for employers to consider is advancing or prepaying the vacation benefit to the worker by a voluntary and elective agreement. Under this approach, an employer may offer a vacation benefit in year one at the option of the worker. However, the worker should be asked to sign an advanced payment agreement or provide them the opportunity to exercise in writing a right to prepaid vacation under a formal prepayment policy. This agreement or policy would allow the employee to receive paid vacation in their first year of service, but it would expressly credit that benefit as an advance towards the SCA benefit which accrues and vests to the employee on their next anniversary date of employment. In other words, the worker would agree that the earlier grant of vacation benefits counts towards the subsequent legal requirement to furnish the benefit on the employee’s next anniversary date of employment.
This advanced or prepayment approach has its genesis in the Fair Labor Standards Act (“FLSA”) Field Operations Handbook (“FOH”) policy which allows employers to prepay wages to workers. See FOH 22j16. The theory is that there should be no bar to prepaying fringe benefits, providing it is voluntary and elective on the part of the worker. Indeed, the worker is getting the SCA required benefit, but he or she is just getting the benefit earlier than legally required. Thus, the policy is a worker friendly variant. Of course, exactly how a particular Department of Labor Investigator may perceive the advanced payment is not entirely clear. Thus, an employer who enters into such an agreement or promulgates such a policy has to be ready to defend the practice to DOL.
If you want help navigating these waters or putting into place some kind of advanced or prepayment payment agreement, feel free to contact us.