All Animals Are Created Equal: Application of the Service Contract Act (“SCA”) to State and Local Governments and Wage Determination Loopholes

I'm not saying my mother didn't like me, but she kept looking for loopholes in my birth certificate.

--Les Dawson

The Service Contract Act (“SCA”) can apply to state and local governments, including public universities performing research and other government contracts.  We tell clients to read their contracts. If the SCA clauses and wage determinations are incorporated into the contract, that is a pretty good indication it is covered by the SCA. And that would mean prevailing wages and fringe benefits must be paid to the workers.

This same advice applies equally to private and public employers who do business with the federal government. For example, there is no specific exception for public educational institutions to SCA coverage. If they entered into service contracts specifically covered by the SCA, then the requirements of those contracts govern performance of the work.

By the terms of the statute, the McNamara-O’Hara Service Contract Act applies to all contracts that are entered into by the United States or the District of Columbia with the principal purpose of furnishing services in the U.S. through the use of service employees. 29 C.F.R. § 4.107. The principal purpose of the contract is largely a question to be determined on a case-by-case basis. 29 C.F.R § 4.111. Contracts that are not principally for services are not subject to the SCA. Id.

The Department of Labor (“ DOL”) regulations follow the statutory provision making the Act applicable to contracts if the principal purpose of the contract is to furnish services in the absence of an exemption.” Id. at § 4.131(a). That section provides:

§ 4.131 Furnishing services involving more than use of labor.

(a) If the principal purpose of a contract is to furnish services in the performance of which service employees will be used, the Act will apply to the contract, in the absence of an exemption, even though the use or furnishing of nonlabor items may be an important element in the furnishing of the services called for by its terms. The Act is concerned with protecting the labor standards of workers engaged in performing such contracts and is applicable if the statutory coverage test is met, regardless of the form in which the contract is drafted. The proportion of the labor cost to the total cost of the contract and the necessity of furnishing or receiving tangible nonlabor items in performing the contract obligations will be considered but are not necessarily determinative. A procurement that requires tangible items to be supplied to the Government or the contractor as a part of the service furnished is covered by the Act so long as the facts show that the contract is chiefly for services, and that the furnishing of tangible items is of secondary importance.

29 C.F.R. § 4.131(a)(emphasis added).

The SCA does not contain any general exemptions specifically for state and local government contractors, and thus the SCA will apply to those contracts. As noted in the Department of Labor (“DOL”) regulations: “This is true of contracts entered into by such agencies with States or their political subdivisions, as well as such contracts entered into with private employers.” 29 C.F.R. 4.110. As further explained in the DOL regulations: “The fact that the required services will be performed by municipal employees or employees of the State would not remove the contract from the purview of the Act, as this Act does not contain any exemption for such employees.” Id. at 4.113(a). See also DOL Field Operations Handbook (“FOH”) 14d07.

Of course, the determination of coverage does end with that rule.  The next step in the inquiry is to look to the various exemptions to the Act to see if there is any fall-out in the coverage of the work. General exemption can include contracts 80-90% for professional services, supply contracts, construction work, and commercially exempt work. This is a fact specific, contract by contract analysis.

Notably, public sector contractors can also try to take advantage of a special wage determination procedures. This is a special public sector process which may be available for issuance of a so-called a sole source wage determination. It is a special accommodation DOL makes for public sector contractors. The sole source wage determination allows the public sector contractor to get a special wage determination in which DOL adopts the existing wages and fringe benefit levels provided by the contractor and displaces the general wage determination rates of pay. See U.S. Department of Labor, Prevailing Wage Resource Book, SCA Wage Determinations at 18-19. To seek a special wage determination, the contractor must have been awarded the contract on a sole source basis. In addition, the contractor must be the only contractor or “source” in the locality where the work is done that is capable of providing the services at the level required because the services are unique or highly specialized. See Federal Acquisition Regulation (“FAR”) § 8.405-6.

In that event, DOL reviews the contractor’s existing public system of compensation (civil service, Regents specified, board specified, or whatever) in the locality of the service contract and can adopt those existing wages and fringe benefits as the special prevailing wage. See 29 C.F.R. § 4.51. A special wage determination is ostensibly appropriate because the contractor is uniquely able to provide the services in the locality. U.S. Department of Labor, Prevailing Wage Resource Book, SCA Wage Determinations at 18-19. DOL then would adopt the current public sector wage scale as the wage determination and add it to the applicable contract. That would allow a public sector sole source contractor to keep their existing pay structure and get it memorialized as the SCA  wage determination for their work.