When Is a Federal or State Specified Fringe Benefit Unallowable Under the Prevailing Wage Laws as a Credit Towards Compliance?
“They want the federal government controlling Social Security, like it's some kind of federal program.”
--George W. Bush
The Service Contract Act (“SCA”) regulations provide that: “No benefit required by any other federal law or by any State or local law, such as unemployment compensation, workers' compensation, or social security, is a fringe benefit for purposes of the Act” 29 C.F.R. § 4.171(c). A similar provision applies to Davis-Bacon Act (“DBA”) fringe benefits. 29 C.F.R. § 5.29(f)). Read literally, these rules would bar any other federal or state mandated fringe benefit from counting towards to SCA health and welfare (“H&W”) requirements or DBA fringe benefits. But we know that isn’t the case. There are several examples of federal or state mandated benefits that have been imposed without any impact on the H&W requirements.
Let’s start with the most obvious. The items expressly enumerated in the regulation are essentially state and federally imposed quasi-tax burdens. Unemployment compensation, worker’s compensation and social security are obligations imposed universally on employers, and they affect each employee in some equal manner. They are a government-mandated tax burden of sorts, rather than a traditional third-party fringe benefit plan. Thus, the regulation should be interpreted under the principle of ejusdem generis, a legal maxim suggesting that where general words or phrases follow a number of specific words or phrases, the general words are specifically construed as limited and apply only to persons or things of the same kind or class as those expressly mentioned. Under that principle, assessments like these kinds of quasi-taxes, which bestow a universal benefit on all the workers, show a regulatory intent to bar only similar kinds of state or federal tax-like mandates, and thus specify what type of state mandate was intended to be excluded as an employer payment “credit” in those regulations.
This interpretive principle is demonstrated by the way DOL enforces the Affordable Care Act (“ACA” or “Obamacare”) requirement. The ACA is an “other federal law.” The “minimum essential coverage” required by the ACA arguably is a “benefit required by any other federal law.” Yet the Department of Labor (“DOL”) has determined that the cost of ACA fringe benefit health plans constitute bona fide fringes under the SCA and DBA. See All Agency Memorandum no. 220 at 8 (May 30, 2016). ACA mandated health benefit plans thus are fully creditable towards both SCA and DBA fringe benefit requirements. What isn’t creditable under the ACA, was the Federal tax or fine originally set by the ACA. In National Federation of Independent Business v. Sebelius, 567 U.S. 519 (2012), the majority of the Supreme Court found that the “requirement that certain individuals pay a financial penalty for not obtaining health insurance may reasonably be characterized as a tax.” The tax also isn’t a fringe benefit under the SCA or DBA, but the health benefits that are furnished under the ACA in lieu of payment of the tax are bona fide fringe benefits for prevailing wage purposes.
The different experience in two states that have ACA-like laws on the books for many years, Hawaii and Massachusetts, is also informative. Since 1974, the Hawaii Prepaid Health Care Act (Hawaii Revised Statutes Chapter 393) has required employers to offer health benefit coverage to employees working at least 20 hours per week. As a mandatory benefit required by state law, that health insurance cannot be used to satisfy the SCA’s requirements (29 C.F.R. § 4.171(c)). Therefore, DOL has had a longstanding practice of issuing SCA wage determinations for Hawaii that provide for a lower SCA H&W fringe benefit than DOL requires in the rest of the country. Specifically, the H&W on Hawaii SCA WDs is nominally lower by an amount equal to the value of the state-mandated health plan. For example, the national H&W benefit level is currently set at $4.80 per hour for service contracts. But DOL has set the Hawaii H&W level effective at only $2.04 per hour in recognition of the state mandated benefits. In essence, DOL chose to give an express credit for the Hawaii state-mandated health plan benefit.
In contrast, when the Commonwealth of Massachusetts enacted a health care reform law (so-called “Romneycare”) in 2006, (Chapter 58 of the Acts of 2006), DOL did something different than what it did in Hawaii. As originally enacted (though not necessarily the same today), RomneyCare required that nearly every resident of Massachusetts obtain a minimum level of health insurance and required all but small employers to furnish health insurance to their workers. For whatever rationale, DOL opted not to issue special wage determinations adjusting the SCA H&W requirement downward in Massachusetts. Instead, DOL decided, in effect, to ignore the Massachusetts law. Thus, it has always been the case that any Massachusetts employer could simply take a credit for the cost of those Romneycare health benefits toward the SCA or DBA required fringe benefits.
This distinction between government mandated taxes and government mandated fringe benefits can play out in other contexts as well. When the State of New Mexico or the territorial government of Guam enacted so-called Gross Receipts Taxes (“GRTs”), a Board of Contract Appeal found those taxes were not wages or benefits under the SCA price adjustment clause, and thus the clause provided no relief or reimbursement for the expense. See Appeals of Sonoran Tech. & Prof'l Servs., LLC , 2017-1 B.C.A. (CCH) P36,792, 179331 (A.S.B.C.A. July 3, 2017). Again state mandated employer taxes are not bona fide fringe benefits.
In contrast, when the Federal Government mandated a new holiday benefit, Juneteenth, no one said that was not a bona fide prevailing wage fringe benefit, and in fact DOL went out of its way to update the new SCA wage determinations and add the new holiday benefits expressly therein. If the federally declared new holiday was not a fringe benefit, there would be no need or even ability to specify its payment expressly in the wage determinations.
Similarly, in Holmes & Narver Services Inc., 90-3 BCA 23,198, ASBCA Nos. 38867, 38868, 1990 ASBCA LEXIS 313 (Aug. 6, 1990), a contractor successfully appealed a final decision rejecting a price adjustment for the increase in holiday premium pay owed employees under a collective bargaining agreement (“CBA”). Specifically, the contractor requested additional labor costs to comply with an executive order (“EO”) closing federal facilities on December 24 and December 26. Under the employer’s CBA, employees who worked on holidays were owed premium pay. Since December 24 and 26 were now holidays because of the EO, those employees that worked were owed premium pay. Since the holiday pay was classified as a fringe benefit under 41 U.S.C. s 351(a)(2), the contractor was entitled to the additional costs under the price adjustment clause, even though the holiday came about by an EO mandate -- it was still a wage or fringe benefit.
In short, bona fide fringe benefits, even if required by EOs or state laws, do not otherwise short-circuit the SCA or DBA ordinary provisions that allow contractors to credit those fringe benefit payments towards compliance with prevailing wage determination fringe benefit requirements. Things like healthcare benefits, new holidays, or additional sick or annual leave requirements, are still plainly defined by DOL as prevailing fringe benefits. They are not the kind of quasi-tax expenditures specified in the DOL regulations which is not creditable under either the SCA or DBA. Accordingly, they can be credited to SCA and DBA H&W compliance, and they are subject to the various price adjustment clauses found in federal service and sometimes construction contracts.