DOGE: Are You Listening? A Call for Reform of the Commercial Exemption to Service Contract Act Coverage
“The best arguments in the world won’t change a single person’s mind. The only thing that can do that is a good story.”
-- Richard Powers
In October of 1994, Congress passed the Federal Acquisition Streamlining Act (“FASA”), which is among the most significant pieces of legislation affecting Federal procurement. A principal thrust of FASA was to reform Government contracting by encouraging the use of commercial practices in the acquisition of commercial items. FASA exempted commercial items from most procurement-related laws and regulations, and, while leaving some discretion to the regulators, or mandated only four clauses. Because the Service Contract Act (“SCA “) was not among them, FASA gave rise to the implication that SCA might not apply to the acquisition of commercial services. Based on this implied authority, the FAR Council promulgated an expansive commercial exemption for contracts. That regulation listed the mandatory flow down laws that were required to be incorporated into a commercial subcontract, and the SCA was not among them. In essence, the SCA requirements were dropped from a wide range of contracting activities which were deemed commercial in nature.
However, the US Department of Labor (“DOL”) objected strenuously. According to DOL, because SCA unambiguously vests the authority to issue exemptions in the Secretary of Labor and, moreover, FASA did not explicitly eliminate SCA from applying to commercial item purchases, the SCA still applies to DOL commercial subcontracts. Ultimately DOL prevailed. Intermittently over the ensuing six years, DOL haggled with the Office of Federal Procurement Policy and the FAR Council over the scope of an SCA exemption, if any, for commercial item acquisition.
Finally, on July 26, 2000, both DOL and the FAR Council issued interim regulations, 65 Fed. Reg. 45,903 and 45,943, exempting a defined group of activities from SCA, but imposing certain conditions. Final regulations were issued on January 18, 2001, 66 Fed. Reg. 5,328, and became effective on March 19, 2001. While the final regulations departed somewhat from the interim regulations, they continued the approach of narrowly defining potentially exempt contracts and imposing certain conditions on the reach of such exemptions. One positive thing they did was to extend the commercial exemption, as revised, to subcontracts. Specifically, the provision now found in FAR 22.1003-4(d) provides essentially the same commercial exemption as identified in the DOL regulations for a very limited set of prime and subcontracts and services. See FAR 22.1003-4(d) for all its full textual glory. https://www.acquisition.gov/far/22.1003-4.
The result Y2K change in the FAR was that most contractors are not eligible for the SCA commercial exemption. They are not performing work in the narrow seven substantive areas of government contracting identified in the FAR and DOL regulations as commercial activities. This short list of activities only encompass a small fraction of the otherwise commercial services that the government contractor community is performing. And even if they are performing one of those limited activities, they are still ineligible because they have dedicated government contract staffing performing the work, and the FAR and DOL regulations limit the workers to spending no more than 20% of their time engaged to provide services on the government service contract. So, you can't have a workforce dedicated to the SCA-covered government contract and qualify as exempt. The workers must spend 80% or more of their time working on the non-SCA covered commercial work and thus be only sporadically engaged in government service contracting. Anyway, most commercial contracting is off limits to the exemption anyway since it isn’t in the seven narrow areas where the exemption is permitted.
Now for my own opinion. The limitation of the commercial exemption to seven narrow areas of procurement never made sense. It was borne of DOL’s grievance that it wasn’t consulted with when a broader commercial exemption was put in place. But now under a new administration, one that wants to reduce the scope of Government regulation, one of the low hanging fruits is changing the DOL and FAR rules to expand the scope of the SCA commercial exemption. It doesn’t have to be as broad as the 1994 changes. They could just adapt the Y2K changes by enumerating more examples of exemption eligible commercial contracting. Come on Department of Government Efficiency (“DOGE”) – if you are serious about reforming the Government, here is one of the good places to start. Have at it!