Happy days are here again
The skies above are clear again
So let's sing a song of cheer again
Happy days are here again

—Lyrics by Jack Yellen

On July 16, 2024, the U.S. Department of Labor (“DOL)” issued its annual All Agency Memorandum (“AAM”) No. 246 that sets the health and welfare (“H&W”) fringe benefit rates for Service Contract Act (“SCA”) covered contracts. I have been searching for the new AAM for almost three weeks. Customarily they are issued in late June every year, but this year things got delayed at DOL. While the AAM is dated July 16, 2023, it apparently only made its way to the sam.gov website on July 23, 2024.

The new update ostensibly went into effect upon its issuance and is supposed to be incorporated immediately into new DOL Wage Determinations (“WDs”) and pending solicitations. “Pen-and-ink changes” to existing solicitations are authorized. Confusingly, the version of AAM No. 246 which was published at the official sam.gov website on July 23, 2024, says that it applies to all solicitations issued after July 2, 2024. That pen-and-ink change retroactively to contracts already awarded will constitute a formal change order to the contract and trigger a right to a contractor price adjustment if the change has an actual cost impact. Apparently, the delay in getting out the AAM and then publishing it properly is having some ripple effects and creating more confusion. 

Before you take any action to reset your H&W, please read your contract(s). The new benefit levels apply to a particular contract only if and when the contracting officer modifies the contract to add an updated WD that requires the new levels. This typically occurs when a new contract is awarded, or an option is exercised, or when a contract extension is made, or not less often than every two years for multi-year funded contracts. See 29 C.F.R. 4.162(b).

So here are the new 2024 rates:

• For contracts requiring sick leave under Executive Order 13706, the new H&W rate is $4.93 per hour (up from $4.57,) which on a 40-hour workweek basis works out to $197.20 per week or $854.53 per month

• For contracts not covered by the sick leave requirement the new H&W rate is $5.36 per hour (up from $4.98), which on a 40-hour workweek basis works out to $214.40 per week or $929.07 per month.

• For contracts that have WDs for employees covered by the Hawaii Prepaid Healthcare Act, the rate is $2.36 per hour (or $94.40 per week, or $409.07 per month for employees who work 40 hours per week).

• For contracts that have WDs for employees covered by the Hawaii Prepaid Healthcare Act and are subject to the EO 13706 sick leave requirements, the rate is $1.93 per hour (or $77.20 per week, or $334.53 per month for employees who work 40 hours per week).

How do you know which rate applies? The rate that will be applicable to the lion’s share of contracts is the $4.93 rate. This is because many contracts have been awarded, extended or options exercised since the sick leave requirements of EO 13706 went into effect for new awards, options, etc. on or after January 1, 2017. The lower rate is intended to give employers credit for providing the mandated sick leave, which they previously were able to take credit to satisfy the H&W requirement.

Bear in mind that all WDs list both H&W rates and make reference to the EO 13706 sick leave mandate. That isn’t intended to be an incorporation of one or both into the contract. So don’t just look at your WD—read your contract. The sick leave mandate only applies if the contract contains FAR Clause 52.222-62 Paid Sick Leave Under Executive Order 13706. If that clause is not in your original contract or it hasn’t been added in a later contract modification, you’re likely not required to provide paid sick leave and presumably the $5.36 H&W rate will apply. 

Now that you’ve figured out what rate applies to you, a contractor’s obligation, in the vast majority of cases, is to furnish fringe benefits (or a cash equivalent) to each employee in an amount that’s equal to or greater than the applicable hourly (or weekly or monthly) rate for all hours paid (including leave) to each employee up to 40 hours per week. In a few cases, a contractor will be required to provide benefits at the hourly rate based on its average fringe benefit cost for hours actually worked by all employees on the contract, including overtime, but not leave time. The applicable WD will specify which formula applies. 

The Hawaii rates apply to contracts where services are performed by workers in Hawaii. There, state law requires most employers to provide health insurance and DOL sets lower H&W rates to offset the state mandate. The requirements are applied in the same manner; only the rates are different.

Last year, the SCA H&W increases were about 3.75%. The year before that they were about 4%. This year’s increase is about 7.6% or more. Before these last three years, the fringe benefit rate had languished in even lower sums, including no increase for one year. It looks like fringe benefit inflation is finally breaking out of the gate and exceeding the wage inflation. That is not surprising given that fringe benefit inflation has since the pandemic lagged the overall rate of increase in consumer prices and wages. There is some catching up to do.  

To decide what rate it will use, WHD looks to the Employment Cost Index (“ECI”) issued by its sibling DOL agency—the Bureau of Labor Statistics. As WHD states in the wage determination section of its Prevailing Wage Sourcebook, it looks at the ECI “summary of Employer Cost for Employee Compensation.” The objective is for the rate to “reflect the total cost for private employers to provide all bona fide fringe benefits ([that are] not legally required) other than vacations and holidays.” Plainly, WHD does some behind-the-scenes computations because you won’t find these rates published anywhere, but they ostensibly they should be tracking similar private sector indexes.

For more information, see All Agency Memorandum no. 246. https://iae-wdol-sam-gov.s3.amazonaws.com/WDOL_MEMORANDUM/AAM246.pdf?X-Amz-Algorithm=AWS4-HMAC-SHA256&X-Amz-Date=20240724T015110Z&X-Amz-SignedHeaders=host&X-Amz-Expires=9&X-Amz-Credential=AKIAY3LPYEEXYSOFBWGG%2F20240724%2Fus-east-1%2Fs3%2Faws4_request&X-Amz-Signature=cc2b43a24c4e0a16cc3f0580520c4f20e257e0e6e01deb459a528442ed6dd60f