Service Contract Act & Davis-Bacon

In this episode, I interviewed Matt Corzine from GSA National about the intricacies of the Service Contract Act (SCA) and the Davis-Bacon Act, two pivotal pieces of legislation that impact government contracting. Matt demystifies these regulations, shedding light on their significance, the recent changes, and their implications for contractors. Learn about the nuances of compliance, the crucial differences between SCA and Davis-Bacon, and how they affect various aspects of contracting, from wages to benefits. Whether you're a newcomer to government contracting or seeking to refine your understanding, this episode offers essential insights into ensuring compliance and navigating the potential pitfalls in this complex field. Join us to unravel the layers of SCA and Davis-Bacon, ensuring your government contracting business stays informed, compliant, and ahead of the curve.

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Read Transcript Here:

[00:00:00]

Mike Hey everybody, Mike LeJeune here with another episode of Game Changers for Government Contractors. And today I've got Matt with me. Matt, I want you to jump in, tell everybody a little bit about who you are and what GSA National does.

Matt: Thanks, Mike. And thank you for having me today. My name is Matt Corzine. I'm the president at GSA National. We are a fringe benefit administrator and compliance partner for government contractors that have contracts specifically covered by the service contract act and a related set of regulations called the Davis Bacon and related acts.

Mike For a lot of folks, this is a really tricky situation. I run into people all the time that are getting into government contracting and they're like, never heard of SCA. And they're like, what's the Davis aBcon thing? What's that about? That clearly doesn't apply to me, right? You know, that is the common thing that I run into all the time. So for those that are not aware of this, or that maybe think they've got it all figured out, could you give us just a real quick overview on what SCA and Davis Bacon is?

Matt: [00:01:00] Sure, absolutely. So the SCA or the Service Contract Act, it's also known as the service contract labor standards. So both terms mean the same thing. Basically, it's a set of regulations dating all the way back to the 1960s that require contractors when they have an SCA covered contract, meaning a contract where they are providing services on behalf of the federal government to pay a certain amount in wages. That's SCA broadly speaking. Davis Bacon is a cousin to SCA. It covers construction, federal construction or building contracts. It walks and talks similar to SCA, but there are some really important differences. And there's been actually a lot of recent changes from the DOL around some regulations there that have been somewhat controversial, probably a deeper dive discussion than we have time for today on. It's one of those sets of regulations that typically doesn't change, but when it does change, it tends to be kind of a big deal. And that's been the recent excitement.

Mike Yeah. We probably could spend a [00:02:00] whole day on that one. For clarification purposes, if I'm in construction, am I just going to be under Davis Bacon or is it a combination of the two?

?

Matt: Typically, it's going to be one or the other. However, there are certainly cases where a contractor may have a contract where both SCA and Davis Bacon could apply. And you could even in really complicated situations have the same employee performing some of their work in terms of Service SCA covered work and working some other hours on true construction Davis Bacon covered work. That's kind of an outlier situation, but it does certainly happen. But typically it's 1 or the other.

And when we think of services, good examples are contact centers, right? So if you think of healthcare.gov, the federal marketplace for health insurance, the Health and Human services department has outsourced the contact centers for healthcare.gov. So if you call in and have a question about getting coverage on the exchanges, you are speaking to, not a federal employee, but an employee of a contractor that is working on a contract [00:03:00] subject to SCA.

Mike Sounds complicated. That's why I love having guests on like yourself so that if someone is in doubt, they can reach out to you and not me because I'm not an expert in this. ?That's why you're here to talk about all this type of stuff. One of the things that I run into with clients, and maybe you could shed a little bit of light on this, is when they're looking at this, they're often saying, look, I'm paying the employee enough to be compliant in this area. Why do I need to look at like the benefits package and all that? And can you even provide a core benefits package for four 98 or four and a half dollars or whatever it is that is under SCA.

Talk to me a little bit about that because again, I know there's confusion with people that say I'm paying them enough so I'm covered. I don't have to worry about this.

Narrator: If you're struggling with your government contracting business, I want to encourage you today to go sign up for a free coaching session with me. You can go in the description of this podcast. There's a link to my [00:04:00] calendar and you can go pick a time where we can sit down for 30 minutes to talk about what you're doing right, what you're doing wrong, what you should change. And then if coaching makes sense for you, I'll actually go over the options on how you can get started with coaching so we can take your business to the next level. Now let's get back into this episode.

Matt: Let me speak briefly to the wages piece of it and then that'll segue well to the benefits piece. So SCA: basically a contractor received what's called a wage determination, which lists pages and pages of different job classifications. Each job classification has a specific minimum wage rate that the contractor must pay to that employee. They can always pay more, but they cannot pay less. But separate, in a part of that, there is a fringe benefit, or it's often called a health and welfare requirement, which is totally separate from the wages. The wages, by the way, are basically indexed based on the cost of living for that locality. So same position in New York City versus Lawrence, Kansas would have a very different wage rate because the cost of living is very different. And that makes sense, right? Intuitive sense. The fringe benefit rate, [00:05:00] though, is strangely, it's the same across the country, except for Hawaii. Hawaii is kind of its own special set of circumstances.

But in all other 49 states, it's the same health and welfare rate. It's currently 4. 57 per hour that the employer is paying for, must provide in benefits somehow, to the employee to be compliant. That wage rate comes out just, we like to think of it in terms of a monthly number, so if an employee is working full time hours, it's about 750 a month that the employer must provide to that employee on top of the wages. That's the best way to think about it.

Mike I think that's the hard part. So they look at it and say, well, wage determination is 15 bucks an hour, but I'm paying him 20 so I'm covered. But that wage is 20 and this is another four and a half bucks on top of that, right?

Matt: Yes. So one option to meet the health and welfare requirement to meet that, call it 750 a month requirement is the employer may provide that as earnings, put it in the employee's paycheck. But this is a really important distinction. The employer [00:06:00] has to carve it out as a separate line item ?on the pay stub. Because what the department of labor, which is the governing body and enforcement entity for SCA, will do is the employer is just bundling the health and welfare, the 4.57 per hour, say with the 16 and 20 cent per hour wage rate.

The department of labor will, it has been very consistent saying, nope, you're not really providing the health and welfare. You're just being overly generous and paying them 20 an hour. Good for you, but you're not breaking out the health and welfare as a separate line item on the pay stub. And we're gonna actually make you go back and pay that separately. And we've seen contractors get dinged for that because they have to go back and pay these employees a bunch of wages.

So this gets kind of into the weeds of payroll administration, but it's an important thing you have to set up if you choose to provide that health and welfare, that 4. 57 per hour, as cash or cash in lieu of sometimes what it's referred to as.

Mike Slightly off topic, but not, if I found myself to have not been compliant and I need to go back and pay this stuff, how far back [00:07:00] does the government typically make you go or deal with?

Matt: That's a great question. There is no clear guideline on statute of limitations for compliance, which is a little bit maddening. When we get phone calls, our general recommendation and those from partners that we work with is three years. And a lot of it comes back to making the employees whole.

So our experience has been that contractors who go and do a three year, roughly, correction if they've been out of compliance for three years can have a reasonable defense to the Department of Labor saying, look, we recognize the problem. We addressed it. We made the employees whole. That being said, what I say to contractors is there's no guarantee that three years will be enough. But in our experience that has demonstrated the intent to the right thing and is a defensible position.

Mike Three years, 750 a month, times say a dozen employees.

Matt: Right.

Mike That adds up really, really quickly. And so, I'm thinking I would be like, what's the fine for that? Can I get away with a fine instead? But you probably have to pay the fine plus the [00:08:00] wages in order to do that.

So again, it's a little bit in the weeds, but just, I know these are questions that folks are going to have to ask. So in this situation, if I'm doing this and I have broken it out, I'm doing the 4.57 an hour and I'm squared away on that. Can that be then applied to their health insurance or things like that? Or does the company then have to do that separately where, Hey, we're going to still pay a portion of your health insurance. Cause I can see health insurance being one of those tricky areas where they're like, Hey, we were covering a portion of the health insurance and still paying them 20 bucks an hour. Now we've got to keep paying them the 20 bucks and the 4.57 and covering the insurance. I can see the fears of some people

Matt: For sure. And this is what we call kind of the existential struggle that contractors have in the space, because it is a balance between recruitment and retention of employees on the contract. Because if you have won and are performing an SCA covered contract, part of how you're being measured from a performance standpoint is your ability to hire and retain [00:09:00] employees. almost first and foremost. At the same time, many employees, I think the perception is that the best way to do that is to just pay the 4 as earnings because employees just love getting that extra cash in their pay stub. Right? That's kind of the one extreme of the best in theory, most appealing for employees.

But at the same time, our experience is that there are many, many employees that are looking for affordable, at least medical, coverage from their employer, right? Depending on where they live, cost of insurance and so on and a more cost effective way to use that health and welfare is to use a part of it to pay for and provide benefits, whether it's medical or maybe what we would call core benefits package to say some medical, some life insurance, something like that.

And that's a more cost effective way to use those health and welfare dollars. And I say cost effective because keep in mind whenever the employer is paying that 4.57 per hour as earnings, they are incurring payroll taxes on those amounts. So it adds expense to the employer versus if you think of it this way, if the employer is[00:10:00] putting that 4.57 towards benefits, there's no payroll tax expense to the employer in that scenario. That's why I kind of put it on the other extreme, which is, it's the more employer friendly because they're going to employers going to save on the payroll taxes. But there's also the long game, I would argue, of being able to offer affordable medical coverage to employees, particularly as the employer grows.

And what we see is contractors who are getting into the SCA space and they're just trying to win contracts, right? They're trying to win that first contract and then win the recompete and grow their business. And they start off paying cash. But then as they grow, they say, you know what, we really need to have an affordable medical coverage to be able to offer to our employees.

But that gets into really thinking through making sure you've got a good mix of healthy and unhealthy people in your medical plan. That's how insurance works. And if you only have unhealthy people in your medical plan, it tends to lead towards a, what we like to call a death spiral, in terms of the claims expense and affordability of that coverage.

Mike It's all going to be very expensive. I'm glad you mentioned that about the taxes, because that was actually a question I was going to ask on the employee side of that. Do [00:11:00] they only pay taxes on their wages or are they also paying taxes on the health and welfare?

Matt: That's a great point. The employee pays their normal payroll taxes on those earnings as well. So it's taxed just like regular wages to be fair. So it's expensive to the employer and the employee isn't really getting 4.57 an hour. That's the gross pay, if you will. The net is a lot less than that, depending on their, tax bracket.

Mike But they're not being dinged extra or anything like that?

Matt: No, nothing like that.

Mike Cause they were already going to make the wage and that sort of thing.

Matt: Right. I'll just add briefly, it's not an either/or decision. There are ways to do both. There are ways to take some of that 4.57 per hour, pay it as earnings and take the other portion and use it to pay for benefits. We certainly run programs like that for our clients where they want to kind of find this middle balance between the two.

Mike Let's back up for a minute. Just to kind of clarify on SCA, for example. What type of contracts, what type of employees are going to fall under that typically, just in general?

Matt: Sure. As the name implies, it's any service [00:12:00] that the contractor is providing on behalf of the government. So I use the example of contact centers, but it's much broader than that. So if you think, on military basis, base support services, ranging from janitorial food service, custodian, et cetera, landscaping, any type of service, is the 1st kind of general coverage. And the 2nd is, it's specifically for non exempt employees. So these are hourly employees, not set, generally speaking, hourly, not salary employees. And that's where SCA applies. So if you have, for example, managers that are salaried employees that are supporting the program, they're still working on an SCA covered contract, but there is not the obligation to pay them a specific wage rate and provide them the health and welfare because they're in a different employee status as salaried or what's called exempt.

?Mike So you'll wind up with some employees on the contract that you're paying this and you have to be compliant. I assume from a an administration standpoint, it's easier to just do it across the board for everybody. Otherwise, you've got some employees that are getting this and [00:13:00] some aren't. Is that true?

Or is that where a company like yourself comes in and says, Hey, this is how you should break this out. You can pay it this way, but you don't have to.

We can help show you how to administer the difference between the two types of employees.

Matt: It definitely requires some analysis. And I say that because we have seen situations where the exempt employees, those managers, supervisors, et cetera, have a different benefits package, a different cost of their benefits, et cetera. In some cases it's a less generous benefits package because of the way it's set up. And so there's actually becomes a strange disincentive for growth and promotion.

We've heard employees say, look. I want to get promoted into that supervisor position, but I need family medical coverage, and I see how expensive that family medical coverage is. It's actually better for my pocketbook if I stay as a non exempt employee because of the health and welfare will cover more of my benefits versus if I get promoted and it's a different, what's called cost share, meaning how much the employee has to pay for their coverage. As with all things, you know, compensation and benefits, you have to be really mindful of the incentives how they might actually work in [00:14:00] unintended ways.

Mike That makes sense. And I've seen scenarios where you have a lot of blue collar work with some middle and lower management, even upper management, where they're like, Hey, I can actually work overtime and make more money than my manager. Because my manager is making that salary and they don't necessarily receive bonuses or anything like that. So they're just going to get paid what they get paid. But I'm over here and working 60, 70 hours a week, making twice as much as that person just based on the way it shakes out.

?Matt: Absolutely.

?Mike: Talk to me a little bit about how your company comes in and helps with this problem. I know it's a large problem figuring out how to do it, what to do, how to manage it. Where does your company come in and what do you do for the client?

Matt: I think I can best answer that in a couple of examples. One is when we work with contractors that are just getting into the SCA space. Maybe they've won their first one or two contracts and say have fewer than a hundred SCA non exempt employees, right? Typically what we're able to best help them is at that point, they want to provide some benefits. Those [00:15:00] employees, they typically have said we want to move away from the cash. At least partially. And what we can do is do the compliance calculations to say, based on what each employee elected and based on the hours that they worked, here's how much you want to put in their paycheck as that remaining health and welfare for earnings.

And here's how much is going to go to pay for the benefits. And those calculations are really important because, keep in mind, although the benefits that employees elect generally stay constant over the year, right? The hours that employees work do not. So you really have to do that analysis because the number is going to vary month to month again. Making sure you're providing the benefits. And then if you want to pay whatever is left as earnings. Or sometimes employers will decide to put that into retirement plan. They'll say, look, we want to help you invest for your future. And, we're going to put that leftover money health and welfare into retirement plan on your behalf. So that's one model is kind of a compliance reporting and analysis.

The other model, which is really for contractors that have grown and have a lot, I'm going to call it the long game strategy in the SCA space, meaning they've figured out how to win contracts, how to be profitable in those [00:16:00] contracts. And they want to continue to grow. We will go and establish what are called health and welfare trusts that are for the benefit of the employees. And without getting into the somewhat, I don't say boring, but maybe less interesting mechanics of how trust work. There's some tax advantages to that. There are absolutely some cost savings to that. But you need to have some economies of scale 100 employees for that trust model to make sense.

But that is a model we run with a good number of our clients. They tend to be those bigger, longer term, very successful names that you would recognize because they figured out how to be successful in this SCA space and bid competitively on these contracts.

Mike That's good information. I didn't know you guys did that part of it. On the benefits side, do you see situations where folks are able to buy into, and I'm not sure exactly how to phrase this, but buy into medical groups, if you will, by working together? I don't know if it's through companies like yourself or certain brokers where they can come in and leverage all of those employees. [00:17:00] Does that make sense?

Matt: It does. Kind of our principles we like to stand on is, we are not a broker. And in fact, we are broker and plan agnostic. So we're not advocating for a specific insurance product per se. We want to work with our clients to support them with whatever products make the most sense.

But to your question, Mike, one example is there are these organizations called PEOs, professional employee organizations, that have some group purchasing power in terms of medical coverage and so on. As with all things in the insurance world, there are pros and cons to that model. We've seen Employers go into them. We've seen employers come out of them for different reasons. But it is something to certainly consider.

Mike How big do you typically need to be to get in with one of those PEOs?

Matt: You don't have to be big at all. In fact, we've seen contractors of, you know, as small as 50 employees, but also as large as several hundred be part of PEOs.

Mike Okay. I know that's been a topic of late, every time I talk to a client in the last, I don't know, two, three years, one of the questions that always comes up is, Hey, who are you using for insurance? That is one of the most common questions. [00:18:00] And one of the answers I've had to give is, ask me in six months. Because with our move to Tennessee, and just the way the insurance is, we've, I think, gone through different brokers like five times in the last four years, maybe three years because the plans have switched or expired. And then we moved and they're like, oh, it doesn't cover that anymore, even though we thought it would. And, you know, there's all kinds of challenges around that. It's an interesting landscape.

What around SCA or even Davis Bacon have we missed today that we need to let people know about?

Matt:? I think the biggest thing I would emphasize is, particularly if you are new or considering to getting into the SCA spaces and you're looking at a solicitation and considering bidding on it, right? If the solicitation is SCA, there are specific FAR clauses that will be incorporated as part of the solicitation that will tell you that.

?My other advice is, if the solicitation walks and talks like an SCA contract, but it doesn't have FAR clauses, it behooves you to ask that question [00:19:00] early and often saying, Hey, this looks like an SCA covered contract. Are you sure it's not? Because what we sometimes see is contractors will, they almost think they got away with one. Because let's be honest, SCA, it's a hassle at a minimum. Right. And they think, it's an SCA contract, but for some reason the FAR clauses were not included and they think, I'll just get away with this one, you know, I won't have to worry about this SCA. And that works for a while.

But the reality is employees are really sharp. Keep in mind, some of these employees have already been working on the contract with the predecessor contractor. They know it's SCA. They're going to raise the issue. And basically the Department of Labor will come in and they have the final authority.

So they will come in six months after the fact and say, look, contracting officer, you messed up. This should have been SCA. You need to go back and retroactively make these employees whole. And, you know, even if the contractor can submit a price adjustment to get reimbursed for that expense, it doesn't really do much to build trust with the employees. You know what I'm saying? If they've now been running this contract for six months and the perception is, well, Why didn't you treat us the way we were treated with the predecessor contractor or something like that? So I would just say if it [00:20:00] walks and talks like SCA, it's probably SCA and you're better to kind of just deal with that on the front end than hope you can fly under the radar in the long run.

?Mike That's good advice. I think for a lot of companies out there, it really is just a complete ignorance that this exists. I can't tell you how many times I have sat down with somebody and they're like, what is it? What are you talking? No, I've never heard of that. Where did that come from?

And we start talking about it and they're like, this is probably every contract I have. When they look back, some of their contracts will have the clause and some don't. This is how I got introduced to SCA a few years ago. A client of mine said, Hey, we've been working on this contract for a little over a year. It's coming out for recompete and they put this clause in here that we've never heard of before. What is this? Does that apply since it didn't apply to the previous one? My first question was, are you doing the exact same work? It's just a recompete. They're like, yeah, yeah. I'm like, it probably applies. So that's the first thing, right?

And then this whole can of worms, right? Because they weren't paying [00:21:00] the employees enough. It was not even in the ballpark of covering. So now they're like, okay, this is going to really affect our bid, our ability to win this thing. And it just threw their game off. And so that was my rude awakening in the SCA several years ago.

And I know a lot of other people have that challenge. So I think being able to just determine and ask a handful of questions. Is that something also that you're able to do? If somebody is one of your clients or comes to you and says, Hey, not sure if this is SCA. Think it is. It sounds like from the podcast it is. Can you guys take a look at this and tell us and then advise us moving forward?

Matt: Certainly can. And one thing to note is that your example is actually very relevant. Because the Biden administration has a much more pro labor orientation, I think, is well documented and there has been a push to reclassify many longstanding contracts that historically have not SCA to start treating them as SCA.

We've actually picked up a couple of new clients in that situation. They've had the contract for 10 years. It's never [00:22:00] been SCA. It goes up for recompete and the Department of Labor has said, you know what? We now think this should be SCA. And to your point, it changes how they think about the proposal, how they think about running the program and everything.

So it doesn't surprise me that you've heard that because we have certainly heard that as well.

Mike Such a hard scenario. ?On the flip side, I know this is going to shock a lot of people that the government often just copies and pastes language, right? Do you ever see on the flip side where it's accidentally been included, the FAR clause has been included in a solicitation and when you look at it, it's not SCA.

Matt: I don't know if I've seen that. I have seen one instance where the contractor pushed back on the reclassification and was able to, don't think they actually succeeded, but it's basically stuck in limbo. It appealed. It's in a, I call it a perpetual appeal state, basically. So it is something they can ask and push back on again, depending on how big they are and influence and so on. But typically it's out of their hands in terms of how that contract's gonna [00:23:00] be treated.

Mike Again, I know sometimes the government just copies and paste and you never know what's gonna be in there. And in fact, I had one recently where a client said, Mike, this employee is salaried,? let's say the SCA was the wage determination was like 15 bucks. Then you have your four and a half. We're paying this person 50 bucks an hour if you break it down by the hour. But they're salaried and this clauses in here. This doesn't apply to this employee, does it? I would assume it doesn't since they were salaried and they're making two and a half times what the wage determination is.

Matt: That's correct. The minimum wages and the fringe benefits apply to the non exempt, hourly employees, not those salary employees.

Mike This has been very educational on this, on a topic that's really tough. So I appreciate that. And as always, we'll have all your contact information on the website for this one so if folks have any questions about it, they can follow up with you. I know people will have questions about this.

?Thank you, Matt, for coming on and talking about this. I really appreciate it.

Narrator: I really hope you enjoyed the podcast [00:24:00] today. If you did, I would really appreciate it if you would like and subscribe to the podcast and screenshot it and tag me on LinkedIn or whatever social media you use.

So thank you again for joining us today and we'll see you next time.