Service Contract Act Compliance FAQ
Everything government contractors need to know about SCA Health & Welfare compliance — from calculating your H&W obligation to preparing for a DOL audit. Based on 13 years of hands-on compliance experience.
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SCA Fundamentals
What is the Service Contract Act?
The McNamara-O'Hara Service Contract Act (SCA) of 1965 requires contractors and subcontractors performing services on federal government contracts exceeding $2,500 to pay service employees no less than the prevailing wage rates and fringe benefits found in the locality where the work is performed. The SCA is codified at 41 U.S.C. Chapter 67, with implementing regulations at 29 CFR Part 4 and Federal Acquisition Regulation Subpart 22.10.
How do I know if my contract is covered by the SCA?
Check your contract for FAR clause 52.222-41 (Service Contract Labor Standards) and an attached Wage Determination. If those are present, your contract is SCA-covered. When in doubt, ask your contracting officer. The SCA applies to service contracts over $2,500 — this covers work like janitorial, security, food service, IT support, and administrative services.
What's the difference between the SCA and the Davis-Bacon Act?
The SCA covers service contracts (janitorial, security, food service, IT support), while the Davis-Bacon Act covers construction contracts (building, alteration, repair). The SCA threshold is $2,500; Davis-Bacon is $2,000. Some contracts involve both construction and service work — in those cases, each portion must comply with its respective requirements.
Who counts as an SCA "service employee"?
Any employee performing services on a covered contract, unless they qualify as a bona fide executive, administrative, or professional employee under 29 CFR Part 541. Common exempt positions include managers who supervise two or more employees, administrators exercising independent judgment, and professionals with advanced degrees. If you're unsure whether someone is exempt, the safer approach is to treat them as covered.
Health & Welfare Fringe Benefits
What is the H&W fringe benefit requirement?
Health & Welfare (H&W) is one component of the fringe benefit requirement under the SCA. Contractors must provide H&W benefits to every covered employee in one of two ways: provide actual bona fide benefits (health insurance, retirement contributions, etc.) that meet or exceed the required H&W amount, or pay the employee the H&W amount directly as additional cash wages. Most contractors use a combination of both.
What is the current SCA H&W rate?
As of July 7, 2025 (AAM 250), the standard H&W rate is $5.55 per hour. Since most federal service contracts include Executive Order 13706 (paid sick leave), the rate that applies to the majority of contractors is $5.09 per hour — the cost of paid sick leave is statistically accounted for separately. Hawaii has separate, lower rates ($2.42/hour standard) due to state-mandated health insurance. These rates apply at your contract anniversary date, not when DOL publishes them.
How do I calculate the H&W obligation?
For odd-numbered Wage Determinations (the vast majority of SCA contracts): Weekly H&W Obligation = SCA Paid Hours (capped at 40 per week) × H&W Rate. "SCA Paid Hours" includes all compensated time — regular hours worked, vacation, sick leave, holidays, and any other paid time off. The critical rule is the 40-hour weekly cap: hours beyond 40 in a week are excluded. However, in states with daily overtime laws (like California), an employee can accumulate overtime hours that still fall within the 40-hour weekly cap — those hours do count. For even-numbered Wage Determinations, the calculation is different: H&W is based only on worked or "productive" hours (vacation, PTO, and sick leave are excluded), and there is no 40-hour weekly cap.
What benefits count toward the H&W obligation?
Employer-paid portions of: medical/health insurance premiums, dental insurance, vision insurance, life insurance, AD&D insurance, short-term and long-term disability, retirement/401(k) employer contributions, HRA employer contributions, and HSA employer contributions. Important: employee contributions (payroll deductions) do NOT count. Only the employer-paid portion counts toward meeting the obligation.
What if an employee declines health insurance?
You're still obligated to provide H&W benefits equal to the required amount. Options include providing other bona fide benefits (retirement contributions, life insurance, etc.), paying the H&W amount as cash fringe (additional wages), or a combination of both. Cash fringe must be separately identified on pay stubs and is subject to all payroll taxes.
Do part-time employees get H&W benefits?
Yes. All SCA-covered employees are entitled to H&W benefits regardless of hours worked. Under odd-numbered Wage Determinations, the obligation is calculated based on actual compensated hours (subject to the 40-hour weekly cap), so part-time employees generate a proportionally smaller obligation — but you still must meet it. Under even-numbered Wage Determinations, the obligation is based on productive hours worked with no weekly cap.
Does overtime affect the H&W calculation?
Under odd-numbered Wage Determinations, the H&W rate is flat regardless of overtime status — there's no 1.5x multiplier. Hours beyond 40 per week don't count toward the obligation. So if an employee works 50 hours in a week at a $5.09 rate, the obligation is 40 × $5.09 = $203.60, not 50 × $5.09. But be aware: in states with daily overtime laws (like California), hours classified as "overtime" under state law still count if the weekly total is under 40. Under even-numbered Wage Determinations, there is no 40-hour cap — all productive hours count, including overtime hours, though paid leave is excluded.
Wage Determinations
What is a Wage Determination?
A Wage Determination (WD) is a DOL document attached to your contract that specifies the minimum wages and fringe benefits required for a particular geographic area and type of work. It lists job classifications with hourly wages, the H&W rate, and vacation and holiday requirements. Your contract's WD is your compliance roadmap — always use the WD attached to your specific contract, not one you find independently on SAM.gov.
What's the difference between odd-numbered and even-numbered Wage Determinations?
Odd-numbered WDs (ending in 1, 3, 5, 7, or 9) express the H&W benefit as an hourly rate — for example, $5.09 per hour. These represent approximately 95% of all SCA contracts. Even-numbered WDs express H&W as a monthly amount and use a different calculation methodology. SimpleFringe is designed for odd-numbered Wage Determinations, which cover the vast majority of service contracts.
When do new Wage Determination rates take effect?
This is one of the most misunderstood aspects of SCA compliance. New rates take effect on your contract anniversary date — not when the Department of Labor publishes the new rates. For example, if DOL publishes new rates on July 7, 2025, but your contract anniversary is October 1, the new rates don't apply to your contract until October 1. Applying rates early means overpaying; applying them late means you're out of compliance.
Where do I find my Wage Determination?
Your contract should include the applicable WD. You can also look up Wage Determinations on SAM.gov by searching by state, county, and service type. But always verify against the WD actually incorporated into your contract — that's the one that's legally binding.
Multi-Contract Compliance
How do I handle employees who work on multiple SCA contracts?
Under odd-numbered Wage Determinations, the H&W obligation is measured at the individual employee level — not per contract. You calculate the total obligation across all contracts, then compare it to the employee's total employer-paid benefits. The formula is: Total H&W Obligation = (Hours on Contract A × H&W Rate for Contract A) + (Hours on Contract B × H&W Rate for Contract B). This is important because contracts may have different H&W rates. The employee's total employer-paid benefits are then compared against this combined obligation to determine compliance.
Can I use excess compliance on one contract to cover a shortfall on another?
Under odd-numbered Wage Determinations, the obligation is evaluated at the employee level, not the contract level. This means the employer's total benefits for an employee are measured against the employee's combined H&W obligation across all contracts. If total employer-paid benefits meet or exceed the total obligation, the employee is compliant — there's no need to "borrow" between contracts because the math is already done as a single calculation. This is one of the areas where the distinction between odd and even-numbered Wage Determinations really matters, and where spreadsheet tracking often gets it wrong.
Can you give an example of a multi-contract H&W calculation?
Say an employee works on two contracts in a biweekly period: Contract A (100 hours at $5.09/hour H&W rate) and Contract B (60 hours at $4.98/hour H&W rate). The total H&W obligation is: (100 × $5.09) + (60 × $4.98) = $509.00 + $298.80 = $807.80. If the employer pays $900.00 in benefits for that employee during the period (health insurance, 401k contributions, etc.), the employee is over-compliant by $92.20. If instead the employer pays only $650.00 in benefits, the employee is under-compliant by $157.80 — and the contractor must make up the difference through additional benefits or a cash-in-lieu payment.
DOL Audits and Enforcement
How common are SCA violations?
Very common. According to a GAO report (GAO-21-11), the Department of Labor found wage or benefit violations in 68% of SCA cases investigated. Over a recent 5-year period, there were over 5,000 SCA investigations resulting in approximately $224 million in back wages recovered. The most common violations are underpayment of wages, H&W violations, and recordkeeping failures.
What triggers a DOL investigation?
Investigations can be triggered by employee complaints, random selection, prior violation history, industry targeting, whistleblower reports, or referrals from contracting agencies. Most SCA investigations begin with a letter or phone call requesting records, though under the FLSA the Wage and Hour Division does have the authority to conduct on-site visits without prior notice.
What happens during a DOL audit?
The investigation typically follows this process: DOL contacts the contractor (often unannounced), issues a records request, conducts employee interviews, communicates findings, gives you an opportunity to respond, issues a final determination, and requires remediation if violations are found. Being cooperative and having organized records helps significantly.
What are the penalties for SCA non-compliance?
Penalties range from withholding of contract payments and back-pay liability (with interest) to contract termination, reprocurement cost charges, and — most severely — a 3-year debarment from federal contracting. Debarment applies to contractors, subcontractors, and their successors. Back-pay liability can span multiple years of violations and devastate a small business.
How should I prepare for a potential audit?
Maintain organized files with: contract documents showing WD incorporation, payroll records with hours broken down by contract, benefit enrollment and cost documentation, H&W compliance calculations, records of any cash fringe payments, predecessor employee service records, and evidence of posting compliance. Conduct regular self-audits — at least annually — and address issues proactively before DOL finds them.
Recordkeeping and Best Practices
What records do I need to keep for SCA compliance?
You must maintain: employee information (name, classification, hire date, status), hours worked each day/week segregated between SCA and non-SCA work and broken down by contract, compensation details including base wage vs. fringe benefit breakdown, benefit enrollment and employer costs, and Wage Determinations incorporated into your contracts. Records must be retained for three years from completion of contract work and available for DOL inspection upon request.
What are the posting requirements?
You must post two things at each worksite: DOL Publication WH-1313 ("Notice to Employees Working on Government Contracts") and the Wage Determination attached to the contract. Both must be displayed in a prominent, accessible place before contract performance begins. Pay stubs must also separately identify wages vs. fringe benefit amounts.
How often should I run compliance calculations?
At minimum, monthly. Many contractors run calculations each pay period to catch issues early. The earlier you identify an under-compliance situation, the easier and cheaper it is to fix — usually by topping up benefits or issuing a cash fringe payment.
What are the most common compliance mistakes?
The top mistakes are: employee misclassification (wrong labor category or incorrectly classifying as exempt), using the wrong Wage Determination or applying rate updates before the contract anniversary date, inadequate time tracking (not segregating SCA vs. non-SCA hours or hours by contract), including employee contributions in the H&W calculation, missing the 40-hour weekly cap, not flowing down SCA clauses to subcontractors, and not monitoring Wage Determination updates.
Executive Orders and Special Topics
What is Executive Order 13706 and how does it affect H&W?
EO 13706 requires certain federal contractors to provide paid sick leave — employees accrue 1 hour per 30 hours worked, up to 56 hours per year. Contracts covered by EO 13706 have a lower H&W rate (currently $5.09/hour vs. $5.55/hour standard) because part of the fringe obligation is satisfied through the sick leave requirement. This applies to contracts entered into or renewed on or after January 1, 2017, and covers the majority of current federal service contracts.
What is the conformance process?
When employee duties don't match any classification in the Wage Determination, contractors must request DOL approval for a new classification and rate using SF 1444. This must be submitted within 30 days after the unlisted classification begins performing contract work. DOL approves, modifies, or disapproves within 30 days, and the final rate must be paid retroactively.
How do subcontractors handle SCA compliance?
The same rules apply to subcontractors. Prime contractors must flow down FAR 52.222-41 and the applicable Wage Determination to all subcontracts performing related services, regardless of subcontract dollar value. Prime contractors are liable for subcontractor non-compliance, so monitoring is essential.
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