The Service Contract Act – Part 1
The Service Contract Act (SCA) generally requires that government contractors on service contracts, with certain limited exceptions, pay a “prevailing wage” to their employees in each specified locality where they have work. Today, we will address the regulatory language and supporting case law that dictate how and at what point contractors should apply new labor rates in the context of the Department of Labor (DOL) wage determinations. The rules are confusing and not intuitive. Moreover, they are different depending on whether or not wages are set by a collective bargaining agreement (CBA).
DOL regulations and applicable law make clear that new wage determinations are not binding on a contractor until incorporated into a modification which exercises an option, extends the contract, or adds labor requirements. 29 C.F.R. § 4.143. Specifically, any wage determination issued by DOL will apply to a contract “entered into thereafter and before such determination has been rendered obsolete by a withdrawal, modification, or supersedure.” 29 C.F.R. § 4.3(b). Wage determinations issued by the DOL are not self-executing, are not retroactive, and do not apply to a contractor until the exercise of the next option period after issuance. Accord Guardian Moving and Storage Company, Inc. v. Hayden, 421 F.3d 1268 (Fed. Cir. 2005). This coincides with the regulatory language, which provides that qualifying modifications creates a new contract. 29 C.F.R. § 4.143.
Under applicable statutes and DOL regulation, the review and implementation of new wage determinations has to be, at least, every two years. 29 C.F.R. § 4.4. This review and implementation also coincides with the type of money on the contract. Id. For annual appropriation contracts, this review is conducted every year. Id. For all other applicable contracts the review is no less frequently than every two years. Id. Moreover, until it is incorporated into the contract, the old rates should remain in effect, but not for longer than two years. Id.
When operating under a CBA, the application of the SCA shifts. See generally 41 U.S.C. §§ 351, et seq. Contracts employing CBAs are not treated the same as those without CBAs. Specifically, while new wage determinations issued by the DOL are obligated to be reviewed and incorporated into the contract no less frequently than every two years, but more commonly every option period, the rates detailed in a CBA become effective immediately due to the arms length nature of the negotiation process of the new CBA. Accord Guardian Moving and Storage Company, Inc. v. Hayden, 421 F.3d 1268 (Fed. Cir. 2005). These rates stay in effect, regardless of any subsequent wage determination or contract successor, until modified with a new CBA. 29 C.F.R. §§ 4.4 & 4.163. The SCA contemplates such a distinction as well, as they have provided for it in Section 4(c) of the SCA. This is different than what is expected of contracts that do not operate under a CBA, as the language of 4(d) of the SCA is not self-executing until a new contract is in place.
Bryant S. Banes, Managing Shareholder, Neel, Hooper & Banes, P.C., Houston, Texas (May 10, 2012)
Update on Executive and Employee Compensation in Government Contracts
The Government is in constant pursuit of later for ways to save money and, for many in the government, there is no better place to do that than on the backs of contractor that serve it. A popular target with the current Administration is the area of executive compensation. It seems not enough that shareholders keep this in check. The government also feels it need inject itself in this market-based equation with hard and fast rules. It has even seen fit on occasion to create rules where there are none, using the Defense Contract Audit Agency (DCAA) as its sword. With respect to rules, there exists the prospect of political restraint. Also, where the Government oversteps its bounds, there are Courts that sometimes rein it in.
On the rulemaking side, Congress amended 10 USC § 2324 this past year to provide that the cap on allowable executive compensation reimbursed on cost-based contracts (currently $693,951 annually, including wages, salary, bonuses and deferred compensation) now applies to “any contractor employee.” It applies not only to prime contractors but also to subcontractors at any level. This does not mean that contractors are limited in what they can pay employees; rather, it simply serves as a limit on what can be reimbursed on a government contract. Accord 48 CFR 31.205-6(p). Additionally, allowable amounts are also subject to the requirements that the compensation be “reasonable and allocable.” This reasonableness requirement is where DCAA has recently been chastised for its views.
In Appeal of J.F. Taylor, Inc., ASBCA No. 56105 (January 18, 2012), the Board rejected the government’s challenge to a contractor’s executive compensation model that considered both the revenues of the whole company and its superior performance, as anyone with experience in the private sector would expect. The government instead tried to rely upon DCAA’s approach that simply mechanically applied a median executive compensation number loosely based upon a market survey unrelated to the contractor at issue. In its decision, the Board accepted the contractor’s unrebutted expert testimony that “the methodology used by DCAA was fatally flawed statistically and therefore unreasonable.” The Board also went on to reject the DCAA expert, saying “the government effort to support its own methodology was supplanted by an expert witness of questionable judgment.” That is harsh by any standard, but appropriate given the circumstances.
What we take from this is that Executive Compensation Reviews (ECRs) by DCAA will continue, and that they may morph into wider reviews. However, the silver lining is that Courts and Boards seem to willing to scrutinize government positions on compensation that do not make sense; this may give the Government pause. It is often a battle of the experts, and this writer can personally vouch for the expert used by J.F. Taylor in its case, namely Jimmy Jackson (having seen his excellent work myself). It remains to be seen whether the Government will appeal J. F. Taylor; they have until May 17, 2012 to do so. Regardless, the Government must deal with DCAA’s methodology on ECR reviews which, at present, is considered fatally flawed. We recommend that any contractor undergoing an ECR seek competent counsel for assistance. It could make a big difference to your bottom line!
Bryant S. Banes, Managing Shareholder, Neel, Hooper & Banes, P.C., Houston, Texas (May 9, 2012)
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