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Service Contract Act 101: A Review of the Regulations

Posted on November 9, 2015
Kayla DineenWritten by Kayla Dineen | Email author

Freqently Asked Questions (FAQs) with SCA

Service Contract Act 101: A Q&A Review of SCA RegulationsMuch like the word “union”, the term “SCA” can make almost any HR professional shudder from compliance fear.  In my experience when consulting with clients, this fear is derived from a lack of understanding the regulations contained within the Service Contract Act.  Below we will break down the basics of the regulations so you can then begin to formulate a plan on how you will apply this information to your SCA contracts.

What is the Service Contract Act?

The McNamara-O’Hara Service Contract Act requires government contractors and subcontractors performing services on prime contracts in excess of $2,500 to pay service employees according to the regulations outlined in the Act.

How do I know if my contract is a Service Contract?

Generally, contracts that are intended to furnish services through service employees within the United States in excess of $2,500 are considered service contracts.  In many cases, the contracting office will indicate the service contract through language in the contract terms and through the supply of a wage determination with the contract.  In the event that the contracting office has not supplied your organization with any information indicating that your contract is a service contract and you feel that it may in fact be a service contract it is the contractor’s responsibility to comply with the law.  It is recommended that you connect with your contract officer to discuss your interpretation of SCA regulations and determine if you are in fact required to comply. If you are, the contracting office will supply you with the appropriate wage determination for compliance.

What is a Service Employee?

A service employee is any non-exempt employee working on a service contract. The regulations outlined in the Service Contract Act apply to all service employees performing work on a service contract within the United States. When determining if a work location is within the United States the Act considers the term “United States” to include any State, the District of Columbia, Puerto Rico, the Virgin Islands, Outer Continental Shelf lands as defined in the Outer Continental Shelf Lands Act, American Samoa, Guam, Wake Island, Johnston Island, and the Commonwealth of the Northern Mariana Islands.

How do I know an employee’s SCA Anniversary Date?

Service employees have an SCA Anniversary date that is used to calculate vacation eligibility. The SCA Anniversary date is based on employee’s continuous service with the present contractor who manages the service contract in any capacity and/or predecessor contractors in performance of similar contract functions at the same facility. When awarded an existing SCA contract the contractor obtains the SCA Anniversary Date of incumbents from the contracting office.

What is a Wage Determination?

Each service contract has a wage determination that dictates the occupational codes and titles and associated minimum wage rates with each occupational code on the contract.  Some contracts have multiple wage determinations for varying work locations on the same contract. It is important to follow the regulations of the wage determination that is applicable to the appropriate geographical location as the requirements may be different from location to location. The wage determinations also dictate the Health and Welfare, Vacation eligibility and Holiday eligibility for the service employees.

What are Occupational Codes?

Occupational codes and titles are the labor categories that have been identified as acceptable labor categories to consider for your service employees.  Each occupational code has a minimum hourly rate that the employee is entitled to for performing work on the contract under the specific occupational code.  Each service employee must map directly to an approved occupational code. This process is not always as straight forward as it may seem.  My colleague has written an article to help employers classify their service employees; you can read more about this topic here: A Review of Classifying Workers under the Service Contract Act (SCA).

What are Health and Welfare Benefits?

The Service Contract Act states that in addition to an employee’s hourly pay, service employees are entitled to a health and welfare benefit (H&W) equivalent to the amount dictated on the applicable wage determination.  Calculating H&W takes into consideration the total monetary value of the benefits that an employee is receiving through your organization (health insurance, vision insurance, life insurance, etc.) divided by the number of hours worked over a period of time.  If this number exceeds the H&W requirement on the wage determination your employee is receiving his/her full entitled benefits.  If the number is lower than the H&W requirement on the wage determination then you are responsible for providing the employee with the value of the benefit above and beyond his/her hourly rate.

It’s important to know that how you calculate H&W depends on the wage determination. If the wage determination ends with an odd number H&W is paid on an “each service” basis; in other words, per employee.  If your wage determination ends with an even number, H&W is paid on an “average cost” basis.  Average cost H&W is calculated by taking the total fringe benefit contributions for all service employees on the contract divided by all hours worked for all service employees that were employed on the contract during period of performance.

Top 2 options for paying out H&W to your service employees:

  1. Pay H&W in the form of cash. With the changes in ACA we are hearing from our benefits partners that cash in lieu of benefits can seem as an incentive to not enroll in organizational benefits and contradicts the ACA regulations. It is important to know that if you do pay H&W in the form of cash it must be paid as a separate line item on the pay stub clearly designated as H&W.  If you incorporate it into an employee’s normal wages it is not considered H&W pay.
  2. Contribute H&W to a 401k account. Your organization can contribute the monetary value into a 401k account and remain compliant with the regulations.  It is important that your 401k plan document is set up so that H&W contributions can begin immediately through immediate entry into the plan.  Immediate entry does not mean the employee can self-contribute to the 401k immediately; it means that they are set up with an individual account on your 401k Plan.  In addition, it is recommended that your plan clearly spell out that employer contributions are not eligible for any discretionary matches provided by the organization. Lastly, the employee should be informed of how to access his/her H&W funds.

What are the Vacation requirements under SCA?

Service employees are entitled to paid vacation days as detailed in their respective wage determination.  Service employees are not eligible for vacation their first year of service on the contract; however, on their first SCA anniversary vacation is front-loaded for the employee’s use in service year two.  At the end of each service year contractors are required to pay out any unused vacation in the given service year and front load the vacation for the upcoming service year. Employees may apply vacation on an accrual basis; however, accrual is always pre-funding the employee’s vacation for the following service year.  As accrued, the employee is eligible to use the vacation in the prior service year without the contractor being required to ensure a full balance at the beginning of the next service year.  It is the responsibility of the contractor to track vacation accrual and usage and continue to payout any vacation intended for the given service year at the end of each service year.

What are the Holiday requirements under SCA?

Service employees are entitled to paid holiday as detailed in the wage determination. In many cases the wage determination specifies that employees are entitled to the ten federal holidays.  It is important to know that some states may have varying holiday schedules so it is imperative to review the holiday entitlement for each working location on the contract.

If you’re feeling overwhelmed with all of the information covered above it’s important to know you are not alone.  Many contractors struggle with the basic concepts of SCA let alone actually applying them and maintaining compliance throughout the life of the contract.  A strong understanding of the intention of the regulations is your best starting point towards compliance.  Human Resources, Finance, Contracts, Program Managers and company Executives must all come together to apply consistent and compliant practices related to the Service Contract Act.   To further familiarize yourself with the regulations visit the Labor Standards for Federal Service Contracts at the Electronic Code of Federal Regulations.

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