Fact Sheet #67B: Meeting Requirements for Service Contract Act (SCA) Fringe Benefits

This fact sheet provides general information regarding compliance with the fringe benefit requirements of the McNamara-O’Hara Service Contract Act (SCA or Act). The SCA contract clauses require contractors and subcontractors performing on service contracts with the federal government more than $2,500 to pay service employees in various classes no less than the locally prevailing wage rates and fringe benefits, or the rates (including prospective increases) contained in a predecessor contractor's collective bargaining agreement. Federal contracting agencies are required to incorporate the contract clauses and applicable SCA wage determinations published by the Department of Labor into covered contracts. The fringe benefit requirements (usually “health and welfare,” vacation, and holiday benefits) are separate and in addition to the hourly monetary wage requirement under the SCA. See 29 CFR §§ 4.6, 4.170.

Compliance with SCA Fringe Benefit Requirements

See 29 CFR § 4.170

The fringe benefits required under the Act must be furnished, separate from and in addition to the specified monetary wages, as specified in the wage determination in the contract documents. The obligation to furnish the specified benefits may be discharged by furnishing any equivalent combinations of bona fide fringe benefits or by making equivalent or differential payments in cash. A contractor cannot pay a higher monetary wage rate than what is required under the wage determination in order to satisfy its fringe benefit obligation, and must keep accurate records separately showing amounts paid for wages and amounts paid for fringe benefits. See 29 CFR § 4.170.

For example, if the applicable wage determination requires a Cook Level II wage rate of $19.50 per hour and $4.98 per hour for health and welfare fringe benefits, the contractor cannot pay a $25.00 per hour wage rate and no health and welfare fringe benefits. The contractor also cannot pay a $22.00 per hour wage rate, and $2.48 in health and welfare fringe benefits. Whether the contractor pays the minimum hourly wage rate of $19.50 per hour or elects to pay more, the contractor must furnish at least $4.98 per hour in health and welfare benefits (or the cash equivalent thereof) separate from and in addition to hourly wages.

Bona Fide Fringe Benefits

See 29 CFR § 4.171

The SCA includes an illustrative list of bona fide fringe benefits, which includes, for instance, medical care, compensation for injuries or illness, and pensions for retirement or death, as well as insurance to provide such items. To be considered bona fide for SCA purposes, fringe benefits must be provided in accordance with a plan, fund, or program. The plan must have a primary purpose of providing benefits to the workers, it must be a legally enforceable obligation, contractor contributions must be made irrevocably to a trustee or third party, and the plan must be in writing and communicated to the workers in writing. See 41 U.S.C. 6703(2); 29 CFR § 4.171(a)(2), (5); Field Operations Handbook (“FOH”) 14j01(a).

Funded Plans. A contractor can satisfy fringe benefit obligations required by an applicable wage determination, such as those related to pension, retirement, or health insurance benefits, by making irrevocable payments of the specified contributions for fringe benefits to an independent trustee or another third party in accordance with a "bona fide" fund, plan, or program on behalf of employees performing work covered by the Act's provisions. It is essential to ensure that contributions made on behalf of workers do not revert to the contractor. The third party must also assume the usual fiduciary responsibilities imposed upon them by applicable law. See 29 CFR § 4.171(a)(1)-(6); FOH 14j01(a)-(b).

Unfunded Plans. Unfunded self-insured fringe benefit plans under which a contractor makes out-of-pocket payments to provide benefits for employees as costs are incurred, rather than making irrevocable contributions to a trust or other funded arrangement, are not normally considered bona fide plans or equivalent benefits, except for plans to provide paid vacation and holiday fringe benefits.  A contractor must request approval by the Administrator of an unfunded plan in order to allow credit for payments under such a plan in meeting the fringe benefit requirements of the Act. In considering whether such plan is bona fide, the Administrator will consider such factors as whether it could be reasonably anticipated to provide the prescribed benefits, whether it represents a legally enforceable commitment to provide such benefits, whether it is carried out under a financially responsible program and whether the plan has been communicated to the employees in writing. The purpose of seeking advance approval is to verify that the proposed unfunded plan meets the requirements for unfunded plans. See 29 CFR § 4.171(b)(2); FOH 14j01(c).

To request the Administrator’s approval to take credit for an unfunded plan, please send the request and related documents to Unfunded@dol.gov.

Items Not Considered to be Bona Fide Fringe Benefits. Contractors may not take credit for any benefit required by federal, state, or local law such as workers’ compensation, unemployment compensation, and social security contributions. The furnishing to an employee of board, lodging, or other facilities under the circumstances described in § 4.167, the cost or value of which is creditable toward the monetary wages specified under the Act, may not be used to offset any fringe benefit obligations, as such items and facilities are not fringe benefits for purposes of the Act. The furnishing of facilities which are primarily for the benefit or convenience of the contractor or the cost of which is properly a business expense of the contractor is also not the furnishing of a bona fide fringe benefit (e.g., items such as relocation expenses, travel, and transportation expenses incident to employment, incentive, or suggestion awards, etc.). See 29 CFR § 4.171(c)-(e); FOH 14j(d)-(e).

Note that some wage determinations also contain provisions requiring a uniform maintenance allowance in addition to fringe benefits.

Meeting Requirements for Health and Welfare Fringe Benefits

See 29 CFR § 4.175

Most wage determinations include health and welfare fringe benefit requirements that are expressed as a set amount per hour for each worker. These payments are also often listed as weekly or monthly amounts. They apply to all hours paid, including vacation, sick leave, and holidays, up to a maximum of 40 hours per week and 2,080 hours per year for each contract. When a wage determination sets a fixed health and welfare benefit amount per hour, the contractor must satisfy this obligation on an individual employee basis. The employer cannot average the cost across all employees.

Meeting Requirements for Vacation Fringe Benefits

See 29 CFR § 4.173

Determining length of service for vacation eligibility. Most wage determinations under the Act require that contractors provide a set amount of paid vacation to workers after a certain period of service with the contractor or a successor. If not stated differently in the wage determination, contractors must consider two factors to determine when an employee is eligible for vacation benefits:

1. The total length of time spent by an employee in any capacity in the continuous service of the present (successor) contractor, including both the time spent in performing on regular commercial work and the time spent in performing on the Government contract itself, and
2. Where applicable, the total length of time spent in any capacity as an employee in the continuous service of any predecessor contractor(s) who carried out similar contract functions at the same Federal facility. See 29 CFR § 4.173(a); FOH 14j03(b).

Eligibility requirement—continuous service. If an employee completes the period of continuous service specified in the applicable wage determination (typically one year), they qualify for paid vacation. The reason(s) for an employee's absence from work is the primary factor in determining whether a break in service occurred. There is no break in service where an employee is absent from work with permission for such reasons as sickness or injury, or otherwise performs no work on the contract due to reasons beyond their control. In contrast, where an employee quits, is fired for cause, or is otherwise terminated (except for temporary layoffs), there would be a break in service even if the employee were rehired. However, an employee may not be discharged and rehired to evade the vacation requirement. See 29 CFR § 4.173(b); FOH 14j03(c).

Vesting and payment of vacation benefits. Vacation benefits do not accrue or vest until the employee's anniversary date of employment. Vacation eligibility is based on completion of the stated period of past service according to the applicable wage determination. Vesting occurs on the individual employee's anniversary date and subsequent annual anniversary date, but this does not mean that the vacation must be given or paid on that specific date. The vacation may be scheduled according to a reasonable plan mutually agreed to and communicated to the employees. However, the required vacation must be given or paid before the next anniversary date, before completion of the current contract, or before the employee terminates employment, whichever occurs first. See 29 CFR § 4.173(c); FOH 14j03(d).

Contractor liability for vacation benefits. The contractor employing a worker at the time the vacation benefit vests, i.e., on the employee's anniversary date of employment, must provide the full benefit required by the wage determination which is applicable on that date. See 29 CFR § 4.173(d); FOH 14j03(e).

Rate applicable to computation of vacation benefits. The employee must receive the rate in effect in the workweek in which the actual paid vacation is taken or the equivalent is paid. See 29 CFR § 4.173(e); FOH 14j03(g).

Meeting Requirements for Holiday Fringe Benefits

See 29 CFR § 4.174

Determining eligibility for holiday benefits. Most wage determinations list a specific number of named holidays for which payment is required. Unless specified otherwise in an applicable determination, an employee who performs any work during the workweek in which a named holiday occurs is entitled to the holiday benefit, regardless of whether the named holiday falls on a Sunday, another day during the workweek on which the employee is not normally scheduled to work, or on the employee's day off. In addition, holiday benefits cannot be denied because the employee has not been employed by the contractor for a designated period prior to the named holiday or because the employee did not work the day before or the day after the holiday, unless such qualifications are specifically included in the determination. See 29 CFR § 4.174(a); FOH 14j04(a).

Unless a different standard is used in the wage determination, a full-time employee who works on the day designated as a holiday must, in addition to the amount they ordinarily would be entitled to for that day's work, either be paid the cash equivalent of a full day’s pay up to 8 hours or be furnished another day off with pay. See 29 CFR § 4.174(c); FOH 14j04(a).

Payment of fringe benefits to temporary and part-time employees

See 29 CFR § 4.176

The provisions of an applicable wage determination apply to all temporary and part-time service employees engaged in covered work. However, generally, such employees are entitled to receive a portion of the fringe benefits specified in the determination that corresponds to the time spent on covered work. See 29 CFR § 4.176 for examples of how to pro-rate the fringe benefits; see also FOH 14j05.

Administrative Costs

See 29 CFR § 4.172

Where the applicable wage determination specifies the health and welfare fringe benefit monetary amount, the amount specified is the actual minimum that the contractor must pay for the employee's fringe benefits. No deduction from the specified amount may be made to cover any administrative costs (e.g., recordkeeping costs associated with payroll administration) which may be incurred by the contractor in providing the benefits, as such costs are properly a business expense of the contractor. See FOH 14j00(a)(1).

Whether the fees charged by a third party are creditable against a contractor’s SCA fringe benefit obligation depends on the facts and circumstances of a particular case. Contractors can take credit for administrative costs incurred by third party fiduciaries that provide fringe benefits to service employees. For example, the contractor may take credit for the premiums it pays to a medical insurance carrier, and the insurance carrier can use those premiums to both pay service employees’ medical claims and perform tasks related to the actual administration and delivery of health benefits to the employees. See FOH 14j00(a)(2). However, in circumstances where the third party helps the contractor perform administrative functions associated with providing fringe benefit plans to its employees rather than itself administering benefit claims and paying benefits, the third party’s fees for such administrative functions are not creditable. For example, administrative costs associated with providing W2s, processing payroll, recordkeeping, and depositing wages into worker accounts are general business expenses of the contractor and are not creditable against the health and welfare fringe benefit obligation. See FOH 14j00(a)(1).

Recordkeeping

See 29 CFR §§ 4.6(g), 4.185

A contractor must keep records of payments made to meet its fringe benefit obligations. These records must be kept separately from the records of wages paid. If a contractor meets its obligation to pay health and welfare fringe benefits by making a payment in cash, it must keep a separate record of the amount paid to satisfy the prevailing wage from the amount paid to satisfy the health and welfare fringe benefit. Failure to keep a separate record of health and welfare fringe benefits paid in cash from regular wages paid may result in a finding that the contractor failed to pay all or a portion of the fringe benefits required by the Act.

Common Violations

• Failure to separate wages from health and welfare fringe benefits on payroll records.
• Failure to pay out unused vacation on an employee’s anniversary date and vest a new amount of vacation based on the applicable wage determination.
• Failure to provide a “length of service” record for employees working on a contract to the contracting agency or successor contractor upon completion or termination of a contract. 29 CFR § 4.6(l)(2).
• Failure to carry over the anniversary date of employees that worked for the predecessor contractor.
• Failure to provide part-time employees with the required pro-rated fringe benefits.
• Taking credit against the employees’ health and welfare fringe benefit for the contractor’s administrative costs and fees.

Additional Resources

• Labor Standards for Federal Service Contracts – 29 CFR Part 4
• For more information about the SCA, visit https://www.dol.gov/agencies/whd/government-contracts/service-contracts
• For frequently asked questions, visit https://www.dol.gov/agencies/whd/government-contracts/service-contracts/faq
• For general wage determinations and other information relevant to the SCA, visit https://alpha.sam.gov/.