Service Contract Act: When Does It Apply?

The Service Contract Act (SCA) applies when a federal agency enters into a contract exceeding $2,500 whose principal purpose is to furnish services in the United States through service employees. In short, if you are a contractor or subcontractor performing services for the federal government under a contract worth more than $2,500, and the work is performed in the U.S., the SCA likely applies to you.

Background and Purpose

Enacted in 1965, the McNamara-O’Hara Service Contract Act was designed to protect workers performing services under federal contracts. Before the SCA, some contractors paid substandard wages and provided poor working conditions on government service contracts. The Act ensures that service employees on covered contracts receive wages and fringe benefits that are at least equal to those prevailing in the local area for similar work, as determined by the Department of Labor (DOL).

The SCA is administered by the DOL’s Wage and Hour Division. It requires contractors to pay their service employees no less than the wage rates and fringe benefits specified in the contract, which are based on DOL wage determinations. The Act also mandates that contractors post a notice explaining employee rights under the SCA at each work site.

Key Criteria for Coverage

To determine if the SCA applies, you must consider several factors. The contract must be with the federal government (or a District of Columbia agency) and be for services. The contract amount must exceed $2,500, and the services must be performed in the United States. Here are the specific elements:

• Federal contract: The contract must be between a federal agency and a contractor or subcontractor. This includes contracts for services performed for the federal government, even if the contract is awarded by a state or local government using federal funds.
• Principal purpose is services: The contract’s main purpose must be to furnish services, not to supply goods. For example, a contract to clean federal offices is covered, but a contract to purchase office furniture is not.
• Contract value over $2,500: The contract must exceed $2,500. If the contract is for $2,500 or less, the SCA does not apply, unless the contract is for certain types of work (like those covered by the Walsh-Healey Public Contracts Act, which is now largely repealed).
• Service employees: The contract must involve service employees, which includes any worker engaged in performing the services called for by the contract, such as janitors, security guards, cooks, or technicians.
• Performed in the U.S.: The services must be performed in the United States, which includes the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, and other U.S. territories.

How It Works in Practice

When a federal agency issues a solicitation for services, it includes a wage determination from the DOL if the contract is expected to exceed $2,500. This wage determination lists the minimum wage rates and fringe benefits for each classification of service employee that will work on the contract. The contractor must incorporate these rates into the contract and pay accordingly.

For example, if a federal agency contracts with a company to provide janitorial services at a federal building in Chicago, the contract will specify a wage rate for janitors, such as $18.50 per hour plus $4.50 per hour in health and welfare benefits. The contractor must pay its janitors at least that amount. If the contractor uses subcontractors, those subcontractors must also comply with the SCA.

Common Exemptions and Exceptions

While the SCA is broad, there are several important exemptions. Contracts that are not covered include:

• Contracts for the construction, alteration, or repair of public buildings or public works (covered by the Davis-Bacon Act instead).
• Contracts for the carriage of freight or personnel by vessel, aircraft, bus, truck, or other vehicle.
• Contracts for the furnishing of services by radio, telephone, telegraph, or cable companies subject to the Communications Act of 1934.
• Contracts for public utility services, including electric, gas, water, and telephone.
• Contracts for the operation of postal contract stations.
• Contracts for the furnishing of services by an employee of the federal government.
• Contracts for the leasing of real property or space.
• Contracts for the purchase of supplies (even if installation or maintenance is included, if the principal purpose is to furnish supplies).

Additionally, the SCA does not apply to contracts that are performed entirely outside the United States, or to contracts with a value of $2,500 or less (unless the contract is for certain types of work, such as those involving the maintenance of buildings).

Consequences of Non-Compliance

Failure to comply with the SCA can result in serious consequences for contractors. The DOL can investigate complaints and conduct its own compliance reviews. If a violation is found, the contractor may be required to pay back wages and benefits to affected employees. The DOL can also withhold payments due under the contract, terminate the contract, and debar the contractor from future federal contracts for up to three years.

For example, if a contractor pays a janitor $12 per hour when the wage determination requires $15, the DOL can order the contractor to pay the $3 per hour difference for all hours worked, plus any unpaid fringe benefits. If the contractor refuses, the DOL can withhold contract payments and refer the case for legal action.

How to Determine If Your Contract Is Covered

If you are a contractor or subcontractor, you can take several steps to determine if the SCA applies to your contract:

1. Read the contract and solicitation documents carefully. Look for a clause referencing the Service Contract Act or a wage determination.
2. Check the contract amount. If it is over $2,500 and for services, the SCA likely applies.
3. Identify the principal purpose of the contract. If it is to provide services (e.g., cleaning, security, data entry) rather than to supply goods, the SCA may apply.
4. Determine where the services will be performed. If they are performed in the U.S., the SCA applies.
5. Consult the DOL’s Wage and Hour Division website or contact them directly for assistance. They have resources and can provide guidance on whether a specific contract is covered.

Frequently Asked Questions

Does the SCA apply to contracts under $2,500? No, the SCA generally does not apply to contracts of $2,500 or less. However, if the contract is for services and is part of a series of contracts that together exceed $2,500, the DOL may consider them collectively.

What if my contract is performed partly in the U.S. and partly abroad? The SCA applies only to the portion of the services performed in the United States. Services performed outside the U.S. are not covered, but the contractor must still comply with the SCA for the U.S.-based work.

Are there any penalties for not including the SCA clause in a subcontract? Yes, the prime contractor is responsible for ensuring that subcontractors comply with the SCA. If a subcontractor violates the SCA, the prime contractor may be held liable for back wages and benefits, and both may face debarment.

Can an employee waive their rights under the SCA? No, employees cannot waive their rights under the SCA. Any agreement to accept lower wages or benefits is void and unenforceable.

Does the SCA apply to contracts with state or local governments? No, the SCA applies only to contracts with the federal government or the District of Columbia. However, if a state or local government uses federal funds to award a service contract, the SCA may apply if the federal agency is a party to the contract.

Template for SCA Compliance Checklist

Getting Professional Help

If you are unsure whether the SCA applies to your specific contract, or if you have questions about compliance, it is wise to consult with a lawyer or a compliance specialist who is familiar with federal procurement regulations. The DOL also provides free resources and can answer questions. This article provides general information, but it is not legal advice. For your specific situation, ask a qualified professional.

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