For those government contractors that perform work on contracts covered by the McNamara-O’Hara Service Contract Act (SCA) and are also subject to Executive Order (EO) 13706, Establishing Paid Sick Leave for Federal Contractors, there is a bit of good news out of the U.S. Department of Labor’s Wage and Hour Division (WHD). On July 25, 2017, the WHD announced changes to the health and welfare fringe benefit rate for SCA-covered contracts in All Agency Memorandum Number 225 (AAM No. 225). As announced in AAM No. 225, the new health and welfare fringe benefit rate under the SCA will be $4.41 per hour or $176.400 per week or $764.40 per month, effective August 1, 2017. This means that the WHD will incorporate the $4.41 health and welfare fringe benefit rate in any new SCA wage determinations it issues on or after August 1, 2017. This new rate represents an increase of $0.14 per hour over the 2016 rate of $4.27 an hour that became effective on July 29, 2016.

Executive Order 13706

AAM No. 225 addresses the impact of EO 13706, which requires some employers performing on contracts with the federal government to provide up to 7 days or 56 hours of paid sick leave each year. By way of background, to comply with EO 13706, employer payments to paid sick leave plans cannot be credited to satisfy the SCA health and welfare fringe benefit requirement. EO 13706 prescribes specific reasons for which such leave can be taken, including to care for one’s self or one’s family and in connection with domestic violence, sexual assault, and stalking. EO 13706 applies to new federal contracts resulting from solicitations issued on or after January 1, 2017.

To offset the impact of applying the paid leave requirement to SCA-covered contracts, the WHD set a lower health and welfare fringe benefit rate for employers subject to EO 13706. It determined that the health and welfare fringe benefit rate for federal contractors performing on SCA-covered contracts that are subject to EO 13706 will be $4.13 per hour, which translates to $165.20 per week or $715.87 per month.

Wage Determinations Applicable to Hawaii

In keeping with prior practice, the WHD issued a SCA health and welfare fringe benefit rate for employers in Hawaii that must comply with the Hawaii Prepaid Health Care Act (HPHCA). In essence, the HPHCA requires employers to provide health insurance coverage for their employees, but those employer contributions cannot be credited to meet the SCA health and welfare fringe benefit rate. To account for this Hawaii requirement, the WHD excludes the health insurance portion of the nationwide health and fringe benefit rate for all employees for whom an employer provides health insurance coverage as required by HPHCA. Consequently the SCA health and welfare fringe benefit level for those covered by the HPHCA will be $1.91 per hour or $76.40 per week or $331.07 per month, effective August 1, 2017.

For employers in Hawaii that are subject to both the HPHCA and EO 13706, the SCA health and welfare fringe benefit rate will be $1.63 per hour or $65.20 per week or $282.53 per month.

If an employer performs work in Hawaii on a SCA-covered contract but is not subject to the HPHCA, then it must pay the full SCA health and welfare fringe benefit as opposed to the reduced rate applicable only in Hawaii.

Adjustments to the SCA Health and Welfare Fringe Benefit Rate

The WHD updates the SCA health and welfare fringe benefit rate in accordance with Section 4.52 of the SCA regulations using the Employment Cost Index (ECI) and the Employer Cost for Employee Compensation (ECEC) data generated by the U.S. Bureau of Labor Statistics. The ECI and ECEC provide nationwide data on the changes in wages and the cost of various fringe benefit components for various occupational groups of civilian workers, respectively.

High (Average Cost) Benefit Rate

Finally, the AAM noted that the new health and welfare fringe benefit rate of $4.41 per hour will apply to contracts that use a “high” level benefit that is determined based on the average fringe benefit cost for all service employees as well as most current SCA contracts that determine compliance based upon contributions on a per employee basis. The high level benefit or average cost methodology applies to certain contracts that were grandfathered when the WHD revised its health and welfare fringe benefit regulations in 1996. While there are some existing SCA contracts that still use the average cost methodology, most SCA contracts today require payment of at least the SCA health and welfare fringe benefit rate on an employee-by-employee basis.