Federal contractors will soon encounter a new hybrid Health & Welfare benefit for annual Wage Determinations (WDs) issued by the Department of Labor that will be challenging to apply and may result negative price adjustments under contracts subject to the Service Contract Labor Standards (SCLS).

Once a year, the Department of Labor (DOL) issues an All Agency Memorandum (AAM) that sets the Health & Welfare benefit (H&W) for new WDs issued for SCLS contracts pursuant to 29 CFR § 4.52. Once a new AAM is released, WDs issued in the coming year reflect the new H&W amount. Those new WDs are eventually added to existing contracts when modified by the agencies.

On Tuesday, DOL issued AAM No. 225 announcing the new H&W rate for the coming year. The new AAM raised the H&W rate from $4.27 to $4.41/hour. As a reminder, contractors should not adjust the rate they are paying to SCLS-covered workers until the new rate is added to their contract.

In a surprising move, DOL also issued a separate H&W rate for workers covered under the new sick leave regulations promulgated pursuant to Executive Order (EO) 13706. For SCLS workers covered by the EO, the new H&W rate will be $4.13/hour. This is lower than last year’s H&W rate and will mean $582.40 less in H&W benefits over the course of a year for non-exempt workers on SCLS contracts covered by the EO. For many workers, this H&W cut essentially erases the benefit provided by the EO while maintaining the compliance challenges associated with it for contractors. In other words, contractors are faced with the difficulties in complying with the EO even no meaningful benefit is given to workers any more. Only Rube Goldberg could be proud of this series of events.

Besides the unhappiness among contractor employees that could impact contract performance, this split H&W rate creates additional challenges for contractors:

  • Contractors may be faced with the difficulty and expense of providing negative contract price adjustments if the H&W rate decreases on contracts;
  • Contractors will have to compare WDs with contracts and task orders to determine which H&W rate is appropriate – an additional tracking requirement that now exists because of the AAM;
  • Contractor employees that move between contracts may receive two different H&W rates complicating tracking of the H&W benefit; and
  • Benefit providers will have more difficulty providing health benefits to SCLS employees because of the lower H&W benefit forcing a difficult juxtapose with potential Affordable Care Act requirements.

Contractor profit margins may also face pressure: contractors are able to receive price adjustments when the H&W is raised. It is not clear, however, that the EO and promulgating regulations allowed for the same price adjustment for the new sick leave benefit even though it was added to existing GSA-schedule contracts. In essence, a benefit contractors were previously able to bill back to the government was replaced by a benefit that they are not.

Contractors faced with new WDs that include the H&W amount should: (i) educate their workforce and explain why the H&W is being lowered; (ii) prepare for expenses associated with negative price adjustments; and (iii) if they have not already, develop compliance systems that enable tracking of which H&W benefits is appropriate.

We will continue to provide updates as this situation develops.