Every year the Department of Labor announces a new rate for fringe benefits. That number is of the utmost importance for thousands of government contractors, as it impacts everything from hiring and employee retention, to employee health and the strength of a contractor’s benefits package. In recent years the fringe rate has not been able to keep pace with rising costs, putting government contractors in a tight spot!
Determining the Fringe Rate
The fringe rate is calculated using the latest cost index summary of Employer Cost of Employee Compensation (ECEC) and is determined by the Bureau of Labor Statistics. Each summer the Department of Labor (DOL) issues a new memorandum, announcing the new fringe benefit rate for contractors covered by the Service Contract Act (SCA). This rate is incredibly important to the government contracting community as it dictates what employers are able to spend on health and welfare benefits, which feeds directly into that contractor’s employee retention and recruiting abilities.
The Reality of Recent Fringe Rate Changes
When examining recent changes, or lack thereof, the findings are distressing for government contractors. For example, in July 2021 the DOL’s memorandum set the fringe rates at $4.60 per hour for contracts that do not offer paid sick leave per Executive Order 13706 and $4.23 for contracts that do. This adjustment was a minuscule 1.3 percent and less than one percent higher than the previous rate in 2020, respectively.
The reality is that in a current market of quickly rising healthcare costs, contracts have averaged a less than one percent increase in the fringe rate over a two-year period. The reasons are unclear, but the result is undeniable. Health benefit costs have increased by 10 percent in that same time and without the fringe rate increasing to match those rising costs, the pressure is now on SCA employees that are being hit by higher out-of-pocket expenses.
The Impact on Government Contractors
Government contractors with higher-than-normal claims or worker populations that are prone to persistent health problems feel the impact of these insufficient fringe rate changes the most. In the current market benefits are an expected perk and are in high demand, but high out-of-pocket costs detract from that offering and damage that contractor’s ability to recruit and compete with the private sector for top talent.
Optimistically, the rapidly rising costs across all industries have not gone unnoticed. Contractors are optimistically watching the DOL’s Wage and Hour Division, in the hope that higher costs all around will encourage a closer look at the costs associated with benefits. A fringe rate increase is desperately needed by the government contracting community. Here’s hoping that 2022 is the year for change.
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