Federal contractors already know that the Service Contract Act (SCA) fringe rate is generally updated annually. In 2016, the Department of Labor (DOL) issued All Agency Memorandum 221, which made no change to the the fringe rate of $4.27 per hour established in 2015 by All Agency Memorandum 217.

The fringe rate update for 2017, All Agency Memorandum 225. introduces a new twist to fringe rates: multiple, distinct fringe rate tiers.

The fringe rate tiers are the result of new regulations in the SCA contracting space. In September 2016, the Department of Labor issued regulations implementing Executive Order (EO) 13706. EO 13706 requires many SCA contractors to provide employees with seven days (56 hours) of paid sick leave annually. As with any benefit required by regulation or by law, the paid sick leave required by EO 13706 cannot be funded by fringe dollars and represents an additional cost burden on federal contractors. EO 13706 is applicable to new federal contracts awarded on or after January 1, 2017.

All Agency Memorandum 225, issued July 25, 2017, responds to EO 13706 by splitting the SCA fringe rate into multiple tiers in an attempt to reduce the cost burden on federal contractors. The fringe rate applicable to an SCA employee is determined by whether the employee is entitled to paid sick leave under EO 13706.

For employees entitled to paid sick leave under EO 13706, the fringe rate will decrease from $4.27 to $4.13.

For employees not entitled to sick leave under EO 13706 EO 13706, the fringe rate will increase from $4.27 to $4.41.

Previous fringe rate updates established a separate, lower fringe rate for employees entitled to health care under the Hawaii Prepaid Health Care Act (HPHCA) All Agency Memorandum 225 also considers the intersection of the HPHCA and EO 13706.

Hawaii employees entitled to health care benefits under the HPHCA, but not entitled to sick leave under EO 13706, will receive a fringe rate of $1.91. Employees entitled both to health care benefits under the HPHCA and to sick leave under EO 13706 will receive a fringe rate of $1.63. Hawaii employees not covered by the HPHCA are subject to the same fringe rates as mainland employees: $4.41 if not covered by EO 13706 and $4.13 if covered by EO 13706.

The new fringe rates are effective for government contracts awarded on or after August 1, 2017.

Confused by the new fringe rates or concerned about rising benefit costs? Contact The Boon Group for help with SCA compliance, fringe accounting and more.

For additional information read the Federal Sick Leave Health and Welfare Benefit Changes Bring Enhanced Compliance Challenges for Federal Service Contractors whitepaper provided by Wiley Rein LLP.