Professional Employment Organizations and Service Contract Act Compliance

A Professional Employment Organization (PEO) that employs and leases employees back to a prime contractor subject to the Service Contract Act (SCA) is considered a subcontractor under the provisions of SCA and therefore subject to the full compliance of The Act as defined in the Code of Federal Regulations (29 CFR Part 4). In addition, each contract the prime contractor wins has a separate Wage Determination incorporated into that particular contract that specifies “minimum economic” requirements for employees working on that contract by labor category. SCA is a “flow down law,” which subjects all subcontractors to the full provisions of the SCA in the same manner as the prime contractor. Furthermore, the prime contractor is responsible for the compliance of all its subcontractors, including the PEO.

The SCA compliance laws, rules and regulations include, but are not limited to, the following topics:

  1. Fringe accounting
  2. Bona fide benefits
  3. Fully funded self-insured plans
  4. Comingling of SCA and non-SCA fringe dollars
  5. Tricare opt-out “prohibited incentives” – John Warner Act
  6. Medicare opt-out “prohibited incentives” – Centers for Medicare & Medicaid Services
  7. Minimum wages
  8. Vacation requirements
  9. Holiday requirements
  10. Part-time employees
  11. Temporary employees

PEOs exist because of the “economies of scale” they provide companies through consolidation of a single employee benefits package (typically unfunded self-insured insurance plans), a single vacation plan with a fixed vesting option, fixed holidays and flexible wages, etc. However, the contract-specific Wage Determination lists minimum labor category wages, vacations and holidays that prevent a “one size fits all” model that would otherwise make a PEO attractive to commercial companies not engaged in SCA work.

PEOs are not prohibited from hiring employees, and then leasing those employees back to the contractor as a subcontractor for SCA contracted work, if the PEOs fully comply with The Act as defined in 29 CFR Part 4 and the specified Wage Determination incorporated into each separate contract.

In reality, few PEOs consider themselves a subcontractor under the SCA, and thus are not complying with the SCA requirements or addressing the topics specified above. This is a very dangerous position for the prime contractor that leases employees back from the PEO, because the prime contractor will be punished to the full extent of the law for the PEO’s failure to follow these basic compliance principles applicable to every other prime contractor.

This article was written by Jim Stevenson, President of Stevenson Contract Advisors (SCA Solutions). SCA Solutions provides strategic solutions for domestic and international service companies. He can be reached at

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