The Service Contract Act (SCA) enforcement process has changed over the past few years with the addition of more than 1,000 Department of Labor (DOL) investigators. Attention is now given to details of the Code of Federal Regulations (CFR) and other related acts that may have been overlooked in the past.

Commingling of SCA employee fringe dollar assets with those of non-SCA employee benefit dollar assets is one example of the DOL paying particular interest to a process that has been in place for years. There is no prohibition against SCA and non-SCA funds residing in the same account. The problem for the contractor is in enforcement rather than regulations. The DOL enforces the code under the premise that the contractor must be able to prove that each employee received the full benefit of the Health &Welfare (H&W) dollars each individual earned and that none of those H&W dollars in any way were used to reduce the contractor’s cost to provide benefits to non-SCA employees. The CFR does state that:

1. Unfunded self-insured plans paid from general assets of the contractor are typically not allowed. (29 CFR § 4.171)
2. Contributions must be paid irrevocably to a third party or trustee. (29 CFR § 4.171)
3. The trust must be set up in such a way that the contractor will not be able to divert the funds to its own use or benefit. (29 CFR § 4.171)

Obviously, if the SCA funds are deposited into an account out of which SCA and non-SCA benefits are paid, and the contractor is not reconciling claims attributable to the separate SCA and non-SCA classes, the contractor cannot be sure that they are in compliance on a per employee basis, or that none of the SCA funds were used to offset non-SCA costs, including non-SCA claims. If any SCA funds were used to offset non-SCA costs, that would benefit the contractor, and by definition, would violate No. 3 above. If the contractor cannot prove, either to itself or to the DOL, that it is in compliance with the above, it will be assumed that the contractor is not. (29 CFR §§ 4.179 and 4.185). Simply put, the contractor bears the burden of proving compliance with the regulations.

Proper recordkeeping is paramount in SCA compliance. Records that adequately segregate not only SCA and non-SCA employees on the same contract but also which SCA employees worked on which SCA contract, for how long, and when also become extremely important. The DOL presumes all employees working in the establishment, department, or division where such covered SCA work is performed have worked on or in connection with the contract during the period of performance unless the contractor can show otherwise. Since the burden of proof is on the contractor, it is the contractor’s responsibility to keep adequate records.

References: 29 CFR § 4.171(b)(1), 29 CFR § 4.171(a)(4), 29 CFR § 4.179, 29 CFR § 4.185

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 jstevenson@scasolutions.com.