Booncast Episode 1: The SCA and Why a Fringe Rate Increase is so Important
Welcome to the inaugural episode of Booncast! Boon President and CEO, Taylor Boon, walks listeners through a brief history of the Service Contract Act, highlights why the fringe rate is so important, and discusses the broad consequences of the past several years as the SCA fringe rate fails to keep up with rising costs.
More resources related to this episode:
- The McNamara–O’Hara Service Contract Act (SCA)
- Government Contractors Need a Fringe Rate Increase
- COVID-19 Hiring Challenges for Employers
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Episode Transcript
Hello and welcome to Booncast, a podcast where we discuss evolving healthcare needs and flexible employee benefit solutions. Join our experts for unique insight into the niche market of fringe administration, solutions to address the needs of the American employer and the hourly worker, compliance concerns, and updates on developing topics in the industry.
Taylor Boon: Hello and welcome. My name is Taylor Boon, President and CEO of The Boon Group, and today’s podcast will be on the history of the Service Contract Act’s Health and Welfare and why this year’s fringe increase is so important.
We need to start at the beginning. Enacted in 1965, Health and Welfare and the fringe has been in place since the Service Contract Act regulations were introduced. For those of you which care to know: the Service Contract Act was arguably a union-backed piece of legislation from the beginning, which attempted to mimic both prevailing wages and benefit costs for a given service and an area. By nature and throughout history, the government has relied heavily on union input for those prevailing wages. The purpose was to make sure that the private sector or “open shop” contractors didn’t undermine local union presidents and underbid work to win government procurements.
The wage determinations and fringe are often updated — and the health and welfare in particular is updated — usually once a year. For those wanting to dig into the regulations, the best place to find it is in 29 Code of Federal Regulations. And starting in about Sections 4.170 kicks off the particular regulations pertaining to health and welfare on SCA contracts. It speaks to furnishing health and welfare separate in addition to base wages, what’s bona fide, etc.
So going back to the history, really of Health and Welfare and the Service Contract Act, we’ve got to look throughout the tenured 57-year history of the Service Contract Act. We’ve actually seen changes to the health and welfare requirement a few times. We’ve had low fringes, we’ve had high fringes, we’ve had average cost contracts with even numbered wage determinations, and we’ve had individual costs other known as odd number Wage Determinations, where they had a separate fringe rate. Making things more difficult. Many contractors over the years have had multiple fringe rates in place for their contracts due to when they were awarded, when they were modified, who they were with, if they were an IDIQ contract, etc. There’s a lot of different factors, why you might have multiple fringe rates.
But in actuality, contractors may have one job site on one fringe rate, another job site on another fringe rate, some might be on last year, some might be on this year’s. It’s always been a little confusing. So, all that said, things are just starting to get better in the years really of 2007 to 2017. We really only had one fringe rate that was effectively used each year nationally. Going back, you know, a lot of the contractors had maybe a previous year’s fringe or maybe even two years ago (shame on you, but it happened). They had one fringe rate to deal with. Then, particularly out of nowhere, we had to go and complicate things.
In 2017 we went from a single fringe rate nationally to dual fringe rates based on whether you had Executive Order 13706 in your contract or not. Reminder for all of you on this podcast: Executive Order 13706 added up to seven days of paid sick leave to match what many in the private sector had already started to offer their employees for many years. Many contractors had issues figuring out if their contracts included the language for the executive order adding sick leave and many companies ended up administering sick leave for some of their employees on certain contracts and not for others. Just plain confusing.
So seemingly more confusing, even then that, adding the Executive Order 13706 to your contract actually dropped the fringe rate in 2017 to $4.13 per hour compared to 2016’s fringe, which was $4.27. This meant most companies out there had to cut their benefits to add the sick time. I don’t know if that was the intent or not, but that’s what happened. So, I guess the government’s way of shifting cost, perhaps, but what it did in practice was it started the ball rolling on a collision course between benefit cost and fringe available.
Why and how did it create issues? Because, up until 2017, employee-centric contractors were already trying to squeeze every benefit dollar out of their health and welfare benefit allotments. Many of them figured that every employee worked 2080 hours a year and they had, at that point, $4.27 to spend and they were using every dollar. So, when the fringe rate actually decreased to add this sick leave, it hurt those contractors that were trying to provide competitive benefit programs to their employees.
You can ask anyone trying to recruit employees over the last decade and they’ll tell you it’s a tough game. And that benefits are considered by the talent pool available in the market, regardless of the market you’re in. So, when the government came in and they added sick leave, no one told the contractors, “Hey look, during the life of your contract, we’re going to add paid sick leave and you’ll have to back benefits down at some point in the future to accommodate adding that sick leave benefit, and therefore you should start planning now.” Nope, they didn’t give them any heads up. The feds said, like many things in our industry, the decision was made and hit everyone at the same time on July 25th, 2017, when the new fringe rate for that year was announced. And it was effective, guess what, less than a week later on new contracts.
So, if you had new contracts out there, a lot of times that new language was plopped in there and you’re already upside down on your health and welfare — if you had a competitive benefit package. It’s always easier to say that it was missed in hindsight, but nevertheless, the change was stressful on contractors whose margins were already very low. The last thing they needed was to absorb the cost of benefit packages which exceed that of the health and welfare allotment on the contract. Some did, some did not.
So, what did the average contractor do? They called their health insurance broker and said, “Come off the golf course, for heaven’s sake, we have to cut costs!” Honestly, no offense to brokers because I am one, that’s what many of them did when they realized that medical costs rose and the fringe fell. You can just imagine. Most people are used the costs of insurance going up every year, and most on government contracts and government contractors are used to the fringe increasing every year.
So, facing annual medical inflation and rising medical costs, which the Kaiser Family Foundation — a nonprofit organization — reports to average roughly 7% annually, every year over the last four or five years, they actually had to cut spending from $4.27 to $4.13 in 2017. For some of you that don’t deal with insurance every day, cutting an effective 7 to 10 percent off your health insurance costs typically means adding $1000 to $1500 on the average deductible to maintain that same cost year over year. That really hits home to the average American, many of which have less than $1000 in savings.
So *boom* 2017 and Executive Orders 13706, which was intended to add paid sick leave to government contracts, started the pain and downward spiral of an SCA contractor’s favorite new game, “What Benefits Do I Cut, This Year?” Fast forward to 2018, just few years ago (I know this sounds like forever, from before COVID), and benefit renewals were rolling in and contractors were waiting with bated breath to see the increase they need to stop the bleeding on their health plans from the previous year. And so they waited. July finally came around and it’s holiday time to the Department of Labor, Wage and Hour Division because it’s time for them to drop their new health and welfare fringe that we all sit and wait for and solve everyone’s problems. Everyone opens up the hand-signed PDF memo. And guess what?
Yes, sir. It went up. It went up a whole seven cents, or 1.59 percent to be exact, less than 2 percent. So here we go again, more cuts (because the cost of medical insurance doesn’t typically go down) and more employee morale issues. I wish the story had a happy ending, folks, but it doesn’t. 2019 gets even worse with a 1.34 percent increase. 2020 — better yet — no fringe rate increase at all. So that brings us to 2021, smack in the middle of COVID last year, we got another six-cent increase, another whopping 1 percent increase. Far for more contractors needed to fend off medical inflation, rising drug costs, and just plain more expensive everything.
For all their guidance on when to raise the fringe, the DOL pointed to the latest Bureau of Labor Statistics employment cost index summary of employer cost of employee compensation (ECEC) for the rationale behind their tepid fringe increase. What a mouthful! I guess early summer was when the Feds thought inflation was transitory and, therefore, we didn’t need a fringe increase. Far from what they’re thinking now, isn’t it, nine months later? Regardless of where we go in 2022, with having received less than 5 percent in aggregate fringe increase in almost five years.
I’m not sure if this is employee centric and I’m not sure if any product or service hasn’t increased more. On the bright side, we know that President Biden signed into law a $15 minimum wage, which took effect this year and I’m confident that that will help wage determinations still suffering from being below market. However, the fringe needs a jumpstart as well.
Maybe, just maybe, the DOL and the Wage and Hour department will listen to his podcast. I sure hope so. Because cutting benefits each year doesn’t make hiring or retaining employees any easier in this post-COVID job market.
Good luck to the contractors out there on your upcoming bids and let’s cross our fingers together for a giant fringe increase! The Boon Group is here to help you and your broker navigate the challenges of selecting a bona fide fringe benefit program that meets your company’s needs. Take care and check out future podcasts related to government contracting here at www.boongroup.com.
That’s all for this episode of Booncast! Thank you for listening! Visit us on www.boongroup.com for more podcasts, blog posts, and information on Boon’s benefit offerings.