The McNamara-O’Hara Service Contract Act (SCA) establishes clear guidelines for employee compensation, requiring contractors to pay prevailing wages and provide fringe benefits to covered workers. Noncompliance can be costly, leading to penalties, back pay obligations, or disqualification from future government work. For businesses providing services under federal contracts, compliance with the McNamara-O’Hara Service Contract Act (SCA) is essential.
In this article, we cover the fundamentals and scope of the SCA, the Health and Welfare (H&W) benefit requirement, and how to ensure compliance as a government contractor.
What Is the Service Contract Act (SCA)?
Enacted in 1965, the McNamara-O’Hara Service Contract Act mandates that contractors and subcontractors performing service work on federal contracts must pay their employees fair wages and provide fringe benefits. The SCA applies to all federal contracts over $2,500 that involve services rather than goods.
The Department of Labor (DOL) administers the SCA and issues Wage Determinations (WDs) for each labor category and locality, ensuring compensation aligns with local prevailing wage standards.
Who Is Covered by the SCA?
The SCA primarily covers non-exempt service workers, distinguished as those eligible for overtime under the Fair Labor Standards Act (FLSA, who actively perform service work under the federal contract. Examples of covered workers include:
Examples of covered workers include:
- Security guards
- Janitorial and maintenance staff
- Clerical and administrative workers
- Call center and IT help desk employees
If your company employs individuals who directly provide services under a federal contract, those workers are likely entitled to wages and benefits dictated by the SCA.
Core Requirements Under the SCA
There are three main areas of compliance under the Service Contract Act:
1. Prevailing Wages
Contractors must pay covered employees at least the minimum hourly rate specified in the appropriate Wage Determination for their job classification and geographic area.
2. Fringe Benefits
Fringe benefits include Health and Welfare (H&W) benefits, vacation pay, and holiday leave. These are required in addition to the base hourly wage.
3. Posting and Recordkeeping
Employers must post the Wage Determination at the job site and maintain detailed records of hours worked, benefits provided, and compensation issued.
Understanding the Health and Welfare (H&W) Requirement
The H&W benefit is a central component of SCA compliance. It is a monetary amount, set annually by the DOL, that must be provided in addition to the employee’s base wage. As of 2024, the H&W rate is $4.98 per hour and applies to all hours paid (up to 40 hours per week).
Two Ways to Meet the H&W Requirement
Employers can meet their H&W obligations using one of two primary methods:
1. Providing Bona Fide Benefits
The most common method is using the H&W dollars to fund real, tangible benefits on behalf of employees. These may include:
- Health, dental, or vision insurance
- 401(k) contributions (per DOL standards)
- Life and disability insurance
If the benefits cost less than the required H&W rate, the employer must either apply the excess toward additional benefits or pay the remainder directly to the employee.
2. Paying Cash in Lieu of Benefits
Alternatively, employers can pay the entire H&W amount as a cash wage supplement if no benefits are offered or if an employee declines coverage. This method, however, increases the employer’s payroll tax liability and provides no long-term value to the employee.
Common Pitfalls to Avoid
SCA compliance requires more than simply offering benefits. There are several mistakes employers frequently make, each of which can result in DOL investigations or penalties.
Common issues include:
- Using a blended rate across labor categories, which often results in underpayment
- Failing to accurately track part-time or variable-hour employees
- Applying H&W funds toward administrative costs, which is prohibited
- Misapplying H&W for hours not worked (benefits only apply to hours paid, up to 40/week)
- Allowing improper benefit opt-outs (employees must opt out voluntarily and in writing)
Best Practices for SCA Compliance
To reduce risk and stay fully compliant with federal labor standards, contractors should implement the following best practices:
- Review Wage Determinations for each contract regularly to ensure accuracy
- Provide benefits packages that meet or exceed DOL requirements
- Use service providers and brokers with specific SCA expertise
- Accurately track hours worked, especially for part-time and remote staff
- Maintain thorough documentation of benefit costs, employee waivers, and plan participation
- Clearly communicate benefit options and SCA rights to employees
Important Considerations
Vacation and holiday requirements are separate from the H&W benefit and must be provided if stated in the Wage Determination.- If a collective bargaining agreement (CBA) is in place, its terms may take precedence and could require higher wages or expanded benefits.
- The Department of Labor enforces the SCA rigorously; contractors found in violation may face significant consequences.
Why SCA Compliance Matters
Adhering to the Service Contract Act can be complicated, but focusing on compliance can do more than help avoid penalties. It can be a strategic opportunity to improve benefit offerings, increase skilled worker retention, and win more competitive contract bids.
At Business Benefits Group (BBG), we help government contractors structure SCA-compliant employee benefits that are cost-effective, transparent, and compliant with the latest federal standards. From health and welfare benefits to compliance audits and benefits administration technology, our experts work with you at every stage.
Need help building an SCA-compliant benefits program? To learn how your organization can align its benefits strategy with SCA guidelines and avoid costly mistakes, contact BBG today.