On July 25, 2017, the Department of Labor (DOL) released All Agency Memorandum #25 (AAM), which serves as the DOL’s annual announcement of the adjustment of the Health & Welfare (H&W) fringe benefit rate for employees working under contracts governed by the Service Contract Act (SCA).
The routine aspect of the AAM provides that effective as of August 1, 2017, the H&W fringe benefit rate is increased from $4.27 to $4.41 per hour.
However, totally unexpectedly, the AAM also provides for a separate, reduced $4.13 per hour fringe benefit rate for employees performing work on contracts covered by recently issued Executive Order (EO) 13706. This EO requires federal contractors to provide paid sick leave to eligible employees working under a contract for services covered under designated federal laws, including the SCA.
What is the Reason for the Reduced Rate?
The reduced H&W fringe benefit rate is prompted by the fact that payments made by a contractor to satisfy its sick leave obligations under EO 13706 cannot be credited toward the contractor’s SCA fringe benefit obligations. To mitigate the effect of this loss of credit, the DOL established an alternative H&W fringe benefit rate, which is designed to reduce the otherwise applicable rate by an amount that is roughly equivalent to the cost of the paid sick leave required to be provided to covered employees.
What is the Effective Date of Rate Reduction?
The new H&W fringe benefit rate, including the new reduced alternative rate, is effective as of August 1, 2017. However, the reduced H&W rate only applies to contracts governed by EO 13706.
EO 13706 generally became effective for new contracts issued or awarded on or after January 1, 2017. A contract entered into prior to January 1, 2017 (an “old contract”) will become subject to the paid sick leave law if, on or after January 1, 2017, through negotiation between the contractor and federal agency:
- the contract is renewed;
- the contract is extended, unless the extension is made pursuant to a provision in the contract as of December 31, 2016 providing for a short-term limited extension; or
- the contract is amended pursuant to a modification that is outside the scope of the original contract.
In contrast, a contract entered into prior to January 1, 2017 will not become subject to the EO 13706 paid sick leave law (and thus will not be eligible for the reduced H&W fringe benefit rate) simply by reason of a federal agency’s unilateral exercise of a pre-negotiated option to renew the contract.
For example, many SCA contracts provide for a first-year base period, with an option by the federal agency to maintain the contract for a period of three or four additional years. The unilateral exercise of the option by the federal agency does not cause a contract entered into prior to January 1, 2017 to then become subject to the EO 13706 paid sick leave law.
In summary, the reduced H&W fringe benefit rate will not be available to a contractor with respect to a particular contract until the contract becomes governed by EO 13076.
Are There Any Other Concerns?
The reduction in the fringe benefit rate does raise a number of issues and concerns.
- The reduced H&W fringe benefit rate may result in the contribution not fully covering the cost of employee-only coverage. Consequently, employees who have become accustomed to 100% employer-paid may now be obligated to pay for a portion of that coverage from their wages. Under applicable SCA regulations, a deduction from an employee’s wage to pay for the coverage requires the consent of the employee.
- The reduced H&W fringe benefit rate may also make it more difficult for an employer to satisfy the premium affordability test imposed under the Affordable Care Act regulations.
- Contractors will need to carefully review new contracts and Wage Determinations to verify that the indicated fringe benefit rate is correct.
- Covered employees will need to be provided notice of the modified H&W fringe benefit rate as required under the SCA regulations.