Breakout Session # 1305 Glenn Sweatt, General Counsel, ECC Tuesday, April 15, 2008 2:10-3:10

2. Service Contract Act and Davis Bacon Act: Compliance and Audit Survival Tips Breakout Session # 1305 Glenn Sweatt, General Counsel, ECC Tuesday, April 15, 2008 2:10-3:10

3. Session Objectives • The Service Contract Act (SCA) and the Davis Bacon Act (DBA) defined (FAR Part 22) • Learn when, why, where and to whom the acts apply, to interpret wage determinations, and to avoid pitfalls • How to manage audits and investigations

4. SCA Applicability - Basics • The McNamara-O'Hara Service Contract Act (SCA) (1965) Supersedes the Fair Labor Standards Act (FLSA) to provide a MINIMUM wages and benefits for service workers on covered Government projects Applies to contracts in excess of $2500

5. SCA Applicability - Contracts • Act applies to “Services” - a broad category including landscaping, security, laundry, mortuary, film processing, maintenance, furniture repair, bomb disposal, etc.

6. SCA Applicability - Location • 50 United States, Puerto Rico, Guam, Virgin Islands, American Samoa, Johnston Island, Marianas Islands, Wake Island, and outer continental shelf • Not applicable to work in Europe, Asia, etc • Not applicable to any State or commercial projects - only Federal Government Projects

7. SCA Applicability – Covered employees • “Any person engaged in the performance” of a Service Contract (contrast to DBA) • Includes (unless exemptions apply) • Everyone working in support of the project • Direct bill, not overhead or G&A (allocability)

8. SCA Applicability – Exempt Employees • Exemptions – known as Section 541 “EAP” exemptions – revised 3/31/2003 Executive – three requirements • Managing the enterprise • Directing work of two or more employees • Having authority to hire and fire, or having such recommendations given great weight • Administrative – employee must hold a position of responsibility • Previous definitions are from 1954 and a bit less clear

9. SCA Applicability – Exempt Employees • Professional - specialized intellectual or artistic professions - includes computer related occupations • Scientific disciplines • Can be obtained by formal education, or combination of job experience, military training, and technical school or community college

10. SCA Applicability – Wage & Benefits • Wages are set by job classification on the wage determination – see next slide • Benefits • Holidays - usually 10 standard federal holidays • Vacation - 2 weeks vacation accrued after 1 year of continuous service

11. SCA Applicability – Wage & Benefits • Health and welfare - cash or health and welfare benefit equal or great to $3.16/per hour • Maximum of 40 hrs per week, even if the employee works overtime • i.e. maximum $3.16/hr; $126.40/week; $547.73/month • Some WDs have rates higher than $3.16 – do the math based on 40 hrs a week, 4.33 weeks/month

12. Wage Determination 2005-2233 Rev 4.5/29/2007

13. Conformance Process • What if a particular labor category is not listed on the WD? • Reasonable equivalence analysis - look for similar job title, be expansive in categorization, not specialized • If there is no reasonable equivalent, then conformance process begins

14. Conformance Process • Look for equivalent positions • SCA Directory of occupations • http://www.dol.gov/esa/regs/compliance/whd/wage/main.htm • Also used to ensure proper administration of SCA to a particular category (especially useful for “Level I, Level II, Level III classifications).

15. SF 1444 The standard form used for conformances

16. SCA Pitfalls • Not extending coverage to all sites (e.g. home office) • Over/under payment based on misperception that DBA applies instead • Not applying benefits to “independent contractors” • Benefits compliance • Your benefits package exceeds SCA requirements • Your benefits are misaligned with SCA requirements • Specifically, H&W is not spelled out on payroll records

17. SCA Pitfalls – Case Study • On a Hurricane Katrina debris recovery project, SCA wage for laborers was $9.68, and required benefits were $2.56 per hour • Employer paid employees $15/hr “flat rate” – no mention of benefits on employee’s payroll stubs • DOL found employer out of compliance and ordered them to pay all employees additional $2.56/hr in benefits over the course of the entire project ($45,456) • A similar case with additional overtime calculations yielded a $76,284 backpay order against an SB subcontractor (included FLSA overtime calculations as well)

18. SCA Pitfalls – Case Study • On debris recovery project, one employer appears to have paid employees in cash • Auditor calculated back pay based on estimated schedule of 72 hours per week, over a 5 month period • Ordered sub to pay each employee $27,636 • Question: were these employees working for 5 months with no pay? • How can employer defend against DOL estimates?

19. SCA Pitfalls – Lesson learned • Benefits MUST be explicitly referred to on employee’s pay stub, NO EXCEPTIONS • Don’t forget standard FLSA rules regarding overtime! • DOL will look very strictly at any claims that individuals are “independent contractors” • Backpay orders are given freely– and if the subcontractor does not pay, the prime is responsible for payment of back wages

20. DOL Form WH-56 – Summary of Unpaid Wages

21. Audits and Investigations • DOL field auditors and compliance personnel will interview employees • Ask them for payroll history, names and addresses of other employees • Best defense is to be in compliance and to maintain good payroll records at all levels • Provide training to subcontractors at the start of the project • Prime contractor is liable for subcontractors refusal to pay • At all levels – (2nd tier, third tier, etc)

22. Audits and Investigations • Long statute of limitations • Investigations reflect a lack of flexibility on part of DOL field personnel • Strict adherence to their audit guidance • Some discussions allowed, but minimal negotiations and no appeals process • If employer refuses to pay, DOL will refer issue to legal for further evaluation and possible action

23. Where to get more information • Labor Requirements of the Service Contract Act - by Federal Publications • Internet resources • www.dol.gov/dol/esa/public/regs/compliance/whd/wage/main.htm • http://www.oalj.dol.gov/libdba.htm • http://servicecontract.fedworld.gov/ (for WD search engine)

24. Where to get more information • Only the WD provided by the CO is valid unless the agency has signed the Memorandum of Understanding with the DOL: see http://servicecontract.fedworld.gov/searchsca.htm • www.wdol.gov contains WDs but you still have to confirm which one has been formally modified into your contract

25. DBA Overview • Davis Bacon Act - history and applicability • 1931 Act for Construction contracts over $2000 • Includes construction, demolition, earth moving, significant repair or retrofit • Some jobs contain service and construction elements • Look at predominance of project • What the CO says your project is, it is

26. DBA Applicability - Basics • Supercedes to Fair Labor Standards Act (FLSA) to provide a MINIMUM wage for laborers and mechanics on covered Government projects • Only provides a floor, or minimum required wage - not a specific wage that must be paid

27. DBA Applicability - Basics • Includes “cash fringe” - generally no holidays, vacation, or insurance • Be careful - some WDs do require paid holidays (e.g. NJ) - be sure to estimate these as direct costs in your estimate and/or change order • WDs in South are generally straightforward

28. Applicability - Geographic Location • 50 States and District of Columbia only • Federal Government Contracts only, though 36 States have “mini-DBA” laws • Direct physical site of work only (vs SCA) • Does not include home offices, tool yards, manufacturing facilities, T&D facilities, etc. • Federal court applies a strict analysis - “project site or immediately adjacent” - 1 mile or less • Be aware of borrow pits or specially created sites

29. DBA Applicability - Employees • Laborers and mechanics only • No administrative personnel, even non-exempt • Traditional craft labor - laborers, operators, truck drivers, pipe fitters, carpenters, electricians, ironworkers, painters, plumbers, mechanics, etc

30. DBA Applicability - Employees • Exemptions – known as Section 541 “EAP” exemptions – revised March 31, 2003 • Same as under SCA – refer back to previous slides

31. Cash Fringe - Exception • Union Collective Bargaining Agreements • Fringe is usually paid to Union funds • vacation • pension • strike fund • health insurance, etc….. • Dollar amounts are the same to union or non-union employees

32. Wage Determinations • Wage Determination (WD) • What they are, how they are developed • Which one applies to your project? • Ensure you are using the correct WD! • Contractors should always cite WD # on your cost proposal list of assumptions • Risk of bidding job at “X” and then learning the prevailing wages are “Y”

33. Wage Determinations • Ensure you are using the right TYPE OF CONSTRUCTION from the RIGHT WD. • Building, Heavy, Highway • Some even more detailed, e.g. residential, building over three stories, etc • Ensure you are using the right location (county) • Ensure you are using right labor category • Know what your employees are doing

34. DBA WD General Decision Number LA0700093/23/2007

35. Certified Payrolls (see attachment) • Must be submitted to the Government every week, 7 calendar days after regular payment date of payroll week covered • Must be complete and accurate • Administrative requirements (two copies, evidence of benefits, correct payroll number, correct employee class, etc…)

36. Certified Payrolls (see attachment) • Subcontractors must also comply • See FAR 22.406-6, “Payrolls and Statements” • FAR 22.406-7 also gives CO right to check

37. DBA WD - Ohio

38. Ensuring Compliance • Wage and fringe audits - internal (payroll, compliance) and external (DOL) • Client monitored compliance (CO letters) • Penalties for non-compliance • Fines, withholding, liquidated damages • DOL audits • CCAS evaluation - 3 items for labor compliance • suspension and debarment

39. Summary of Pitfalls • Applying incorrect act • Applying incorrect WD for Cost Proposal • Applying WD incorrectly • Wrong area, wrong revision, wrong type of construction (heavy vs. building vs. hwy) • Agreeing prematurely to submit a Request for conformance • Requesting “updated” WD from client

40. PITFALLS (continued) • Underpayment of fringes • Underpayment of overtime • Approving subcontractor invoices w/o proper certified payrolls • Revised WD/ 2 WDs on same project –

41. PITFALLS (continued) • Employee (mis)understandings Overpaying/underpaying employees when making offers that don’t comply with DBA/FLSA or your employment policies • Mis-classification of employee • E.g. Laborer Group 1 vs Laborer Group 3 • Leaving out hazardous pay differentials or other differentials (e.g. night shift, etc).

42. Audits and Investigations • DOL field auditors and compliance personnel will interview employees • Not as necessary because of certified payrolls • Best defense is to be in compliance and to maintain good payroll records at all levels • Provide training to subcontractors at the start of the project • Prime contractor is liable for subcontractors refusal to pay

43. Audits and Investigations • Long statute of limitations • Investigations reflect a lack of flexibility • Strict adherence to their audit guidance • Some discussions allowed, but no negotiations or appeals • Unions more apt to get involved in DBA issues vs SCA; added pressure to resolve issues, pay quickly or face penalties

44. In Summary You Should..... • have an understanding as to which contracts the DBA applies to, and which the SCA applies to • be able to spot potential problem areas, and avoid common SCA and DBA traps • understand and meet SCA and DBA requirements. • know where to look for additional information

45. Where to get more information • Internet resources • www.labor.org/workplace/davisbacon.html • www.dol.gov/dol/esa/public/regs/statutes/whd/dbra.htm • www.dol.gov • www.wdol.gov