[Federal Register Volume 61, Number 86 (Thursday, May 2, 1996)]
[Proposed Rules]
[Pages 19770-19781]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-10797]




[[Page 19769]]


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Part VI





Department of Labor





_______________________________________________________________________



Wage and Hour Division



_______________________________________________________________________



29 CFR Part 4



Service Contract Act; Labor Standards for Federal Service Contracts; 
Proposed Rule

  Federal Register / Vol. 61, No. 86 / Thursday, May 2, 1996 / Proposed 
Rules  

[[Page 19770]]



DEPARTMENT OF LABOR

Employment Standards Administration
Wage and Hour Division

29 CFR Part 4

RIN 1215-AA78


Service Contract Act; Labor Standards for Federal Service 
Contracts

AGENCY: Wage and Hour Division, Employment Standards Administration, 
Labor.

ACTION: Notice of proposed rulemaking; request for comments.

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SUMMARY: The Department of Labor (DOL or the Department) is proposing 
alternative approaches for procedures to establish minimum health and 
welfare benefits requirements in the regulations issued under the 
McNamara-O'Hara Service Contract Act (SCA). Pursuant to Sec. 4(b) of 
the SCA, a variance from the SCA's locality and occupational 
requirements for determining prevailing health and welfare fringe 
benefits is also proposed to reflect the limitations of available 
fringe benefit data. Comments are also requested on revisions to 
timeframes for section 4(c) substantial variance proceedings.
    The United States District Court for the District of Columbia has 
set a deadline for the Department of July 31, 1996, to complete this 
rulemaking process. SEIU v. Reich, CA No. 91-0605 (D.D.C. January 29, 
1996). To aid in the selection of the most appropriate methodology, the 
Department is in the process of developing data on the occupational mix 
of service contract employees. This data will help provide a basis for 
the regulatory impact analysis. Due to the time constraints imposed by 
the district court, however, it is not feasible to publish the impact 
analysis for comment with the proposed rule. Instead, the analysis will 
be published as soon as possible for comment. Comments on the analysis 
will be reviewed prior to promulgation of a final rule.

DATES: Comments are due on or before July 1, 1996.

ADDRESSES: Submit written comments to Maria Echaveste, Administrator, 
Wage and Hour Division, Employment Standards Administration, U.S. 
Department of Labor, Room S-3502, 200 Constitution Avenue NW., 
Washington, DC 20210. Commenters who wish to receive notification of 
receipt of comments are requested to include a self-addressed, stamped 
postcard, or to submit them by certified mail, return receipt 
requested. As a convenience to commenters, comments may be transmitted 
by facsimile (``FAX'') machine to (202) 219-5122 (this is not a toll-
free number). If transmitted by facsimile and a hard copy is also 
submitted by mail, please indicate on the hard copy that it is a 
duplicate copy of the facsimile transmission.

FOR FURTHER INFORMATION CONTACT: William Gross, Director, Division of 
Wage Determinations, Wage and Hour Division, Employment Standards 
Administration, U.S. Department of Labor, Room S-3506, 200 Constitution 
Avenue NW., Washington, DC 20210; telephone (202) 219-8353. This is not 
a toll-free number.

SUPPLEMENTARY INFORMATION:

I. Paperwork Reduction Act

    The Department is proposing alternative procedures for determining 
prevailing health and welfare fringe benefits under SCA and seeks 
comments on each alternative. The Department does not intend, with this 
notice, to introduce new or added reporting or recordkeeping 
requirements subject to the Paperwork Reduction Act of 1980 (Pub. L. 
96-511). The existing information collection requirements contained in 
Regulations, 29 CFR Part 4 were previously approved by the Office of 
Management and Budget under OMB control number 1215-0150. The general 
Fair Labor Standards Act (FLSA) recordkeeping requirements which are 
restated in Part 4 were approved by the Office of Management and Budget 
under OMB control number 1215-0017.

II. Background

    The McNamara-O'Hara Service Contract Act of 1965 (SCA) (41 U.S.C. 
351, et seq.) applies to Federal contracts with the principal purpose 
of furnishing services through the use of service employees. For 
service contracts in excess of $2,500, the Department of Labor is 
required to make determinations of prevailing wage rates and fringe 
benefits that must be paid as a minimum by contractors and 
subcontractors to employees employed on covered contacts ``* * * in 
accordance with prevailing rates for such employees in the locality, * 
* *'' (see sections 2 (a)(1) and 2(a)(2) of the Act).1
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    \1\ The prevailing wage and fringe benefit determination scheme 
provided by sections 2 (a)(1) and 2(a)(2) of the Act was modified by 
amendments to the Act in 1972. As a result of a new Sec. 2(a)(5), 
the Department, in making prevailing determinations, is also 
required to give due consideration to the rates that would be paid 
to the various classes of service employees if directly hired by the 
Federal agency. In addition, prevailing determinations are not 
applicable where the employees of a predecessor contractor are 
covered by a collective bargaining agreement. In such cases, 
collectively bargained wages and fringe benefits are specified in 
determinations pursuant to section 4(c) of the Act.
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    Section 4(b) of the Act as amended in 1972 authorizes the Secretary 
of Labor to ``provide such reasonable limitations'' and to ``make such 
rules and regulations allowing reasonable variations, tolerances, and 
exemptions to and from any or all provisions of this Act (other than 
Sec. 10), but only in special circumstances where * * * necessary and 
proper in the public interest or to avoid the serious impairment of 
Government business, and is in accord with the remedial purposes of 
this Act to protect prevailing labor standards.''
    Federal agencies award contracts for a large variety of services 
which are performed for a specific period, typically one year with 
options for additional years.2 Upon the expiration of such 
contracts, through new solicitations for bids or requests for 
proposals, follow-on contracts are commonly awarded to continue the 
services at the same locality or localities. When new contracts are 
awarded, the employees of predecessor contractors often routinely go to 
work for the new contractors.3 Continuity of services and, 
generally, employees from year to year makes consistency in wage and 
fringe benefit determinations a key concern of contracting agencies, 
contractors, and service employees. Although the statutory requirements 
for issuing both prevailing wage rate and fringe benefit determinations 
are the same, different procedures have been used since the Act's 
enactment in 1965 to implement them. These procedures have been shaped 
by the availability of wage and fringe benefit data, the need for 
consistency and continuity over time, and the common practice of 
employers in the service contracting industry to provide uniform fringe 
benefit packages to all workers.
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    \ 2\ Option periods are deemed wholly new contracts for wage 
determination purposes and must include new or updated wage 
determinations (see 29 CFR 4.145).
    \ 3\ Experience with this general practice underlies Executive 
Order 12933, signed by President Clinton on October 20, 1994. While 
successor contractors on service contracts for the maintenance of 
public buildings typically hire the majority of the predecessor's 
employees, the executive order seeks to minimize the disruption in 
services that otherwise would occur if a successor contractor hires 
a totally new work force. The executive order, among other things, 
requires solicitations for building service contracts for public 
buildings to include a clause that requires the successor contractor 
to offer certain employees of the predecessor a right of first 
refusal to employment on the new, follow-on contract.
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    Prevailing wage rates are based primarily on cross-industry surveys

[[Page 19771]]

conducted by the Bureau of Labor Statistics (BLS), either under its own 
Area Wage Survey program (currently under review) or under contract 
with the Department's Employment Standards Administration. These 
surveys are designed to provide earnings data for selected occupations 
common to many manufacturing and nonmanufacturing industries, using a 
standard set of job descriptions, within a particular local labor 
market usually described in terms of a metropolitan area. Since 1965, 
the Department has routinely issued locality-based, occupation-specific 
prevailing wage rate determinations.
    Since 1965, the fringe benefit levels specified in prevailing 
determinations have been applicable to all of the listed occupational 
classes in a particular determination. The locality surveys conducted 
by BLS, in addition to data on the wages paid to workers in selected 
occupations, provide information on the overall prevalence of certain 
fringe benefits, such as life insurance, sickness and accident 
insurance plans, hospitalization, surgical and medical insurance plans, 
accidental death and dismemberment insurance, long-term disability 
insurance, sick leave, retirement plans, civic and personal leave, and 
other benefits. These surveys also provide information on the numbers 
of holidays and vacation days provided by the surveyed employers. 
Unlike wage data, the fringe benefit information from these surveys is 
not currently collected on an occupation-by-occupation basis; nor is 
data on the cost of such benefits collected. In the past, the 
Department has found that reliable data by locality or by occupation 
could not be obtained due to prohibitive costs.
    It has been the Department's general practice to include locality-
based holiday and vacation benefits in determinations, based on 
information obtained from the locality surveys. However, due to the 
absence of locality-based data up to this time, health and welfare 
fringe benefits 4 have always been specified in a determination as 
a monetary amount based on survey data collected on a nationwide 
basis.5 Until 1976, the Department routinely issued a single, 
national ``insurance'' benefit level for all occupations of service 
employees throughout the country,6 based primarily on data from 
the BLS' Biennial Survey of Employee Compensation in the Private 
Nonfarm Economy.7 This ``insurance'' benefit level was limited to 
the average cost per hour of providing life, accident, and health 
insurance in all industries, based on available information which 
indicated that this fringe benefit package was the most prevalent of 
the various benefits provided by employers, particularly small 
employers, and was stated in determinations as a fixed hourly payment 
amount due for each hour paid (up to a maximum of 40 hours per week and 
2,080 per year) on behalf of each service employee.
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    \4\ The term ``health and welfare'' fringe benefits refers to 
all benefits provided to workers not required by law except vacation 
and holiday benefits.
    \5\ BLS is currently in the process of redesigning its system 
for collecting fringe benefit data to potentially allow for the 
collection and publication of health and welfare benefit information 
for several of the country's largest metropolitan areas. The number 
of localities for which such data will be published is uncertain at 
this point and clearly would not include all localities for which 
the Department issues wage determinations under the SCA. Such data 
is currently not available and may be several years from 
publication.
    \6\ This did not include pension or other benefits because BLS 
locality surveys indicated that such benefits did not ordinarily 
prevail.
    \7\ When information available for a geographic area indicated 
that collectively bargained wage rates and fringe benefits were 
furnished to a majority of the employees in a particular occupation, 
such wage rates and fringe benefits were adopted as prevailing. 
Studies of employee compensation practices in particular industries, 
in contrast to those conducted as cross-industry area wage studies, 
were also sometimes used in the past for determinations issued for 
service contracts in that industry, e.g., mail hauling.
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    In the early 1970s, several large Federal service contractors and 
some contracting agencies asked the Department to consider an 
alternative methodology because the contractors were having difficulty 
hiring and retaining highly skilled workers, and remaining competitive, 
at the ``insurance'' only benefit level. In response, a second health 
and welfare benefit level was developed that took into account not only 
insurance, but all types of benefits not legally required, since these 
were commonly provided to employees by larger employers. This ``total 
benefits'' level has since been applied primarily to solicitations for 
large base support service contracts, solicitations (for OMB Circular 
A-76 actions) with potential for displacement of federal civilian 
workers, and solicitations that require bidders to be large, national 
corporations, or providers of highly technical services. The ``total 
benefits'' level includes the all-industry average hourly cost of not 
only life, accident, and health insurance, but also sick leave, pension 
plans, civic and personal leave, other leave, severance pay, and 
savings and thrift plans. Rather than a fixed payment for each hour 
worked, the ``total benefit'' level is expressed in terms of average 
cost--which allows variable contributions to employees (e.g., 
contributions to a health insurance plan typically vary depending upon 
the individual employee's marital or employment status)--so long as 
total contributions for all service employees average at least the 
specified amount per hour for each service employee. (See 29 CFR 
4.175(b).)
    From 1966 to 1979, the BLS Biennial Survey of Employee Compensation 
in the Private Nonfarm Economy was the primary source for the 
nationwide cost data on the health and welfare benefit level, for both 
the ``insurance'' and the ``total benefit'' levels. However, in 1979, 
BLS discontinued this survey. Absent a new survey data base, benefit 
levels were not adjusted between 1980 and 1986. In 1986, updated fringe 
benefit levels were based on BLS Employment Cost Index (ECI) data 
showing the percentage increase in benefit costs between 1980 and 1986, 
which was applied to the 1980 base rates. At that time, the 
``insurance'' benefit level was increased from $0.32 to $0.59 per hour, 
and the ``total benefit'' level from $1.08 to $1.84 per hour.
    When BLS published ECI survey data on fringe benefit levels for the 
first time in 1987,8 the average employer's cost of the various 
fringe benefit components did not correspond with the SCA health and 
welfare fringe benefit levels then being issued (i.e., the ECI data 
would have significantly increased the ``insurance'' benefit level and 
comparably decreased the ``total benefit'' level). It was decided to 
evaluate alternative methodologies which might better reflect the 
practices of the type of employers who perform contracts subject to 
SCA. As a consequence, health and welfare fringe benefits levels again 
were not adjusted until 1991 (see below).
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    \8\ Employer costs for employee compensation are developed from 
data collected for the Bureau of Labor Statistics Employment Cost 
Index (ECI) during a March sample. The report, ``Employer Costs for 
Employee Compensation,'' is published once a year, and covers all 
occupations in private industry (excluding farms and households) and 
state and local governments. It is a measure of the average cost to 
employers per employee hour worked for wages and salaries and 
employee benefits. See BLS Handbook of Methods, Bulletin 2414, for a 
full background discussion concerning the ECI. The ECI has been 
designated as a principal Federal economic indicator by the Office 
of Management and Budget and ``is the only measure of labor costs 
that treats wages and salaries and total compensation consistently, 
and provides consistent subseries by occupation and industry.'' Id., 
p. 63.
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    On March 21, 1991, the Service Employees International Union (SEIU) 
filed a lawsuit against the Department in the U.S. District Court for 
the District of Columbia, seeking to compel the Secretary of Labor to 
immediately raise

[[Page 19772]]

the fringe benefit amounts specified in prevailing wage determinations.
    At the time, the Department was completing the development of a new 
methodology for setting health and welfare fringe benefit levels 
utilizing newly published ECI size-of-establishment breakouts. In 
evaluating the new BLS ECI fringe benefit cost data, the Department 
concluded that cost distributions by size-of-firm best approximated 
fringe benefit levels and practices among the types of establishments 
that performed SCA-covered contracts, and would preserve continuity and 
consistency for Federal agencies, service contractors, and service 
employees. Accordingly, the health and wealth fringe benefit level 
issued for most service contracts, which was based only on the 
``insurance'' component, was raised from $0.59 to $0.74 per hour in 
September 1991, based on 1990 data for employers with less-than-100 
employees. The new BLS ECI data on total benefits for firms with 100-
or-more employees was used to increase the ``total benefits'' level 
from $1.84 to $2.07 per hour.
    Actual BLS ECI fringe benefit cost data by size-of-firm was also 
used as a basis for updating the health and welfare levels in 1992, 
1993, and 1994. Applying the same principles adopted for the 1991 
updates, the ``insurance'' level was raised to $0.83 per hour in July 
1992, to $0.89 in August 1993, and to $0.90 in August 1994. 
Correspondingly, the ``total benefit'' package was raised to $2.23 per 
hour in July 1992, to $2.39 in August 1993, and to $2.56 in August 
1994.9
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    \9\ The following year (1995), Wage and Hour decided to keep the 
health and welfare benefits levels the same as were issued in August 
1994, even though the BLS ECI fringe benefit cost data, published in 
March 1995, showed decreases in both the ``insurance'' and ``total 
benefits'' levels (to $0.82 and $2.32, respectively). The rationale 
behind this decision was three-fold. First was the concern that 
issuance of decreased health and welfare benefit rates would be 
disruptive to the federal services procurement community. Second, it 
was perceived to be inappropriate to decrease health and welfare 
benefit rates based on a methodology which was uncertain to continue 
in light of the Board's remand order (see below) and the pending 
litigation which challenged the methodology. Third, Wage-Hour was 
aware that BLS was considering significant revisions to its survey 
methodology.
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    After the issuance of updated health and welfare fringe benefit 
levels in September 1991, SEIU amended its complaint to seek review of 
the Department's fringe benefit methodology, in particular the use of 
BLS ECI fringe benefit data for employers with less-than-100 employees 
for the ``insurance'' level. In addition to challenging the size-of-
establishment methodology, SEIU also challenged a number of other 
aspects of the existing methodology, including the issuance of 
nationwide rather than locality-based health and welfare fringe benefit 
determinations, the use of private industry data only (the ECI covers 
private industry and also state and local governments), and the lack of 
consideration of fringe benefit costs in the Federal sector. Because no 
administrative review within the Department was sought by SEIU relating 
to the size-of-establishment methodology adopted for the September 1991 
updates, the District Court dismissed the case without prejudice, 
directing SEIU to exhaust its administrative remedies before the 
Department of Labor. See SEIU v. Martin, CA No. 91-0605 (JFP) (D.D.C. 
April 1, 1992).
    The size-of-establishment procedures were subsequently reaffirmed 
by the Acting Administrator of the Wage and Hour Division on July 8, 
1992, and SEIU appealed the decision to the Department's Board of 
Service Contract Appeals (BSCA). In a decision dated August 28, 1992, 
the BSCA generally affirmed fringe benefit practices, including the 
issuance of fringe benefits on a nationwide basis, but remanded the 
issue of using size-of-establishment data as a basis for fringe benefit 
rates.10 The BSCA directed Wage and Hour to either better support 
the use of the size-of-establishment data or develop an alternative 
methodology for setting fringe benefit rates. On remand, Wage and Hour 
conducted a study of service contracts subject to the SCA and examined 
other available data. This research indicated that the great 
preponderance of service establishments employs fewer than 100 workers, 
and the Acting Administrator, by letter to SEIU dated May 28, 1993, 
reaffirmed the use of BLS ECI size-of-establishment data in the 
development of prevailing fringe benefits under the Act.11
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    \10\ SEIU re Nationwide Fringe Benefit Determinations, BSCA Case 
No. 92-01 (August 23, 1992).
    \11\ Wage and Hour reasoned that cost data for firms with fewer 
than 100 employees approximated the cost of providing health and 
welfare benefits to employees furnishing services of the kind 
required under the vast majority of SCA-covered contracts, and that 
data for firms with 100 or more employees best approximated the cost 
experience of employers with SCA-covered contracts involving large 
base support contracts and other contracts involving competition 
among major corporations or for highly technical tasks.
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    In response to SEIU's review petition, the BSCA decided on 
September 23, 1993, that Wage and Hour had not provided sufficient 
justification for its departure from the practice of basing the 
``insurance'' and ``total benefit'' components on all industry data 
(prior to 1991) without regard to size-of-establishments. While the 
BSCA acknowledged that the size-of-establishment methodology addressed 
certain concerns such as consistency, ease of administration, and the 
ability to update on a regular basis, it was not convinced that these 
attributes and objectives were ``characteristic only of a system that 
utilizes size-of-establishment data or whether those same objectives 
can be also achieved by using other data to set the SCA rates.'' While 
the BSCA upheld the use of BLS ECI data in general and concluded that 
the lack of reliable locality data was reasonable justification for 
issuing nationwide benefit rates, it again remanded the matter to Wage 
and Hour for reconsideration; the Board was not satisfied that the 
size-of-establishment data justified departure from the previous 
practice of basing the fringe benefit rates on all-industry data, or 
that other data might not achieve the desired objectives.12
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    \12\ See SEIU re Nationwide Fringe Benefit Determinations, BSCA 
Case No. 93-08 (September 23, 1993).
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    Because of the variety of alternatives that could be used to 
determine prevailing fringe benefits, and the potential effects of each 
of these alternatives, the Department concluded that resolution of the 
issues in the pending litigation would be best accomplished through 
rulemaking.
    In the meantime, SEIU moved in district court to reopen its case 
against the Department. SEIU asked the court to enjoin the use of the 
1991 methodology and direct DOL to immediately begin setting minimum 
fringe benefit rates in accordance with the methodology used prior to 
1991. The district court, by Order dated January 29, 1996, dismissed 
the case without prejudice to SEIU's right to reopen for 
reconsideration upon a showing that DOL has not adopted a final rule in 
this matter by July 31, 1996. The court declined to order reinstatement 
of the Department's pre-1991 methodology, stating that it would not 
``impose a disruptive interim rule that will itself be displaced by the 
full participation exercise of rulemaking.'' SEIU v. Reich, CA No. 91-
0605 (CRR) (D.D.C. January 19, 1996)
    The Department has given careful consideration to a number of 
alternative methodologies involving the use of BLS ECI fringe benefit 
cost data (as the best currently available data source) and, 
accordingly, is proposing to use one of the approaches described below 
in determining prevailing health and welfare benefits under the SCA in 
the

[[Page 19773]]

future. In order to assist the Department in establishing the most 
appropriate method, the Department requests commenters to consider the 
optional fringe benefit methodologies discussed below and seeks 
information on ease or difficulty of compliance; administrative and/or 
recordkeeping burdens; economic and budgetary impact from the point of 
view of service contractors, service employees and Federal procurement 
agencies; transitional difficulties in departing from the current 
methodology, including the appropriateness of a phase-in alternative 
for such methodologies; the nature of SCA-covered contracts and the 
fringe benefit practices typical of service contractors; the effects on 
contracting activity and employment; and any other areas of concern 
that the Department should take into consideration in deciding this 
matter.
    If commenters favor continued use of the current methodology based 
on size-of-establishment data, comments should include data or other 
evidence that the methodology in fact is consistent with industry 
practices. Commenters are also invited to comment on any alternative 
approach for which reliable fringe benefit cost data are available 
through the ECI or otherwise, including a discussion of how the 
approach would result in fringe benefits which would better indicate 
prevailing fringes on SCA contracts, as well as the other issues raised 
below.
    Commenters are also requested to comment on whether they would 
favor utilization of locality-based fringe benefit data for certain 
selected metropolitan areas, should such data become available in the 
future (see note 5, supra), within the framework of any of the 
following proposed methodologies favored by the commenter.

III. Alternative Proposed Methodologies

Alternative I: Issue a Single Benefit Level Based Upon ECI Data for 
Workers in Private Industry

    This methodology would utilize employer costs per hour worked for 
all benefits (excluding holidays, vacations, and benefits otherwise 
required by law, such as social security, unemployment insurance, and 
workers' compensation payments) as reported annually by the BLS ECI 
study of employer costs for employee compensation in the private sector 
(all workers, all industries, all establishment sizes, and all 
occupations). Under this ``total benefits'' approach, the Department 
would issue a single nationwide health and welfare fringe benefit level 
applicable to all employees engaged in the performance of SCA-covered 
contracts, based on the average cost 13 for the following 
compensation components:
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    \13\ The cost of the benefit components in the BLS ECI study are 
an average based on data of all employers in the survey, including 
employers that do not provide the particular benefit. Because 
averaging in the ``zeros'' is another way of showing prevalence, the 
proposal is not limited to only those benefits that prevail. Data is 
not currently available that computes the cost of benefits provided 
by only employers with benefit plans. The Department is currently 
exploring the possibility of obtaining such data, and if it can be 
obtained, will consider its use under the various alternatives for 
those benefits that prevail.
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    (1) Sick and other leave (excluding vacation and holiday leave);
    (2) Insurance, consisting of life, health, and sickness and 
accident insurance plans;
    (3) Retirement and savings, consisting of pension and savings and 
thrift plans; and
    (4) Other benefits not otherwise required by law.
    Based on March 1995 BLS ECI data, this alternative would result in 
a single fringe benefit rate of $1.89 per hour. This alternative would 
increase the current benefit level (from $0.90 to $1.89 per hour) for 
those SCA-covered contracts now subject to prevailing determinations 
containing the ``insurance'' fringe benefit level, and would result in 
a benefit level reduction (from $2.56 to $1.89 per hour) for SCA-
covered contracts currently subject to the ``total benefit'' fringe 
benefit level.
    In basing the fringe benefit level on the average compensation 
level for all employees, this alternative is consistent with the 
approach generally used in determining prevailing wages in that it does 
not differentiate by size of firm, and in determining prevailing fringe 
benefits in the past. It would eliminate the two-tier benefit levels 
that have been difficult to defend in the legal proceedings before the 
BSCA described above. This approach would apply the same minimum hourly 
benefit level for all service employees and would not require any 
subjective judgments as to which benefit level to apply based on the 
type of contract or employee. This determination method would be simple 
to understand and to comply with, and relatively simple to administer 
and enforce by the Department. It would allow all service contractors 
to offer health benefits for their employees, whereas at present some 
employers cannot purchase health benefits at the current ``insurance'' 
benefit level.
    Service employees currently employed on contracts subject to the 
``total benefit'' level could experience a reduction in fringe benefits 
and not return to the current level for several years. Further, this 
approach does not recognize the real differences in types of SCA-
covered contracts that are apparent from the occupational data. As 
demonstrated by the data by occupational groupings, discussed below, 
privately-employed service employees in relatively low-skilled, low-
wage service occupations do not generally receive this level of fringe 
benefits. On the other hand, privately-employed high-skilled service 
workers, such as aircraft mechanics, generally receive fringe benefits 
above this level.
    In addressing this alternative, comments are specifically sought on 
the appropriateness of mitigating any disruption (and the short-term 
costs) caused by the increase in the current ``insurance'' level by 
phasing in the changes during a transition period; whether or not the 
current ``total benefit'' level should be grandfathered at its present 
level until it is overtaken by the all-industry, all-occupation average 
rate; and, whether such actions would be consistent with statutory 
requirements.

Alternative II-A: Issue a Single Benefit Level for Each of Six Major 
Occupational Groupings Based on ECI Data for All Workers in Each 
Grouping in Private Industry

    The BLS ECI reports employer fringe benefit costs for employees in 
broad occupational groups compatible with the ``Standard Occupational 
Classification Manual.'' Of these occupational groupings, six account 
for most of the classifications used in the performance of SCA-covered 
contracts: (1) Professional, specialty and technical; (2) 
Administrative support, including clerical; (3) Precision production, 
craft and repair; (4) Transportation and material moving; (5) Handlers, 
cleaners, helpers, laborers; and (6) Service workers.
    Under this alternative, the ``total benefit'' level for each of 
these six occupational groupings would be specified in prevailing 
determinations. Thus, a benefit amount would be specified for each 
occupation listed on an SCA-determination with the amount applicable to 
a particular occupation determined by the occupational grouping of that 
occupation. Based on the data reported by the March 1995 BLS ECI study, 
the hourly ``total benefit'' amounts for the six basic

[[Page 19774]]

occupational groupings would be as follows: \14\
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    \14\ The listed amounts represent close approximations based on 
Wage-Hour's reading of 1995 BLS ECI cost data and may not be exact.

1. Professional, specialty and technical (nurses, computer              
 systems analysts, etc.).......................................    $3.15
2. Administrative support including clerical (computer                  
 operators, secretaries, typists, clerks, etc.)................     1.96
3. Precision production, craft and repair (vehicle mechanics,           
 heavy equipment operators, automotive mechanics, aircraft              
 mechanics, machinery repairers, electrical and electronic              
 equipment repairers, heating/air-conditioning/refrigeration            
 mechanics, etc.)..............................................     2.73
4. Transportation and material moving (motor vehicle operators,         
 truck drivers, material moving equipment operators, operating          
 engineers, etc.)..............................................     2.22
5. Handlers, equipment cleaners, helpers and laborers (helpers,         
 handlers, equipment cleaners, laborers, etc.).................     1.24
6. Service occupations (guards, food/beverage preparation and           
 service occupations, health service occupations, janitors and          
 cleaners, barbers, hairdressers, amusement/recreation facility         
 attendants, etc.).............................................     0.62
                                                                        

    Utilizing this approach would permit the Department to issue 
prevailing health and welfare fringe benefit determinations for various 
``classes of service employees'' as contemplated by the Act, thereby 
permitting health and welfare benefits to correspond more closely to 
the benefits such classes of employees actually receive in the private 
sector. Because many service contracts do not involve a broad mix of 
different occupations, the administrative difficulty with multiple 
fringe benefit determinations for those contracts would be minimized. 
Further, it would not result in large differences for highly skilled 
employees on many technical service contracts that currently receive 
the ``total benefit'' level.
    Certain administrative concerns arise under this alternative, 
however, especially regarding those SCA-covered contracts that do 
involve a mix of employees from different occupational groups. This 
alternative envisions that employers would provide different fringe 
benefit plans to employees in each occupational group, and thus would 
be contrary to what we understand to be the common employer practice of 
providing the same benefits to all employees. Not only might it be 
difficult for a carrier to provide, and for the employer or the carrier 
to administer, up to six different benefit plans, but labor-management 
problems would be likely where employees realize that their co-workers 
are entitled to different benefits than they are receiving. 
Furthermore, an employer administering self-funded plans may be 
restricted in providing different benefit plans because of non-
discrimination rules of the Internal Revenue Code which prevent 
providing higher-paid employees with better health benefits. See 26 
U.S.C. 105(h); 26 CFR Sec. 1.105-11. An employer's alternative, if it 
did not want to, or could not, provide different plans, would be to (1) 
provide all employees benefits at the lowest level and pay the 
difference to other classes of employees in cash; (2) provide all 
employees higher benefits and absorb the difference from the employer's 
profit margin; or (3) provide employees the same health benefits at the 
lowest level, but provide other benefits, such as pension benefits, to 
employees in the other classifications.
    Therefore, some mechanism such as the use of an average cost 
concept, discussed below, with which most small service contractors and 
employees are not familiar, or providing benefits to all employees in 
accordance with the predominant class, may be advisable. On the other 
hand, such a mechanism would entail significant administrative 
difficulties for contractors and for the Department in determining 
compliance. Further, it would result in a substantial decrease in 
benefits for large numbers of service employees in ``service'' 
occupations, e.g., janitors, guards, food service workers.
    Therefore, in particular, comments are sought regarding whether in 
fact employers normally provide the same level of fringe benefits to 
all classes of employees; on the administrative feasibility of this 
alternative; whether or not the current ``insurance'' level should be 
grandfathered at its present level until it is overtaken by the 
``service'' occupation average rate; and on the practicality of 
assigning a single rate to a particular service contract based on the 
benefit rate applicable to the predominant occupational group 
performing the contract services.

Alternative II-B: Issue a Single Benefit Rate Adjusted To Reflect the 
Difference Between the BLS ECI Occupational Universe and the Actual Mix 
of Comparable Occupations on SCA-Covered Contracts

    As noted above, the BLS ECI data provide a breakout of fringe 
benefit costs by broad occupational groupings. The fringe benefit costs 
for employees in each of these occupational categories is a component 
factor of the all-industry, all-occupation ``total benefit'' costs 
calculated for the universe of employees. The distribution of employees 
within the six occupational categories in the BLS ECI data (above) may 
not correspond proportionately to the actual mix of employees 
performing work on SCA-covered contracts in the same occupational 
categories, i.e., it is likely that the number of SCA-covered employees 
within the BLS ECI service occupation category is proportionately 
larger than the number of such employees in the overall BLS ECI 
occupational universe. Under this proposed alternative approach, the 
distribution of benefit levels in the six BLS ECI occupational 
categories would be weighted by the corresponding distribution of SCA-
covered employees in the same occupational categories to arrive at an 
adjusted ``total benefit'' level that may better reflect actual 
employment experience on SCA-covered service contracts, rather than the 
overall employment mix among these occupational groups in the general 
economy.
    While the benefit level under this approach would be expected to be 
somewhat less than the March 1995 BLS ECI ``total benefit'' level of 
$1.89, data to compute an actual rate for this level is not yet 
available. The Department is in the process of developing information 
on the occupational mix of service contract employees utilizing 
procurement data in the Federal Procurement Data System (FPDS), and a 
survey of SCA-covered contracts is being conducted.
    Because the actual mix of occupations on SCA-covered contracts 
generally would be a factor in the determination, the benefit 
determination would be more reflective of the prevailing benefit level 
on SCA-type contracts than the all-industry, all-employee average. 
Moreover, the single benefit level that would be established avoids 
many of the administrative and compliance complexities associated with 
separate levels for each of the occupational groupings, is a simple 
determination for contractors to understand and comply with, and, 
because the same benefit level would be applied to all employees, does 
not require subjective judgment as to which benefit level to use.
    On the other hand, this alternative would not be consistent with 
past practice of using all-industry, all-employee data for wages and, 
until 1991, benefits. Furthermore, this alternative would apply a lower 
fringe benefit level to those service employees currently receiving the 
``total benefit''

[[Page 19775]]

level, and, thus, requires consideration of what, if any, transition 
procedure would be appropriate.
    Because the alternative, unlike the others, does not directly apply 
BLS ECI data to SCA-covered contracts, the Department is particularly 
interested in receiving public comments on its appropriateness. In 
commenting on this alternative, comments are also sought on the 
appropriateness of mitigating any disruption caused by any increase in 
the current ``insurance'' level by phasing in the changes during a 
transition period; whether or not the current ``total benefit'' level 
should be grandfathered at its present level until it is overtaken by 
the new fringe benefit rate; and whether such actions would be 
consistent with statutory requirements.

Alternative II-C: Issue Two Benefit Levels Based on a Combination of 
the Occupational Groupings

    This alternative combines some aspects of both Alternatives II-A 
and II-B. Rather than using six occupational groupings as proposed in 
Alternative II-A, occupational groups would be combined to result in 
only two groupings (or some other number). For example, the ECI 
``professional, specialty and technical'' occupational group could be 
combined with the ``administrative support, including clerical'' group 
to develop a single rate for ``white-collar'' occupations. Similarly, 
the ``precision production, craft and repair;'' ``transportation and 
material moving;'' ``handlers, cleaners, helpers, laborers;'' and 
``service worker'' groupings could be combined to develop a single rate 
for production occupations, both skilled and unskilled.
    Like the approach proposed under Alternative II-B, Alternative II-C 
might weight the ECI data based on the corresponding distribution of 
SCA-covered employees in the same occupational categories to arrive at 
an adjusted ``total benefit'' level for each of the two occupational 
groupings. In the alternative, the ECI data could be weighted in 
accordance with the national incidence of the various occupational 
groups.
    Although this alternative would reduce the potential number of 
different benefit levels that might be required on a single contract 
from six to two, Alternative II-C still has the potential for applying 
different benefit levels to employees working on the same contract. 
Therefore, many of the questions and issues identified under 
Alternative II-A are also applicable to this alternative. By reducing 
the number of occupational groupings, however, the probability of 
having all workers employed on the contract fall within the same 
occupational grouping increases greatly. Thus, for many contracts the 
problem of multiple benefit levels would be unlikely because the 
employees performing the contract will be clustered within a single, 
broad occupational grouping.
    In commenting on the feasibility and desirability of this 
alternative, commenters are asked to comment on the appropriate number 
of occupational groupings, how the occupational groups should be 
combined, and the weighting methodology which should be used. 
Commenters are asked to give particular attention to whether this 
smaller number of groups would significantly decrease any 
administrative and compliance difficulties which might be entailed in 
using the six groups.

Alternative III: Issue a Single Benefit Rate for Each of Four 
Geographic Regions Based on ECI Data for All Workers in Private 
Industry

    The BLS ECI data includes average costs for benefit categories in 
four broad regions: Northeast, South, Midwest, and West.\15\ This 
alternative would result in four benefit levels that would be reflected 
in SCA-determinations issued for contracts within each of these 
geographic regions. Based on the March 1995 BLS ECI data, the benefit 
amount for each area would be as follows:

    \15\ These four regions correspond to the four Census regions. 
The State composition of the regions is as follows: Northeast--
Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New 
York, Pennsylvania, Rhode Island, and Vermont; South--Alabama, 
Arkansas, Delaware, District of Columbia, Florida, Georgia, 
Kentucky, Louisiana, Maryland, Mississippi, North Carolina, 
Oklahoma, South Carolina, Tennessee, Texas, Virginia, and West 
Virginia; Midwest--Illinois, Indiana, Iowa, Kansas, Michigan, 
Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, and 
Wisconsin; and West--Alaska, Arizona, California, Colorado, Hawaii, 
Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, and 
Wyoming.

1. Northeast--$2.30
2. South--$1.57
3. Midwest--$1.99
4. West--$1.90

    4The BLS ECI data base does not cross-correlate fringe benefit 
costs by occupational groupings within the four geographic areas, and 
this limitation precludes any options that would combine this 
alternative with the above occupational approaches, absent a large 
increase in sample size and thus survey costs. Utilizing this 
alternative would permit the Department to issue prevailing fringe 
benefit determinations on a ``locality'' basis, as contemplated by the 
Act. The single benefit level for each geographic region would be 
simple to administer, and is relatively easy for contractors to 
understand and comply with.
    This option fails to reflect variations within a region, which we 
believe may be more significant than variations among regions. 
Furthermore, like the occupational approach, this option is in 
potential conflict with our understanding of the common practice that 
employers, including service contractors, provide similar fringe 
benefits to all employees without regard to either occupation or 
geographic location. This alternative also raises unique administrative 
questions because some service contracts require performance in a 
number of different locations and some service contractors bid on 
contracts for similar services at various facilities and installations 
throughout the country. Finally, while the option permits all service 
contractors to offer meaningful health benefits, it could result in 
reduced benefits for those service employees currently employed on 
contracts subject to the ``total benefit'' level.
    Commenters are asked to address whether service contractors 
typically provide similar fringe benefits to all employees without 
regard to geographic location, and the administrative feasibility of 
this alternative. In particular, comments are sought on what 
adjustments, if any, would be appropriate in the case of a service 
contract that requires performance in more than one of the four 
regions, or in those cases where service contractors customarily bid on 
contracts for similar services at various facilities and installations 
throughout the country.

Alternative IV: Issue a Single Fringe Benefit Rate (as a Percent of 
Wages) Based on the Relationship Between the ECI All-Private Industry 
``Total Benefit'' Rate and the ECI All-Private Industry Average Wage 
Rate

    The BLS ECI data correlates employer fringe benefit expenditures as 
a percent of overall compensation. Under this alternative, a single, 
nationwide fringe benefit percentage level, determined as the percent 
that all industry ``total benefit'' costs represent of total average 
wages, would be established. The March 1995 BLS ECI data reports 
average straight-time wages and salaries for all workers in private 
industry at $12.25 per hour. Based on a ``total benefit'' level of 
$1.89, the ratio of the fringe benefit amount to the wage rate under 
this methodology would be 15.4 percent, which would be specified in all 
SCA-determinations. If the prevailing wage for an occupation were $8.00 
per hour, for example, the applicable fringe benefit amount under this 
alternative

[[Page 19776]]

would be 15.4 percent of that amount, or $1.23 an hour; a prevailing 
wage of $11.00 an hour would require a fringe benefit obligation of 
$1.69 an hour; and a prevailing wage of $15.00 an hour would compute to 
a fringe benefit obligation of $2.31 an hour.
    Because fringe benefits are directly related to locality-based wage 
rates, this alternative results in fringe benefit levels that vary by 
occupation and location (wages listed in a prevailing determination for 
particular occupations are survey-based by locality) and, therefore, 
has the advantage of being more consistent with the statutory provision 
that contemplates determining prevailing fringe benefits for classes of 
service workers in localities than are the other alternatives under 
consideration. The ratio of benefits to wages is easy to determine from 
BLS ECI data, and should remain relatively consistent over time; many 
employers, particularly Federal service contractors, have familiarity 
with the concept in connection with contract costing practices.
    The alternative is a significant departure from current practices, 
and many contractors, particularly smaller ones, may have difficulty 
with its administrative requirements, which will be similar to the 
problems with separate benefit levels for occupational groupings. It 
will also require a more extensive revision of the current regulations 
to explain the compliance requirements. Moreover, the methodology 
assumes a straight line relationship between wages and benefits. 
Finally, the option could be problematic under IRS rules discussed 
above and would be inconsistent with the common practice of offering 
the same health benefits to all employees without variation based on 
individual employees' wage rates.
    Because the wage rates paid and the number of workers used to 
perform SCA-covered contracts can fluctuate considerably, comments are 
requested on the administrative and recordkeeping burdens associated 
with this alternative, and how compliance would be determined. Comments 
are also sought on whether this alternative should be applied on an 
individual employee basis (applying the ratio to the individual's rate 
of pay to determine the fringe amount that must be furnished) or on a 
payroll basis (for example, by applying the percentage to the total 
payroll and dividing by total employment to determine the fringe 
benefit amount that must be furnished to each service employee).

Alternative V: Issue Two Fringe Benefit Levels Based on BLS ECI Size-
of-Establishment Data for All Workers in Private Industry

    This alternative is essentially the same as the current methodology 
that has been used since 1991. In addition, the Department seeks public 
comments on the appropriateness and feasibility of a variation of the 
current methodology, which also is under consideration:
    A. Currently, the ``insurance'' benefit level is issued based on 
employers' average cost for providing insurance benefits in 
establishments with fewer than 100 employees. The ``total benefit'' 
level is based on the average cost for providing all benefits in 
establishments with 100 employees or more. Although size-of-
establishment data are used to determine the different benefit levels, 
in practice the two levels are applied based primarily upon the nature 
rather than the size of the contract.16 Based on the March 1994 
BLS ECI data, the ``insurance'' benefit level, as established in August 
1994, is $.90 per hour, and the ``total benefit'' level is currently 
$2.56 per hour.17
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    \16\ Currently, the ``total benefit'' level is applied to large 
base support contracts, solicitations based on OMB Circular A-76 
solicitations, solicitations for highly technical services typically 
provided by large corporations, and other selected solicitations 
without regard to size of contract. Such contracts are frequently 
awarded to large contractors, but not always. In practice, small 
contractors are most likely awarded contracts that contain the 
``insurance'' level.
    \17\ As noted previously, these rates continue to remain in 
effect, even though 1995 BLS ECI data for size-of-establishment 
would have resulted in somewhat lower rates.
---------------------------------------------------------------------------

    B. A variation of this methodology would continue the issuance of 
two levels but, instead, use the BLS ECI all industry ``total benefit'' 
data for (1) firms with fewer than 100 employees and (2) firms with 100 
or more employees--perhaps to be applied, respectively, to SCA-covered 
contracts performed by fewer than 100 employees and those performed by 
100 or more employees. On the basis of the March 1995 BLS ECI data, the 
``fewer than 100'' level would be established at $1.28 per hour, and 
the ``100 or more'' level would be $2.32 per hour. This alternative, 
thus, differs from the methodology applied from 1991 through 1994 in 
that an amount comprising ``total benefits'' is used instead of an 
amount limited to the cost disclosed for ``insurance,'' and the 
applicable rate would possibly be applied by the size (rather than the 
nature) of the contract.
    Both versions of this alternative are consistent with the 
longstanding procedure of generally applying a lower fringe benefit 
level to small contractors and a total benefit level to large 
contractors. Under Alternative A, in accordance with current practice, 
the lower fringe benefit rate would be based only on the ``insurance'' 
component, derived from data from employers with fewer than 100 
employees. Under Alternative B, the lower fringe benefit rate would be 
based on the ``total benefit'' level, also derived from data from 
employers with fewer than 100 employees. In both cases, in accordance 
with current practice, the ``total benefit'' level is derived from data 
from employers with 100 or more employees. These are the only 
alternatives which would not appear to be greatly disruptive to 
contractors and employees in that current practices would generally be 
continued. Neither would result in any significant reduction of 
benefits for employees currently working on SCA-covered contracts--or 
significant increase in costs to contractors and to the Government--and 
there would be continuity with the benefit levels that have been issued 
for the last twenty years.
    The major disadvantage of both versions of this alternative is that 
there is little evidence to support the rationale for two fringe 
benefit levels: i.e., assumptions that the average benefit level for 
small firms corresponds best to benefits paid by private employers on 
contracts similar to most SCA contracts, and that the level paid by 
large firms corresponds to employers which perform contracts to which 
the ``total benefit'' package is applied. Although most SCA-covered 
contracts involve performance by fewer than 100 employees, there is not 
a direct relationship in all cases between the size of an SCA-covered 
contract and the fringe benefit package (``less than 100'' and ``100 or 
more'' size-of-establishment data divisions) which has been applied. 
The second variation ameliorates this problem, but instead would put 
small and large contractors on an unequal footing in bidding on 
contracts, unless estimated size of contract (instead of size of firm) 
is used. Also, both options require a sometimes subjective 
determination regarding which contracts are subject to the high level 
benefit and which the low level benefit.
    In addition to the practical aspects of a two-level fringe benefit 
approach, commenters who favor this methodology are also requested to 
provide data to support its continued use, including any suggestions on 
how the available ECI data, or new data in the long term, could be used 
to provide a basis for its continued use consistent with the 
requirements of the SCA.

[[Page 19777]]

IV. Average Cost Approach

    As noted above, the lower ``insurance'' level has traditionally 
been stated in determinations as a fixed payment due for all hours paid 
for (up to a maximum of 40 hours per week and 2,080 per year) on behalf 
of each service employee. The ``total benefits'' level, on the other 
hand, has traditionally been stated in terms of average cost which 
allows variable contributions among employees so long as total 
contributions for all service employees on a particular contract 
average at least the specified amount per hour per service employee. 
Explanation of the average cost concept is set forth in 29 CFR 
4.175(b).
    The average cost concept was intended to provide flexibility to 
accommodate variable employee benefit practices. It takes into account 
variable contributions based, for example, on an employee's election of 
single or family coverage under health insurance plans, or an 
employee's election not to participate in health insurance plans or 
other supplemental plans that may be offered like those for dental and 
eyeglass coverage. It also accommodates variable contributions to 
pension or other plans like life insurance that are commonly related to 
an employee's wages.18 It is also recognized that certain 
employees may receive lesser or even no fringe benefits when the 
average cost approach is used by a service contractor, for example, 
because they are part-time and not eligible for certain benefits, are 
subject to a waiting period before becoming eligible, have elected not 
to participate, or for other reasons. Therefore this approach may be 
perceived as inequitable. The Department is seeking specific comments 
on the use of the average cost concept in conjunction with any of the 
above alternative methodologies, or other alternatives suggested by 
commenters, and what changes, if any, would be appropriate to 
facilitate compliance, reduce administrative burdens, and create 
fairness for service employees, consistent with the requirements of the 
SCA. In considering the average cost approach in connection with the 
above alternatives, or other alternatives suggested by commenters, 
comments are also sought on any recordkeeping requirements which would 
be necessary to document the average cost, and whether this would 
result in a greater burden on conractors, particularly smaller 
contractors.
---------------------------------------------------------------------------

    \ 18\ Under current regulations, service contractors who elect 
to pay the specified benefit level as a cash equivalent to each 
employee for each hour worked, rather than administer particular 
health and welfare plans, are required to pay the amount specified 
in the wage determination to each employee. The regulations do not 
permit variable cash contributions.
---------------------------------------------------------------------------

V. Variance Under Section 4(b) of the Act

    In connection with any fringe benefit methodology that may be 
adopted as a result of this rulemaking, the Department is further 
proposing to provide a corresponding variance pursuant to Sec. 4(b) 
from the Act's provisions for making prevailing fringe benefit 
determinations for various classes of workers on a locality 
basis.19 Under the Department's longstanding procedure, the 
vacation and holiday components of the fringe benefit determination 
vary based on the locality where the contract services are to be 
performed because locality data are available for these components. The 
health and welfare component has been issued only on a national basis 
due to the current absence of locality-based data (except the large 
regional groupings discussed above), and none of the available data 
sources on fringe benefits provides any occupational-based information 
(except the broad occupational groupings discussed above).
---------------------------------------------------------------------------

    \19\ A variance from both provisions may not be necessary under 
some of the alternatives on which comments are solicited.
---------------------------------------------------------------------------

    Moreover, the Department has researched all available data sources 
over the years to ascertain the existence of any reliable information 
that would permit the making of prevailing fringe benefit 
determinations on a locality and occupation basis. The Department has 
also initiated special pilot studies to test the feasibility of 
collecting fringe benefit cost data in specific geographic localities. 
Based on the results of these pilot studies by BLS, it has been the 
Department's conclusion that significant technical problems would have 
to be overcome before such data could be collected and utilized on a 
routine basis, and at probably very high cost.20 At this time, the 
available BLS ECI fringe benefit cost data is the most comprehensive, 
and best information available that shows what employers spend for 
different types of fringe benefits furnished to their employees. While 
the annual ECI study provides some locality (four geographic regions) 
and occupational information (broad occupational groupings), it does 
not currently produce cost data by occupation within each of the 
geographic regions.
---------------------------------------------------------------------------

    \ 20\ A September 1987 BLS test survey of fringe benefit costs 
in the Madison, Wisconsin, locality, for example, used newly 
developed ECI concepts, manuals, and methods. The pilot did not 
produce publishable data, and the cost to upgrade the data 
collection effort to produce publishable data were viewed at the 
time as prohibitive.
---------------------------------------------------------------------------

    Under these circumstances, the variance discussed above is believed 
by the Department to be reasonable, necessary and proper in the public 
interest or to avoid the serious impairment of Government business. 
Furthermore, because it is our understanding that many employers 
normally provide the same fringe benefit package to employees in all 
locations and occupations, this variance is believed to be in accord 
with the remedial purposes of this Act to protect prevailing labor 
standards.
    As discussed in footnote 5 above, BLS is currently redesigning its 
system for collecting fringe benefit data to potentially allow for 
collection and publication of health and welfare benefit information 
for several large metropolitan areas. Commenters are therefore 
specifically requested to comment on whether they would favor 
utilization of locality-based fringe benefit data for selected 
metropolitan areas, should such data become available in the future.
    Public commenters are requested to specifically include in their 
comments particular views on any alternative ways to balance the Act's 
``locality'' and ``class of service worker'' requirements with the 
practical problems of data availability; and the feasibility, expense, 
and burden of collecting fringe benefit cost data in occupational and 
locality-based surveys in relation to the benefits derived therefrom. 
Commenters are also requested to provide information regarding whether 
it is their practice to provide different benefit packages in different 
localities or to different classes of workers, and to address the 
burden on employers of providing different benefit packages.

VI. General

    In considering the various alternatives discussed above, the 
Department also seeks comments on the requirement to give ``due 
consideration'' to the wage and fringe benefit rates being paid Federal 
employees in making wage determinations applicable to SCA-covered 
contracts, and what administrative procedure, if any, would be 
appropriate in factoring this information into fringe benefit 
determinations (see 29 CFR 4.51(d)). Also, see AFGE v. Donovan, 25 WH 
Cases (D.D.C. 1982), aff'd 694 F.2d 280 (D.C. Cir. 1982), which 
interpreted the SCA's ``due consideration'' clause.
    The Department also seeks comments concerning whether state and 
local employee data should be included in data compiled in determining 
health

[[Page 19778]]

and welfare benefits in the future. The BLS ECI data currently reports 
fringe benefit cost information for the civilian workforce which 
includes private industry and State and local governments. Under the 
current methodology, the ``insurance'' and the ``total benefit'' levels 
are based on private industry data. However, the Department has 
recently changed its methodology to include both private and public 
employee data in determining prevailing wage rates where the data is 
available. The insurance component (life, health, and sickness and 
accident insurance plans) for all workers in private industry, as 
reported by March 1995 BLS ECI data, is $1.15 an hour, whereas the 
comparable cost in the State and local government sector is $2.03; the 
combined insurance cost for private and governmental civilian workers 
is $1.29 an hour. The effect of including State and local governments 
cost data is similar in the other fringe benefit components.
    Also, the Department requests comments on whether the Department 
should explore the cost and feasibility of expanding the ECI survey so 
that more refined data could be obtained, or in the alternative, 
developing other data bases. For example, should the Department 
consider expanding the survey to permit determination of prevailing 
fringe benefit levels by occupation within geographic regions; or to 
permit determination of whether the individual fringe benefit 
components prevail in each occupation? In commenting on whether 
expanding the survey should be pursued, commenters are specifically 
asked to comment on the value of the more refined data which might be 
obtained relative to the potential costs and burden of conducting such 
surveys, as well as to consider whether there would be a net benefit to 
the Government or to the contractors and service employees subject to 
the SCA from obtaining more refined data, thereby presumably permitting 
more accurate prevailing fringe benefit determinations.21
---------------------------------------------------------------------------

    \21\ Of course any expansion of the surveys or development of 
more refined data bases would have to be funded and could not be 
accomplished immediately. Therefore, if pursued, a fringe benefit 
methodology for the short-term would continue to be required.
---------------------------------------------------------------------------

    Finally, the Department seeks comment on whether it should continue 
to recognize different benefit levels for certain industries. Data 
limitations and the expense of conducting such surveys make their 
widespread use infeasible. Although some special surveys were conducted 
in the past, they are rarely used currently except for mail-haul 
contracts. The Department notes that these industries would be included 
in existing data, and that past practice has been to issue such special 
rates for low-benefit industries (and not vice-versa).

VII. Other Proposals

    The Department is also seeking comments on the current procedures 
for the conduct of substantial variance hearings under Section 4(c) of 
the Act. Under existing regulations, the Administrator is required to 
respond to the party requesting a hearing within 30 days after receipt 
of a request for a hearing (29 CFR 4.10(b)(2)). Upon submission of an 
Order of Reference to the Chief Administrative Law Judge, interested 
parties must submit a written response to the Chief Administrative Law 
Judge within 20 days of the date on which the Order of Reference was 
mailed (29 CFR 6.51(b)), and the hearing is to take place within 60 
days of the Order of Reference (29 CFR 6.52). The regulations further 
provide that an expedited transcript shall be made of the hearing (29 
CFR 6.54(f)), and that the Administrative Law Judge's (ALJ) decision 
shall be issued within 15 days of receipt of the transcript. Any 
aggrieved party within 60 days of the ALJ's decision may appeal to the 
Board of Service Contract Appeals (the Board) (29 CFR 8.7(b)). No time 
frames are established for issuance of a decision by the Board.
    The National Performance Review (NPR) has recommended that the 
regulations be revised to require that substantial variance hearings be 
held and decisions issued within 60 calendar days.22 In view of 
the NPR recommendation, comments are requested on the existing time 
frames and how these time frames might be reduced to conform with the 
NPR recommendation. In particular, comments are sought on a 60-day time 
frame for the completion of substantial variance hearings, and whether 
or not this period accords interested parties adequate time to prepare 
for the proceeding, obtain a transcript, and file necessary briefs, and 
for the ALJ to issue a considered opinion on the merits.
---------------------------------------------------------------------------

    \ 22\ Creating a Government That Works Better and Costs Less, 
Reinventing Federal Procurement (Accompanying Report of the National 
Performance Review), Office of the Vice President, September 1993, 
page 37.
---------------------------------------------------------------------------

    Finally, it is proposed that the final rule will include certain 
minor, technical modifications necessitated by the 1989 Amendments to 
the Fair Labor Standards Act (FLSA), a 1985 court decision, a 1983 
treaty, and a 1986 intergovernmental compact. Specifically, Section 4.2 
would be revised to delete the reference to dated minimum wage rates, 
and the tip credit example in Section 4.6(q) would be modified to 
delete the example that is based on the minimum wage rates required by 
the 1978 Amendments to the FLSA. Furthermore, the text of Section 
4.112, which was invalidated by a 1985 court decision in AFL-CIO v. 
Donovan, 757 F.2d 330 (D.C. Cir. 1985), would be modified to reinstate 
the previous regulations as they appeared in the July 1, 1983, edition 
of the CFR. In addition, necessary changes to address more recent 
enactments pertaining to the geographic scope of SCA would be included 
in the restored regulatory language.23 Also, the reference ``See 
Section 4.6(m)(8)'' in the previously existing Section 4.112(b) would 
be deleted since this section was deleted from the regulations issued 
October 27, 1983. If commenters have any questions about these planned 
changes, information can be obtained as indicated above.
---------------------------------------------------------------------------

    \ 23\ SCA covers contract services furnished ``in the United 
States.'' The geographical area included in this term, as defined in 
Sec. 8(d), requires changes to conform to the Treaty of Friendship 
Between the United States and the Republic of Kiribati, T.I.A.S. No. 
10777, ratified June 21, 19183, and the Compact of Free Association 
between the United States and the Governments of Marshall Islands 
and the Federated States of Micronesia which was placed into effect 
by the President on November 3, 1986, pursuant to Pub. L. 99-239.
---------------------------------------------------------------------------

VIII. Executive Order 12866/Section 202 of the Unfunded Mandates Reform 
Act of 1995

    The Department is seeking public comment on various optional fringe 
benefit methodologies and is not proposing any specific methodology. 
The anticipated cost of some alternatives to the existing methodology 
for updating SCA health and welfare fringe benefit rates may exceed the 
costs associated with the existing methodology. Therefore, adoption of 
an alternative methodology may result in increased procurement costs to 
Federal agencies who award SCA-covered service contracts, as well as 
higher fringe benefits for many of the affected service employees. To 
cover that possibility, the Department has reached the preliminary 
conclusion that this notice may likely result in a rule deemed an 
economically significant regulatory action within the meaning of 
Executive Order 12866. However, the rule will not include any Federal 
mandate requiring expenditures by State, local or tribal governments of 
$100 million or more in any one year. Preparation of the required 
analyses under the executive order and

[[Page 19779]]

Unfunded Mandates Reform Act must necessarily await the compilation of 
related economic data.
    As noted in the discussion under Alternative II-B, the Department 
is in the process of developing data to establish more reliable 
information on the occupational mix of service employees engaged in the 
performance of SCA-covered contracts. Based on data collected by the 
Federal Procurement Data System for Fiscal Year 1994, a statistical 
survey will provide specific information on service contract employment 
by occupation within SIC industry classifications. The information 
collected should also provide a basis for more reliable estimates of 
the economic impact of the various proposed alternatives.
    Due to the time constraints imposed by the district court, 
discussed above, it is not feasible to publish the impact analysis for 
comment with the proposed rule. Instead, the analysis will be published 
as soon as possible for comment. Comments will be reviewed prior to 
promulgation of a final rule. In the meantime, if commenters have 
empirical evidence which would assist in developing the analysis or 
evaluating the data, it would be welcome at this time.

IX. Regulatory Flexibility Act

    Under the Regulatory Flexibility Act, Public Law 96-354 (94 Stat. 
1164; 5 U.S.C. 601 et seq.), Federal agencies are required to prepare 
and make available for public comment an initial regulatory flexibility 
analysis that describes the anticipated impact of proposed rules on 
small entities. The Department has prepared the following Regulatory 
Flexibility Analysis regarding this rule.

(1) Reasons Why Action Is Being Considered

    The McNamara-O'Hara Service Contract Act of 1965 (SCA) requires 
that the Department of Labor (DOL) determine locally-prevailing wages 
and fringe benefits for the various classes of service employees 
performing contract work subject to the SCA. Contracts over $2,500 (if 
the predecessor contract was not subject to a collective bargaining 
agreement) are required to contain wage determinations issued by DOL 
that specify the minimum monetary wages and fringe benefits that must 
be paid to the various classes of workers who perform work on the 
service contract, based upon rates determined by DOL to be prevailing 
in the locality where the work is to be performed. As discussed 
previously, fringe benefit data are not generally available on an 
occupation-specific or on a locality basis, which prompted DOL to issue 
fringe benefit determinations for health and welfare based on 
nationwide data ever since SCA was enacted.
    The Service Employees International Union (SEIU) sued DOL in March 
1991 in the United States District Court for the District of Columbia 
over the longstanding administrative practice, since 1976, of issuing 
two nationwide rates for health and welfare fringe benefits, and for 
failure to periodically update SCA H&W fringe benefit levels which, at 
that time, had not been updated since 1986 (SEIU v. Martin, CA No. 91-
0605 (JFP) (D.D.C. April 1, 1992)). In this court challenge, the 
district court remanded the case to DOL for exhaustion of 
administrative remedies and final agency action, which led to the 
decision of DOL's Board of Service Contract Appeals that remanded the 
matter to the Wage and Hour Division to consider alternative 
methodologies for implementing the statutory objectives (BSCA Case No. 
92-01 (August 28, 1992) and Case No. 93-08 (September 23, 1993)). The 
proposed rulemaking alternatives are being considered in order to 
develop a methodology for establishing prevailing SCA fringe benefits 
consistent with statutory requirements. In the meantime, SEIU moved the 
district court to reopen its case against the Department. The district 
court dismissed the case without prejudice to SEIU's right to reopen 
for reconsideration upon a showing that DOL has not adopted a final 
rule in this matter by July 31, 1996 (SEIU v. Reich, CA No. 91-0605 
(CRR) (D.D.C. January 19, 1996)).

(2) Objectives of and Legal Basis for Rule

    These regulations are issued under the authority of the McNamara-
O'Hara Service Contract Act of 1965 (SCA) (41 U.S.C. 351 et seq.), 
Public Law 89-286, 79 Stat. 1034, as amended by Public Law 92-473, 86 
Stat. 789; by Public Law 93-57, 87 Stat. 140; and by Public Law 94-489, 
90 Stat. 2358. The objective of these regulations is to provide 
effective procedures for implementing SCA's statutory requirement that 
DOL determine prevailing health and welfare fringe benefits that are to 
be specified in wage determinations included in SCA-covered service 
contracts, which benefits are required to be furnished to the various 
classes of service employees performing work on SCA-covered contracts.

(3) Number of Small Entities Covered Under the Rule

    The definition of small business varies considerably depending upon 
the policy issues and circumstances under review, the industry being 
studied, and the measures used. The Small Business Administration's 
Office of Advocacy generally uses employment data as a basis for size 
comparisons, with firms having fewer than 100 employees or fewer than 
500 employees defined as small.24
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     24 The State of Small Business: A Report of the President 
Transmitted to the Congress (1991), Together with The Annual Report 
on Small Business and Competition of the U.S. Small Business 
Administration (United States Government Printing Office, 
Washington, D.C., 1991), p. 19. A more detailed breakdown also used 
is: under 20 employees, very small; 20-99, small; 100-499, medium-
sized; and over 500, large. In general, a business bidding on a 
government contract is regarded as small if it has fewer than 500 
employees (see p. 221).
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    Statistics published by the Internal Revenue Service indicate that 
in 1990, an estimated 20.4 million business tax returns were filed for 
4.4 million corporations, 1.8 million partnerships, and 14.2 million 
sole proprietorships, most of which are ``small''--fewer than 7,000 
would qualify as large businesses if an employment measure of 500 
employees or less is used to define small and medium-sized 
businesses.25
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    \25\ U.S. Department of the Treasury, Internal Revenue Service, 
SOI Bulletin (Spring 1990) Table 19; reprinted by SBA in The State 
of Small Business (1991), Id., p. 21.
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    Federal procurement data are compiled and reported by the Federal 
Procurement Data Center (FPDC) in the Federal Procurement Data System 
Federal Procurement Report (Washington, D.C.: U.S. Government Printing 
Office). The value of Federal contracts and volume of contract 
``actions'' are currently reported individually to the FPDC for 
contract actions exceeding $25,000; actions of less than $25,000 are 
reported only in the aggregate. A contract ``action'' differs from an 
initial contract ``award'' because a single contract may involve more 
than one action--for example, a modification to an initial contract 
award is reported to the FPDC as a separate action and may involve the 
obligation or de-obligation of funds.
    Small businesses were awarded $58.8 billion of the $184.2 billion 
spent by the Federal government on goods and services in Fiscal Year 
(FY) 1989, including $31.6 billion awarded directly to small firms and 
$27.2 billion awarded to small subcontractors by Federal prime 
contractors.26 Small firms accounted for more than one-half (51.3

[[Page 19780]]

percent) of the value of contracts under $25,000, but only 14.1 percent 
of those over $25,000 in FY 1989.27 Since FY 1979 when the FPDC 
first began reporting procurement data regularly, the share of Federal 
procurement dollars awarded to small firms has fluctuated between 14 
and 16 percent over the entire period--for FY 1989 it was 14.1 percent 
overall.
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    \26\ Id., p. 220.
    \27\ Ibid.
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    Of the major product/service categories under which contract 
actions are reported to the FPDC, the ``other services'' category 
(which includes a variety of non-construction activities ranging from 
technical, sociological, administrative, and other professional 
services, to installation, maintenance, and repair of equipment) 
amounted to 28.9 percent of the total Federal prime contract actions 
reported individually in FY 1989. Small businesses were awarded $6.8 
billion or 14.7 percent of the contract dollars awarded for services in 
FY 1989.28
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    \28\ Id., pp. 223, 226 & 235-237.
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    This FPDC data on small business awards does not correlate 
precisely with the number of contract actions or contract dollars 
awarded that are subject to the SCA. However, the ``services'' category 
can be considered a reliable proxy for analyzing the universe of SCA-
covered contracts reported to the FPDC that may be awarded to small 
businesses. Of a total 502,138 contract actions valued at $177.8 
billion that were individually reported to the FPDC in FY 1992 (i.e., 
actions over $25,000 each), 82,957 contract actions, valued at $18.1 
billion, were classified as subject to the SCA.29 Of these awards, 
we estimate that $2.66 billion (14.7 percent) went to small businesses. 
These figures, however, do not include any portion of the contract 
actions not individually reported but reported in summary to the FPDC, 
which totaled 19.6 million contract actions valued at $22.02 
billion.30 Based upon the percentage of contract actions and 
contract dollars in the services category that were reported 
individually to FPDC as being subject to SCA, we estimate that an 
additional 2,905,696 actions, valued at $2.2 billion, of the actions 
reported in summary to the FPDC were subject to SCA. Of these awards, 
we estimate that $1.1 billion (50 percent) went to small businesses.
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    \29\ Federal Procurement Data System Standard Report, Fiscal 
Year 1992, Fourth Quarter, pp. 74-75.
    \30\ Id., p. 74.
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    No current employment data are available by size of business that 
would relate to Federal contracts awarded subject to SCA. (The SBA 
measures employment change on a current basis for each small-or large-
business-dominated industry using Bureau of Labor Statistics payroll 
data.31)
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    \31\ Id., p. 34.
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(4) Reporting, Recordkeeping and Other Compliance Requirements of the 
Rule

    This proposed rule, which relates to the procedures to be followed 
by DOL for determining prevailing health and welfare fringe benefits to 
be paid to service employees working on Federal service contracts 
covered by SCA, contains no reporting, recordkeeping, or other 
compliance requirements applicable to small businesses. However, some 
of the proposed alternatives may involve additional recordkeeping. All 
SCA-covered contractors (including small businesses) are required to 
maintain records specified under 29 CFR Part 4 that demonstrate 
compliance with the statutory requirements to furnish equivalent fringe 
benefits or cash equivalents at not less than prevailing rates.

(5) Relevant Federal Rules Duplicating, Overlapping or Conflicting With 
the Rule

    There are currently no Federal rules that duplicate, overlap or 
conflict with this proposed rule.

(6) Differing Compliance or Reporting Requirements for Small Entities

    This proposed rule, as noted, relates to DOL procedures for 
determining prevailing health and welfare fringe benefits for service 
employees on SCA-covered service contracts. At this time, the rule 
contains no reporting, recordkeeping, or other compliance requirements 
applicable to small businesses. Moreover, the requirement to provide 
prevailing fringe benefits applies to all contracts in excess of 
$2,500, and establishing different requirements for small entities is 
not a valid alternative under the terms of the statute. However, under 
the express terms of the statute, all SCA-covered contractors may 
discharge their obligations to furnish prevailing fringe benefits under 
SCA ``* * * by furnishing any equivalent combinations of fringe 
benefits or by making equivalent or differential payments in cash under 
rules and regulations established by the Secretary * * *,'' which are 
set forth at 29 CFR Sec. 4.177.

(7) Clarification, Consolidation and Simplification of Compliance and 
Reporting Requirements

    As noted, this proposed rule pertaining to DOL procedures for 
determining prevailing fringe benefits under SCA contains no new 
compliance or reporting requirements for small entities.

(8) Use of Other Standards

    Given the stated objectives of the statute, compliance by 
contractors can only be achieved through performance rather than design 
standards--i.e., the Secretary is required by the Act to determine the 
prevailing wages and fringe benefits to be paid by service contractors. 
The available alternative methodologies that are being considered and 
put forth in this proposed rule are discussed in the preamble above and 
are not repeated here.

(9) Exemption From Coverage for Small Entities

    Exemption from coverage under this rule for small entities would 
not be appropriate given the statutory mandate of SCA that all 
contractors (large and small) performing on SCA-covered contracts 
furnish prevailing fringe benefits to service employees performing on 
Federal service contracts. Further exclusion of such small businesses 
from data collected to determine prevailing fringe benefits would also 
be impractical, and would distort determinations of prevailing fringe 
benefits, possibly to the detriment of small businesses.

Summary

    Based upon the foregoing analysis, the revised procedures contained 
in this proposed rule are expected to have a ``significant economic 
impact on a substantial number of small entities'' within the meaning 
of the Regulatory Flexibility Act. This impact is mitigated in some 
respects by the statutory authority for SCA-covered contractors to 
discharge their obligations to furnish prevailing fringe benefits by 
furnishing any equivalent combinations of fringe benefits or by making 
equivalent or differential payments in cash.

Document Preparation

    This document was prepared under the direction and control of Maria 
Echaveste, Administrator, Wage and Hour Division, Employment Standards 
Administration, U.S. Department of Labor.

List of Subjects in 29 CFR Part 4

    Administrative practice and procedures, Employee benefit plans,

[[Page 19781]]

Government contracts, Investigations, Labor, Law enforcement, Minimum 
wages, Penalties, Recordkeeping requirements, Reporting requirements, 
Wages.

    Signed at Washington, DC, on this 26th day of April, 1996.
Maria Echaveste,
Administrator, Wage and Hour Division.
[FR Doc. 96-10797 Filed 5-1-96; 8:45 am]
BILLING CODE 4510-27-P