[Federal Register Volume 61, Number 251 (Monday, December 30, 1996)]
[Rules and Regulations]
[Pages 68647-68664]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-33222]
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DEPARTMENT OF LABOR
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: Final rule.
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SUMMARY: This document adopts as a final rule a new methodology for
establishing minimum health and
[[Page 68648]]
welfare benefits requirements under the McNamara-O'Hara Service
Contract Act (SCA). In this document, the Department of Labor (DOL or
the Department) also issues a variance, pursuant to Section 4(b) of the
Act, to reflect the Department's practice of issuing prevailing fringe
benefit determinations on a nationwide basis, rather than separately
for classes of employees and localities. This document also contains
other minor, clarifying modifications that conform the regulations to a
1985 court decision, a 1983 treaty, a 1996 intergovernmental compact,
and more recent amendments to the Fair Labor Standards Act (FLSA)
minimum wage provisions.
EFFECTIVE DATE: June 1, 1997.
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
This rule does not contain any 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) requires
that the Department determine locally-prevailing wages and fringe
benefits for the various classes of service employees performing
contract work subject to the SCA. Federal service 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. However, because
fringe benefit data are not generally available on an occupation-
specific or on a locality basis, DOL has issued fringe benefit
determinations for health and welfare based on nationwide data ever
since SCA was enacted.1
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\1\ For a complete description of the history and content of the
current methodology, see the Background section of the Notice of
proposed rulemaking published at 61 FR 19770 (May 2, 1996).
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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 health and welfare 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)). Following a
remand to the Department for exhaustion of administrative remedies, the
DOL's Board of Service Contract Appeals remanded the matter to the Wage
and Hour Division to consider alternative methodologies for
implementing the statutory objectives. Accordingly, the Administrator
of the Wage and Hour Division, by Notice of Proposed Rulemaking (NPRM)
published in the Federal Register on May 2, 1996 (61 FR 19770),
proposed for public comment various alternative methodologies based on
data from the U.S. Bureau of Labor Statistics, Employment Cost Index
(ECI). Due to the time constraints, it was not feasible to publish the
required regulatory impact analysis for comment with the proposed rule.
The Department thereafter developed 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, the Department conducted a survey which
provided specific information on service contract employment by
occupation within SIC industry classifications. By Notice published in
the Federal Register on October 25, 1996 (61 FR 55239), the Department
published its preliminary regulatory impact analysis containing
estimates of the economic impact of the various proposed alternatives.
In an action filed by the SEIU in the U.S. District Court for the
District of Columbia, the court set a deadline for publication of this
final rule of December 24, 1996. SEIU v. Reich, CA No. 91--0605 (August
27, 1996).
In response to the proposed rulemaking, the Department received 80
comments. This included comments from seven Federal agencies:
Department of the Army, Department of the Navy, Department of the Air
Force, Defense Commissary Agency, U.S. Postal Service, Environmental
Protection Agency (EPA), and National Aeronautics and Space
Administration (NASA). Comments were received from six union
organizations: Service Employees International Union (SEIU), the
American Federation of Labor-Congress of Industrial Organizations (AFL-
CIO), the International Union of Operating Engineers, the Laborers'
International Union of North America (LIUNA), District No. 5--ITPE,
NMU/MEBA (AFL-CIO), and the International Association of Bridge,
Structural and Ornamental Iron Workers. The Contract Services
Association of America (CSA), which according to its comment represents
more than 240 companies that provide technical and support services to
37 Federal agencies, provided detailed comments, and thirty-three of
its member contractors separately submitted comments concurring with
CSA's position. Several major government service contractors, including
Johnson Controls, Lockheed Martin, Raytheon Aerospace, Aspen Systems
Corporation, and Kay and Associates, Inc., also provided comments. In
addition, the law firm of Hogg, Allen, Norton & Blue, which stated that
it represents a large number of service contractors throughout the
country, commented on the Department's proposal.
Thirteen firms which employ or provide employment services to
disabled workers under the NISH program and the Javitz-Wagner-O'Day Act
(JWOD) submitted comments. The National Star Route Mail Contractor's
Association and six mail hauling firms also filed comments. Fringe
Insurance Benefits, Inc., which markets and provides services to the
Contractors and Employees Retirement Trust Fund and several health
plans designed specifically for prevailing wage employees, provided its
comments. ACIL, which represents firms performing scientific testing
and engineering services, also commented on the Department's proposal.
III. Comments and Analysis of Alternatives
Summary of Comments
A majority of the commenters favored Alternative I, which would
provide for a single fringe benefit rate based on ECI all-industry
data. The CSA supported the Alternative I methodology, and thirty-three
of its member contractors concurred separately with CSA's position.
Both the Department of the Army and the Department of the Navy
[[Page 68649]]
preferred Alternative I. Alternative I was also supported by Lockheed
Martin and Kay and Associates, Inc. (KAI).
Little support was offered by the commenters for Alternatives II,
III or IV, including the variations of these alternatives. The Defense
Commissary Agency and four firms which employ disabled workers
supported Alternative II-A, which would provide separate benefit levels
for six major occupational groupings, primarily because it would be the
least costly in their particular circumstances. None of the commenters
favored Alternative II-B, which would provide a single fringe benefit
rate based on the occupational mix of service employees engaged in the
performance of SCA-covered contracts, or Alternative II-C, which would
provide for two benefit levels based on combining occupational
groupings into two categories. Alternative III, under which separate
rates would apply to each of four geographic regions, was supported by
only three commenters. Alternative IV, which would provide for a fringe
benefit rate based on a percentage of wages paid was endorsed by Aspen
Systems Corporation, which desired a high benefit package for its
employees, and three firms which wanted a low benefit package.
The Air Force strongly supported Alternative V-A, which would
continue the current methodology of applying two benefit levels based
on ECI size-of-establishment data. NASA, EPA, and the U.S. Postal
Service, and 3 other organizations also supported this alternative.
Three commenters supported Alternative V-B, a variation of the current
methodology in that it would be applied by the size, rather than
nature, of the contract and the lower benefit level would be based on
``total benefit'' rather than ``insurance only'' ECI data.
The unions commenting favored none of the proposed alternatives,
choosing instead to propose another alternative, which would preserve
the two-tier benefit system, but would use a different methodology for
calculating the lower ``insurance'' benefit rate. The unions proposed
that this lower rate be based on all-industry insurance only data,
rather than ``size-of-establishment'' insurance data, and that those
firms not providing health insurance be eliminated from the data (i.e.,
eliminating the ``zeros''). The unions also proposed including data on
fringe benefits paid to public employees in the low level fringe
benefit calculation.
Another alternative was also proposed by Fringe Insurance Benefits,
Inc., under which the Department would issue a single level for health
insurance which would be the same for all employees, and an additional
amount for pension which would vary based upon wages or job
classification.
More detailed discussion of the comments on each of the
alternatives proposed follows:
Alternative I: Issue a single benefit level based upon ECI data for
workers in private industry. The commenters who supported the
Alternative I methodology did so generally for three basic reasons.
First, they preferred its simplicity in establishing a uniform benefit
rate for all employees and the consequent ease with which contractors
could administer this rate and the government could verify SCA
compliance. Commenters also believed that this methodology would
eliminate the possibility of contractors manipulating employee
classifications in order to obtain a competitive advantage, which might
happen under some of the other proposed methodologies, thus ensuring a
``level playing field for bidders.''
Secondly, many commenters preferred Alternative I because it does
not discriminate between classes of employees based on the kind of job
they have or the location of their employment, and because it is easy
for employees to understand and would result in fewer morale problems.
KAI complained that because on some military installations the $2.56
``total benefit'' package applies to some contracts while the $.90
``insurance'' applies to others, it has lost highly qualified employees
to a different company working at the same base location which paid the
same wage but with the higher $2.56 benefit rate. According to KAI, its
employees ``never understand or accept why someone else on the same
base receives $2.56 per hour in benefits in comparison to the $.90 they
receive.'' Vinnell Corporation echoed this concern, stating as follows:
We have long believed that the two tier fringe benefit rate
methodology used for service contracts is discriminatory and creates
a disparate impact on those individuals working on projects where
the lower rate is applicable. One of Vinnell's current service
contracts is at a location where the higher fringe rate is
applicable because the project was derived from an A-76 procurement
action approximately 15 years ago. At that same location we have a
second project where the lower fringe rate is applicable. We find it
inconceivable that two carpenters, both working for Vinnell on
different service contracts but at the same military installation
and receiving the same wage rate should not also receive the same
fringe benefit rate.
KAI was also concerned that a two-tiered system ``results in added
administrative costs and negates the cost savings associated with
economies of scale.''
Finally, many commenters preferred the Alternative I methodology
because, as CSA stated in its comments, it produces a benefit rate
which is ``sufficient to allow all service contractors to purchase a
good benefit package for employees that would cover a range of health
and welfare benefits for all contract workers.'' Many commenters
expressed their belief that due to the continually rising cost of
benefit packages, the current ``insurance only'' benefit rate of $.90
per hour is simply insufficient to purchase any meaningful benefit
package, especially one that would include adequate health insurance.
KAI offered the following concrete example:
In 1993, $.89 per hour of benefits allowed the contractor to
provide a benefit package with 3 personal days, $10,000.00 of life
insurance, profit sharing contribution, dental insurance, and
medical insurance with a $250.00 deductible and supplemental
accident insurance. The $.90 per hour of benefits in 1996 allows the
contractor to provide a benefit package with 4 personal days, zero
life insurance, profit sharing contribution, zero dental insurance,
and a medical plan with a $350.00 deductible and no supplemental
accident insurance.
Contractors favoring Alternative I also believe that the resulting
increase in the benefit level for many of their employees would aid
them in attracting and retaining qualified employees to work on service
contracts with the Federal government.
Both the Department of the Army and the Department of the Navy
supported the establishment of a single health and welfare benefit rate
to be issued on all SCA wage determinations. The Army stated that it
supports one flat rate ``in the interests of simplicity and acquisition
streamlining.'' The Army preferred a ``single rate'' methodology
because it believes that the standards currently used by DOL to apply
the high benefit rate have no rational basis. The Army cited as an
example the Department's policy of applying the high rate to ``OMB
Circular A-76'' contracts.2 The Army stated that if DOL is to
continue with a two-rate methodology, it must ``publish clear
understandable and fair guidance to explain when each rate is
applied.''
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\2\ OMB Circular A-76 actions are solicitations with potential
for displacement of Federal civilian workers. The rationale behind
applying the high benefit level to such contracts is that Federal
workers whose jobs are being converted to the private sector should
not suffer an abrupt decrease in their benefits.
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The Army appears to regard the $1.89 rate as acceptable since it
``splits the
[[Page 68650]]
difference between the `low' and the `high' fringe rate.'' However, the
Army believes that ``it is important that the contracting agencies have
the ability to challenge that one rate by industry. If rates are
significantly lower for a particular industry, then DOL should deviate
from the one rate and set a lower rate for that industry.''
The Navy similarly concludes that ``[t]he single rate is far more
justifiable in terms of both contracting for services and compliance
within established employer wage and benefit programs.'' The Navy also
expressed belief that DOL has applied the current ``high'' health and
welfare benefit level in an artificial manner. Like the Army, the Navy
specifically mentioned the OMB Circular A-76 contracts involving
displacement of Federal employees as an example of improper application
of the high benefit rate. The Navy stated that once the high rate is
applied to such a contract, it continues to apply indefinitely to
follow-on contracts, and consequently, ``many service contracts contain
the artificially high benefit level while the prevailing rates for
those contracts are considerably lower.''
The Navy also stated that ``information available within the
Federal Employees Health Benefits Program'' would provide a sound basis
for establishing a single benefit rate. The Navy is concerned that
implementation of the $1.89 rate would create a significant cost
increase that might result in ``the federal contracting agencies'
inability to continue funding certain services, or existing service
levels, or [cause agencies] to reconsider decisions to contract out
such services to the private sector,'' thus causing a reduction in the
service contract workforces. The CSA also was concerned that
``[i]ncreased cost to government agencies could result in downsizing of
contracts and layoffs of employees.''
On the other hand, the Department of the Air Force opposed the
Alternative I methodology on the bases that the $1.89 ECI-based rate is
too costly and not appropriate for any contractor, being ``too low for
employees of large companies or with high-skilled workers and too high
for employees of small companies or low-skilled employees.'' The Air
Force, however, agreed with the Army and the Navy that ``[t]he current
problems with the two rate system stem from the inconsistent
application of the two fringe benefit levels resulting in confusion and
frustration by Federal contracting agencies, contractors, and service
contractors.'' The Air Force further stated that ``[t]he inflexibility,
for example, in applying the `high' fringe benefit rate to A-76
[Federal employee displacement] solicitations and then maintaining the
high benefit level regardless of the type of continued circumstances of
the contract has created the climate for complaints and attacks on the
two level system.''
The Defense Commissary Agency believed that Alternative I would be
cost-prohibitive for its contracting purposes since that agency
normally uses ``service occupations'' that would be paid the ``low''
health and welfare benefit rate under the current methodology.
Another disadvantage to the Alternative I methodology, specifically
mentioned by CSA, is that the all-industry ECI data upon which the
Alternative I benefit rate would be based includes ``zeros''--that is
data from companies that do not provide the benefit surveyed, thus
resulting in a lower rate that does not accurately reflect the actual
cost of such benefits. This concern was also reflected in the unions'
alternative proposal for determining health and welfare benefit rates,
which is separately discussed below.
Many commenters expressed concern that lowering the current high
``total benefit'' rate to the Alternative I single benefit rate would
result in serious employee morale problems and disruption in benefits.
Accordingly, as will be more fully discussed below, many commenters
favored some type of ``grandfathering'' or ``phase-in'' mechanism to
ameliorate the disruptive effects resulting from a change in the health
and welfare benefit rate methodology.
The unions unanimously opposed the single rate methodology provided
in Alternative I primarily because it would reduce existing benefits
currently received by those service contract workers to which the
higher level ``total benefits'' rate applies. They believed that
Alternative I met their primary criterion of establishing a rate high
enough to purchase health insurance coverage, but nonetheless found
this alternative unacceptable because it would eliminate the existing
``total benefits'' rate. SEIU also opposed Alternative I for the
specific reasons that it excludes public employee data and fails to
give ``due consideration'' to Federal employee rates.
Alternative II-A: Issue a single benefit level for each of six
major occupational groupings based on ECI data for all workers in each
of these groupings in private industry. This alternative was favored by
the Defense Commissary Agency and four firms which employ workers with
disabilities pursuant to programs sponsored under the Javitz-Wagner-
O'Day Act (JWOD), based primarily on their view that this alternative
would be the least costly in their individual circumstances. The
Defense Commissary Agency recommended use of Alternative II-A because
the ``service occupations'' it normally uses ``really would justify
only a rate of $.62 per hour.'' Eastern Carolina Vocational Center
(ECVC), which operates a work center for disabled individuals,
explained that Alternative II would be the best alternative for its
operations based on cost reasons. While ECVC acknowledged that
Alternative II-A may be the most expensive to the government as a
whole, it would be the least costly where ECVC was concerned since its
workers fall within the second lowest paid occupational group
(handlers, equipment cleaners, helpers and laborers, which would
receive fringe benefits of $1.24 per hour [based on 1995 ECI data]
under this alternative).
Most of the commenters who opposed adoption of Alternative II-A
believed that it would be too difficult to administer and enforce, and
would result in ``additional costs to the contractor, and ultimately to
the contracting agency, for personnel and systems to administer the
program.'' The Air Force was concerned that the increase in the
complexity of accounting resulting from this alternative would pose
``additional compliance difficulties for contractors and [Wage-Hour]
investigators.''
Commenters also expressed concern that too much subjectivity would
be inherent in the administration of this alternative. Both CSA and
Aspen Systems Corporation specifically stated that utilization of this
alternative could lead to gamesmanship involving manipulation of
classifications by contractors during the competitive bidding process.
Many commenters expressed their belief that minimum fringe benefit
rates differentiating among various groups of employees under
Alternative II-A would not reflect the prevailing practice in the
service contracting industry and would be unfair to employees in lower-
paid occupations. CSA stated that a ``vast majority'' of its member
companies ``provide the same level of benefits to all workers, except
those workers who are covered under a Collective Bargaining Agreement
or a prevailing wage law.'' The AFL-CIO also stated that employers
generally provide the same rate of fringe benefits, particularly health
insurance, to all employees working on the same
[[Page 68651]]
contract. The AFL-CIO further stated that ``a system based on
occupational groupings that would provide different employees working
for the same employer under the same contract with widely different
fringe benefits simply could not be considered to be prevailing since
such a system is rarely found among employers.''
Several contractors stated that, especially on those contracts with
a mix of labor categories, there could be a high potential for
discrimination problems arising under the Internal Revenue Code in view
of the large disparity between the various benefit rates. Several
commenters were also concerned that having the various benefit levels
under Alternative II-A would create serious labor and morale problems.
In addressing this point, the AFL-CIO stated as follows:
[Q]uality health insurance is needed by all service workers
regardless of their occupational groupings. The cost of insurance is
the same for the custodian as for the computer technician.
Establishing different minimum fringe benefit levels based on
occupational titles or groupings probably would lead to different
levels of health care among service workers, creating basic problems
in the workplace.
Finally, several commenters, including Fringe Insurance Benefits,
Inc., opposed this alternative because the $.62 rate for ``service
occupation'' employees would not be sufficient for such employees to
obtain any meaningful health insurance.
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 contracts. No commenters favored
this alternative; Lockheed Martin was the only commenter to provide any
favorable comments concerning this alternative. 3 Lockheed Martin
believes that the benefit rate produced under this methodology would be
less than the $1.89 rate produced under Alternative I and that it
``would be more reflective of prevailing benefit levels of SCA type
contracts.'' Lockheed Martin also believed this alternative to be easy
to administer.
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\3\ Lockheed Martin supported Alternative I.
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Most commenters opposed Alternative II-B simply because they
believed it to be too complicated. CSA believed that ``the data
required to effectively accomplish this may be too difficult to obtain
and may have too much error to be effective.'' Aspen Systems expressed
concern that this alternative would be difficult for the government to
implement, thus creating delay, and that it was unclear as to which
agency would have the authority to set the single benefit rate. Several
commenters, including the AFL-CIO and the Air Force, questioned the
accuracy of the Department's calculation of the occupational mix of
service employees contained in the regulatory impact analysis, which
formed the basis of the cost estimate for this alternative. The Air
Force also believes this alternative to be the most inflationary of all
those proposed.
Alternative II-C: Issue two benefit levels based on combining the
occupational groupings. This alternative likewise garnered no support
from any commenters. Many commenters had the same objections to this
alternative that they had to Alternative II-A. The commenters generally
complained that this alternative would be too complex administratively,
and would be discriminatory against workers in certain types of
occupations leading to employee morale problems. Aspen Systems believed
that there would be too much subjectivity in determining under which of
the two broad occupational groupings certain classifications would
fall.
Alternative III: Issue a single rate for each of four geographic
regions based on ECI data for all workers in private industry. This
alternative was endorsed by Goodwill Industries, Inc. of Eastern
Nebraska and Southwest Iowa, which stated that this alternative ``would
provide the least financial burden to the Federal Government and
provide a significant increase in benefits to [its] employees,'' and by
the EPA, which believed this alternative to be ``among the most prudent
cost effective alternatives.'' 4
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\4\ EPA equally supported Alternative V-A.
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Commenters which opposed this alternative stated that regional data
is not an adequate substitute for locality data, especially since this
methodology would not take into consideration fringe benefit
differences within a particular region. One commenter noted that the
District of Columbia and Mississippi would be located in the same
region, yet the labor costs in these two regions are significantly
different. Similarly, the AFL-CIO points out that prevailing rates in
San Francisco, which is located in the Western region, are much more
likely to be similar to the prevailing rates in Boston than to the
prevailing rates in Boise, Idaho, which is also in the Western region.
Commenters therefore questioned the usefulness of the geographic
breakdown embodied in Alternative III.
Several commenters also pointed out that fringe benefits are
provided to employees within a company on a similar basis without
reference to geographic location and that benefit plans to which
employers subscribe are not structured to take into account
geographical differences. CSA and its member companies disliked
Alternative III, finding it too difficult to administer because it
would possibly require four separate benefit plans. They were also
concerned that implementation of this alternative would necessitate
major payroll, accounting and administrative changes, and would be
especially problematic with regard to employees who work in more than
one region. CSA was also concerned as to how contract bids would be
evaluated in situations where place of performance of the service
contract would be determined by the location of the successful bidder.
Finally, CSA believed that this alternative ``could cause non-
compliance with IRS discrimination rules on pension plans.'' Hogg,
Allen, Norton & Blue was concerned that the establishment of a higher
benefit for one geographic region than another might give rise to
``control group issues under ERISA.''
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. This alternative was endorsed by Aspen Systems Corporation and
three firms which employ workers with disabilities pursuant to programs
sponsored under the JWOD. Aspen Systems believed that this alternative
would provide positive incentive to employees ``in the sense that the
higher an employee's hourly wage, the higher the employee's fringe
benefit rates.'' Aspen Systems also stated that implementation of this
methodology would aid firms in attracting and retaining employees in
high level classifications, such as specialty and technical personnel.
Aspen Systems did not view this alternative as being too burdensome
from an administrative standpoint and recommended that the methodology
be applied as a percentage of each individual employee's wages rather
than of an average based on all wages paid under a contract. The JWOD
firms which favored this alternative appeared to do so because the
percentage methodology when applied to the wage rates typically paid to
their low-wage employees would serve to decrease their labor costs and
enhance their competitiveness.
Many commenters believed that this alternative would not be
[[Page 68652]]
administratively feasible. For example, Johnson Controls stated that
many of its contracts are not staffed with administrative personnel who
could adequately perform the requirements associated with this
alternative. The Air Force was also specifically concerned that
applying multiple fringe benefit rates on a contract would impose an
excessive administrative burden on contractors, particularly small
contractors such as those operating under the Small Business
Administration's ``8a'' program and the ``NISH'' programs. The Air
Force also believes that the complexity of accounting inherent in this
alternative would pose added compliance difficulties for contractors
and Wage-Hour investigators alike. Fringe Insurance Benefits, Inc. was
concerned that use of this alternative would provide incentives for
employers to intentionally misclassify employees.
Several commenters stated that a methodology providing for multiple
fringe benefit rates would naturally lead to problems of inequity and
morale in the workforce. CSA and the AFL-CIO both expressed concern
that lower paid workers might not be able to obtain adequate health
insurance under this alternative. Finally, Fringe Insurance Benefits,
Inc., while pointing out that ``the cost of health has no relationship
to wages,'' stated that this methodology is ``inconsistent with the
traditional approach of providing all non-exempt employees with the
same health benefit level.''
Alternative V-A: Issue two fringe benefit levels based on BLS ECI
size-of-establishment data for all workers in private industry (Current
methodology--applied based on nature of contract). The Air Force, NASA,
EPA and the United States Postal Service specifically recommended this
alternative. Moreover, several commenters, including Johnson Controls
and Hogg, Allen, Norton & Blue, even though they did not choose this
alternative, believe this to be the least disruptive alternative since
it most closely approximates the present two-level methodology.
The Air Force believes this to be the least costly of all the
alternatives proposed and that experience over the past twenty years
shows that a methodology providing a two-tier system would best ``meet
the needs of large or high-skill contractors and provide a
representative rate for the small and low-skill contractors.'' The Air
Force further believes that ``[t]he current problems with the two rate
system stem from the inconsistent application of the two fringe benefit
levels resulting in confusion and frustration by Federal contracting
agencies, contractors, and service employees.'' The Air Force favored
establishment of regulations that would ``place a high fringe benefit
level only on large dollar contracts and contracts that require the use
of a highly skilled workforce.''
The United States Postal Service preferred this alternative so that
``the current methods of calculating wages and benefits for highway
transportation contract employees would be continued.'' The Postal
Service's preference stems from its desire to preserve the status quo
with respect to the Department's current policy of special treatment of
the mail transportation industry.
The primary objections to this alternative are that the two levels
are inconsistently and subjectively applied to contracts and that the
insurance level is too low to provide adequate benefits and/or attract
and retain qualified employees. SEIU points out that ``size-of-
establishment'' data has no direct correlation to the population of
establishments performing SCA contracts and the types of contracts to
which the two benefit levels apply, i.e., the size of the business has
no relationship to the nature of the service contract or to the level
of benefit applied under the current methodology. SEIU and the AFL-CIO
both stated that the ``size-of-establishment'' approach for the lower
``insurance'' rate has been rejected by the Department's Board of
Service Contract Appeals.
Alternative V-B: Issue two fringe benefit levels based on BLS ECI
size-of-establishment data for all workers in private industry
(variation of current methodology--applied by size/number of employees
on contract; lower fringe benefit rate based on ``total benefit''
level). This alternative was favored only by CCAR Services, Inc., an
employer of persons with disabilities, whose primary concern was that
an increase in the cost of benefit packages would result in a reduction
in the number of employees on government service contracts.
The Air Force opposed this alternative because of the problems
attendant to its application. The Air Force notes that ECI fringe
benefit data is based on the number of employees in the firm, whereas
the suggested application would be based on the number of employees on
the contract. The Air Force believes this illogical given that many
large firms that would normally pay high fringe benefit rates have
contracts that utilize only a small number of employees. CSA states
that employees would be penalized for working on smaller contracts and
that it would be difficult to attract and retain highly skilled workers
on small contracts. Finally, Job Options, Inc. states this alternative
would lead to a perception by employees of arbitrariness and unfairness
since ``there is really no difference from the workers point of view
whether or not he or she works for a large or small employer, the
workers' needs are the same. Therefore, to either penalize or reward
them based on the size of the employer seems unfair to employees.''
Other Alternatives
Unions' Proposal
The union commenters suggested an alternative methodology that
would maintain the existing ``two-tier'' system, including the ``total
benefits'' rate (currently at $2.56) utilizing the current methodology,
but would provide a different methodology for determining only the
lower ``insurance'' rate.5 SEIU and the AFL-CIO both stated that
the Department should continue to set the lower fringe benefit rate
based on the cost that employers pay for insurance because BLS data
shows that insurance is the only benefit which a majority of service
workers receive. However, rather than using the ECI size-of-
establishment data currently used to determine the ``insurance'' rate,
the unions recommended using ECI all-industry data, but only after
those establishments that reported no health insurance costs are
factored out of the survey data, i.e., after eliminating the ``zeros.''
The unions argued that inclusion of ``zeros'' as amounts paid for
health insurance distorts the cost of health insurance paid by
employers which actually provide health insurance, and therefore
artificially deflates the prevailing fringe benefit rate. The AFL-CIO
believes that its proposal would bring the ``insurance level'' cost
within the range of $2.00.6 As discussed below, the unions''
proposal also would include State, local and Federal data in the
computation. They argue that inclusion of State and local data is
appropriate because nothing in the Act suggests that prevailing rates
are based only on private industry. They further suggest
[[Page 68653]]
that inclusion of Federal rates is appropriate because of the statutory
provision for the Department to give ``due consideration'' to the rates
paid Federal employees.
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\5\ SEIU recommends that the ``Total Benefits'' rate should be
``frozen at $2.56 until such time as the ECI data for all benefits
for establishments of 100 or more employees rises above the $2.56''
because the ECI data for 1995 and 1996 fell below this rate.
\6\ Fringe benefit data with ``zeros'' excluded is not currently
available from BLS. SEIU claims in its comments that BLS has
informed them that ``establishments with zero health care benefits
can be eliminated from the ECI data by some programming changes * *
*''
---------------------------------------------------------------------------
As an alternative, SEIU suggested that the ``insurance'' rate could
be based on data derived from the Federal Employee Health Benefits
Program (FEHBP). According to SEIU, the family coverage contribution
rate under the FEHBP program was $1.65 in 1996, whereas a blend of
single and family coverage rates as reflected in the actual cost per
employee to the Federal government would amount to approximately $1.30
per hour. Apparently, SEIU would support either of these two rates as
the basis for the ``insurance'' rate.
The Army believes that the unions' proposal to change the ``low''
rate methodology, but retain the methodology for computing the ``high''
rate as it now stands is a ``protectionist stance * * * that cannot be
defended.'' The Army states that if DOL decides to continue with a two-
rate methodology, the rationale for each rate must be the same. In
other words, it would be illogical and inconsistent to determine the
lower ``insurance'' rate based on all-industry data, while continuing
to determine the higher ``total benefits'' rate based only on ``size-
of-establishment'' data.
Insurance Plus Variable Rate
Fringe Insurance Benefits, Inc. (FIBI) recommended implementation
of ``a prevailing rate for health insurance that is level and
consistent for all employees on the contract and a pension rate that is
based on either wages or job classification.'' Under this method,
health care costs for each class of employee would be consistent, but
other fringe benefits such as pension amount would vary by occupation
or wage rate. FIBI suggested that this method would better conform to
actual market place practices. Furthermore, FIBI suggested that the
Department closely review the National Association of Insurance
Commissioners' Small Employer Health Insurance Availability Model Act.
``Due Consideration'' and Inclusion of State and Local Data
Five organizations commented concerning the appropriate procedure
for the Department to give due consideration to the wage and fringe
benefits paid Federal employees, as required by the Act. Three unions
and one contractor stated that due consideration should be given to the
wage and fringe benefit rates being paid Federal employees in making
SCA wage determinations. SEIU stated that due consideration was
intended to narrow the disparity between the compensation received by
Federal employees and service contract workers. SEIU's view is that
Wage and Hour has made no attempt to determine the cost of Federal
employees' fringe benefit in order to close the gap. The AFL-CIO
contends that the Department cannot rationally maintain that it gives
``due consideration'' to Federal wage and fringe benefit rates, as
required by the statute, when Federal workers are excluded from the
data on which the SCA fringe benefit rates are based. LIUNA and
Lockheed Martin concurred that in computing the insurance level, ECI
insurance benefit costs from all civilian sectors, including government
employees, should be used.
The unions strongly supported the inclusion of fringe benefits paid
to all public employees, including State and local as well as Federal
employees, in SCA fringe benefit rate determinations. According to
SEIU, data on fringe benefits paid State and local government employees
is readily available in that the ECI now publishes data on fringe
benefits paid to ``civilian workers'' including both private and State
and local workers combined. SEIU and the AFL-CIO also maintain that
data on fringe benefits paid to Federal workers, which SEIU states is
``readily available'' from the Office of Personnel Management, should
also be factored into the fringe benefit rates. SEIU states that fringe
benefits received by State, local, and Federal workers ``tend to be
higher than the fringe benefits paid in private industry'' and their
exclusion artificially suppresses the rates currently published by the
Department. The unions pointed out that neither the Act nor the
regulations make a distinction between private and public service
employees, and therefore, there is no basis for excluding public sector
fringe benefit data.
In contrast, the Air Force states that if ECI fringe benefit data
is to be used, State and local government fringe benefit data should be
excluded. The Air Force states that not only are fringe benefits paid
by these entities ordinarily above the levels provided by local private
industry, but that a disproportionate number of these employees are
represented by unions. These factors would tend to skew the data and
results, just as would the inclusion of Federal government data.
Furthermore, the CSA states that the benefit rate should be based on
private industry data and does not believe that the Department should
explore the cost and feasibility of expanding ECI to include fringe
benefits of State and local workers.
``Grandfathering'' or ``Phase-In''
Nine organizations provided comments concerning the possibility of
``grandfathering'' and/or ``phasing-in'' any of the proposed
alternative health and welfare benefit rate(s). CSA and its member
contractors specifically recommend that the current ``total benefit''
level of $2.56 be ``grandfathered'' throughout the life of all existing
contracts, including all options and extensions, and that all new
contracts and recompetitions convert to the new health and welfare rate
at the time of award. The Navy concurs that ``the revised benefit rate
should be implemented only at the resolicitation of a contract, or the
new solicitation of contract services.'' The Navy also states that
``[a]ny existing contract would continue with the same present benefit
level through the end of that contract, regardless of options or
extensions.'' The Navy did not specifically indicate whether its
``grandfathering'' scheme would apply only to the ``total benefit''
level or would also apply to the current ``insurance'' level of $.90 as
well. The Army also agrees that ``implementation should occur when a
contract is being resolicited or a new requirement is being awarded.''
The Army anticipates that this would allow implementation ``to occur
over a period of one to four years, given the fact that most contracts
are for a five year term.''
KIA, on the other hand, suggested that contracts subject to the
$2.56 level be ``grandfathered to protect the current level until such
time as the lower single level of $1.89 can catch up to it.'' Hogg,
Allen, Norton & Blue also offered this suggestion. These commenters
generally believe that this approach would protect incumbent employees
against a reduction in their fringe benefits upon recompetition and
would protect incumbent contractors against predatory pricing practices
by non-incumbents at the time of recompetition. They believe that
grandfathering the high benefit level until the new rate catches up,
provided it is not cost-prohibitive for the agencies involved, would
cause the least disruption for contractors and employees alike.
SEIU states that equity dictates that no employee's benefits should
be cut back. In addition, LIUNA believes it appropriate for the
Secretary of Labor to issue an exemption or variance for purposes of
preserving the current high benefit rate. Another organization
concurred, stating that because of the inevitable employee
dissatisfaction resulting from a reduction in benefits,
[[Page 68654]]
contracts should be grandfathered to protect the current level ``until
any lower level H & W rate can catch up because failure to do so would
negatively impact employee morale and retention.''
The AFL-CIO proposes a two-year phase-in approach for
implementation of its recommended new ``insurance'' rate. The AFL-CIO
recommended that implementation of the new ``insurance'' rate start
with all contract anniversary dates after September 30, 1997, and that
only one-half of the difference between the current rate and the new
rates which would otherwise apply for fiscal year 1998 be implemented
at that time. On the next anniversary date of the contract, the second
half of the increase would be implemented.
The Air Force strongly opposes grandfathering the high fringe
benefit level should a final rule be adopted to change to a methodology
other than Alternative V-A. The Air Force objects to the Department
artificially retaining higher fringe benefit rates, which they do not
believe to be supported by the surveys. The Air Force recommends a
``phase-in'' period whereby the rate[s] would ``take effect only upon
recompetition of each contract.'' The Air Force believes that, while a
phase-in period would not reduce the eventual cost of the benefit
increase, it would at least serve to ``reduce the immediate negative
impact on employees facing layoffs.''
The Defense Commissary Agency recommends against a permanent
grandfathering at the current rate because that agency believes that
the current rates are already too high for the type of work for which
it contracts. Instead, the Defense Commissary Agency recommends a
phase-in period of two years, with half the reduction occurring the
first year, and movement to the then-current rate the second year.
Analysis
Based on a careful review of the comments and further analysis of
the various alternatives, the Department has concluded that Alternative
I best accords with the Department's dual responsibilities to determine
fringe benefits which prevail, and to select a methodology which is
administrable and not unduly disruptive for employees, contractors,
contracting agencies, and the Department. Currently there are no
occupation-specific or locality-based fringe benefit data available.
Furthermore, virtually all commenters opposed any alternative which
would result in their having to pay different fringe benefits to
different classes of workers or in different parts of the country.
While recognizing that no methodology will satisfy all parties
interested in the service contracting process, the Department believes
that Alternative I represents a reasonable application of the statutory
requirement to establish prevailing fringe benefit rates and best meets
the concerns expressed by the commenters to the Department's proposal.
(See also the discussion below concerning the Department's issuance of
a variance under Section 4(b) of the Act.)
Pursuant to the Alternative I methodology, the applicable fringe
benefit level would be based on employer costs per hour worked for all
benefits--excluding holidays and vacations, which are separately
determined, and excluding benefits otherwise required by law, such as
social security, unemployment insurance, and workers' compensation
payments--as reported annually by the BLS Employment Cost Index (ECI)
study of employer costs for employee compensation in the private sector
(i.e., all workers, all industries, all establishment sizes, and all
occupations). Under this ``total benefits'' approach, the Department
will 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 7 for the following
compensation components:
---------------------------------------------------------------------------
\7\ The cost of the benefit components in the BLS ECI study is
an average based on data from all employers in the survey, including
those employers that do not provide the particular benefit.
Averaging in these ``zeros'' gives consideration to the degree to
which a benefit in fact is paid by employers.
---------------------------------------------------------------------------
(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.
The Department chooses Alternative I because, as noted by many
commenters, this determination method is simple to understand and to
comply with, and relatively simple to administer and enforce. The
Department also chooses Alternative I because it is consistent with the
Department's general practice of using cross-industry data which is not
differentiated by size-of-firm in determining prevailing wage rates.
The Department has concluded that use of size-of-firm data should not
be continued because the Department's application of the two benefit
levels did not in fact correspond to the size of the employer, and
because review of the survey conducted in preparation of the
Department's impact analysis (61 FR 55239, October 25, 1996) led the
Department to conclude that the low ``insurance'' level which was
applied to most contracts was particularly inappropriate for the large
numbers of white collar and skilled blue collar workers employed on
Federal service contracts.
Furthermore, the Department prefers Alternative I over the current
methodology (Alternative V-A) because it addresses concerns expressed
by commenters that the current two-tier system has been inconsistently
and subjectively applied. This approach is also preferable because it
applies the same minimum hourly benefit level for all service employees
and does not require any subjective judgments as to which benefit level
to apply based on the type of contract or employee. Accordingly,
adoption of Alternative I will largely avoid the potential for employee
morale problems and perceptions of unfairness and inequity that are
inherent in the current system and in those alternatives that would
establish different rates for different occupations (Alternatives II-A,
II-C, and IV).
The Department also notes that Alternative I provides a benefit
level that is sufficient for service contract employees to obtain
meaningful health insurance coverage and will allow service contractors
to obtain and retain qualified employees. This is consistent with the
Department's goals of encouraging employers to provide a high quality
and high performance work place. In contrast, the current low insurance
fringe benefit level, because it is based on only ``small'' employers
and averages in those employers which provide no fringe benefits, has
resulted in a fringe benefit level significantly lower than the level
actually paid by employers in private industry.
Alternative I also is consistent with the desire of almost all
commenters that health and welfare fringe benefit rates be based upon
nationwide data. The Department agrees with those commenters which
opposed the alternative (III) which would base rates on the four
regional breakdowns because it does not take into account the
potentially wider prevailing rate disparities within regions and
because employers commented that they generally provide similar
benefits to their employees regardless of location.
The Department has decided not to mix State and local government
fringe benefit data with ECI private industry data in determining the
fringe benefit
[[Page 68655]]
level applicable under this methodology. The Department has concluded
that the determination of the prevailing fringe benefit level should be
based only on private industry data since this is the sector that
competes for government contracts. Public employee benefit rates are
not representative of the benefit levels paid by the universe of
private firms that comprises SCA contractors. Rather, fringe benefit
levels paid by State and local governments are substantially different
than private industry, and consequently, inclusion of such data would
inappropriately skew the fringe benefit determination.
The Department has also concluded that inclusion of Federal fringe
benefit data is not feasible.8 The Department has not been able to
obtain usable cost data for Federal benefits other than health and life
insurance. The pension system provides a defined benefit package for
one group of employees 9 and a defined contribution system for
others, with contributions which vary according to the level of
contributions by employees. Pension and sick leave both vary with the
pay of employees. Thus, it is apparent that data on fringe benefits
paid to Federal employees would not readily mix with ECI private
industry data. However, the Department has taken ``due consideration''
of the Federal benefit system in its selection of Alternative I, which
utilizes ``total benefits'' data and will bring SCA fringe benefit
levels more into line with Federal benefits.
---------------------------------------------------------------------------
\8\ Inclusion of Federal benefits would likely have little
impact in any event. For example, Federal health insurance would
affect the insurance level by no more than a few cents per hour.
\9\ The level of the defined benefit plan presumably is also
affected by the fact that participating employees do not receive
credit towards Social Security benefits for their period of
Government service.
---------------------------------------------------------------------------
The Department shares the view of many commenters that any change
in the methodology should avoid the serious adverse effect of a
substantial reduction in fringe benefits for those service employees
currently employed on contracts subject to the ``total benefit'' level.
We anticipate that employers paying the higher benefits in accordance
with past determinations of the Department will face the Hobson's
choice of cutting fringe benefits for their workers (possibly losing
them to employers who are not Federal service contractors which pay
higher fringe benefit packages) or becoming uncompetitive. Similarly,
Federal agencies may lose the continuity of services provided by major
contractors which may become uncompetitive, or by valuable employees
who leave because of the reduction in their fringe benefits.
Accordingly, the Department has concluded that the current ``total
benefit'' level should be grandfathered at the present rate ($2.56 per
hour) until the single benefit provided by Alternative I (all-industry,
all-occupation average) reaches or exceeds $2.56. This grandfathered
rate will apply to all contracts which currently contain the high,
``total benefit'' level, and future solicitations for those contracts.
The grandfathered rate will not apply to contracts for new services.
The Department also believes it is necessary to allow contracting
agencies (which may have budgeted based upon existing fringe benefit
levels) and contractors (which will likely need to develop new fringe
benefit plans) a period of time in which to prepare for the change in
minimum fringe benefit levels. Accordingly, the new methodology
established by this final rule will apply only to wage determinations
issued on or after June 1, 1997. This date was selected so that the new
rate will apply to contracts solicited and options exercised for the
fiscal year beginning October 1, 1997. For the same budgetary and
planning reasons, the Department has also concluded that a four-year
phase-in of the rate set by the new methodology would be appropriate.
The Department believes that this approach is preferable to the
alternative suggestion of applying the new rate only to new
solicitations, and not to extensions and options on existing contracts,
because it is more equitable. Furthermore, the Department is concerned
about potentially serious problems in applying the proper fringe
benefit determination because of difficulties in ascertaining whether
the wage determination is needed for a new contract or exercise of an
option.
As discussed above, most of the alternative methodologies proposed
did not garner significant support from commenters, though they were
fully considered by the Department in light of the rulemaking record.
The Department did not select Alternative II-A, which would set
different rates for each of six occupational groups, because it would
be much more difficult for contractors to administer and for Wage-Hour
to enforce. The Department considered it significant that commenters
stated that providing different levels of benefits according to
occupation is contrary to the common practice of employers providing
the same benefit program to most employees, and that it would be
difficult for insurance carriers to accommodate. Commenters also agreed
generally that having different benefit levels based upon occupation
would create serious labor-management and morale problems. The
Department also shares the concern expressed by several commenters
about subjectivity inherent in this alternative and the possibility
that some contractors might attempt to manipulate the classifications
in order to obtain a competitive advantage.
Alternative II-B is similar to Alternative I in that it would
provide a single benefit level for all employees and all contracts.
However, no commenters responded favorably to this new concept for
computing health and welfare fringe benefits, which would set the
fringe benefit level based upon available information regarding the mix
of occupations used on Federal service contracts. Under this
alternative, fringe benefit rates would be determined based upon the
survey the Department conducted last year which formed the basis for
its impact analysis. Commenters generally expressed little confidence
in the Department's efforts to determine the occupational mix on SCA-
covered contracts.
The Department did not select Alternative II-C for many of the same
reasons it declined to adopt Alternative II-A. Reducing the
occupational groupings from six to two would decrease the frequency of
having different levels paid to groups of employees on the same
contract. However, where that situation arose, there still would be a
distinct possibility of perceptions of discrimination and consequent
employee morale problems. Moreover, determining the appropriate mixing
and weighting of the various occupational group rates would be
difficult.
The Department rejected Alternative III because the Department
agrees with the many commenters expressing the belief that establishing
benefit rates on a regional basis offers no significant advantage over
using a nationwide rate. To the contrary, regional data does not
reflect variations in labor costs and fringe benefit rates within a
region, which, as the commenters pointed out, are often more
substantial than variations among regions. Moreover, this option would
be inconsistent with the reportedly common practice among employers,
including service contractors, of providing similar fringe benefits to
most employees nationwide, without regard to either occupation or
geographic location. This alternative would be particularly problematic
to those government service contractors which perform contracts for
similar services at various facilities and installations throughout the
country. It
[[Page 68656]]
could also create serious administrative problems for service
contractors whose contracts require performance in multiple locations
that fall within different regions.
Alternative IV (benefits based on a fixed percentage of each
employee's wages) was not chosen by the Department primarily because of
the extreme difficulty that would be posed by its administrative
requirements. Several commenters expressed serious concern that the
additional administrative and recordkeeping requirements that would be
associated with this alternative would simply be too burdensome,
especially for smaller contractors. Although the Department is of the
view that there is a correlation between wage levels and fringe
benefits paid when viewed across the entire workforce, the Department
recognizes that individual employers reportedly provide the same or
similar benefit packages to most employees (especially insurance
benefits), without regard to wage levels. Moreover, the Department
agrees with the commenters that this alternative has the greatest
potential for creating problems of inequity and morale in the workf
orce. The Department also notes that under this alternative many lower
paid workers simply would not receive adequate health insurance.
As discussed above, the Department decided against continuing the
methodology proposed under Alternative V-A or the variation proposed
under Alternative V-B primarily because of the lack of evidence
justifying continued use of ECI ``size-of-establishment'' data, which
has been difficult to defend before the Board of Service Contract
Appeals, and commenter concerns regarding the manner in which the two
rates have been applied and the resulting effects on the morale of the
work force.
The Department also seriously considered the union proposal. The
Department was concerned about the lack of opportunity for comment on
this specific alternative. Furthermore, the Department believes that
the union proposal, which would maintain the existing ``two-tier''
system, including the current method for determining the high ``total
benefits'' rate, while providing a revised methodology for determining
the lower ``insurance'' rate, would be difficult to support given that
the two rates would be based on inconsistent methodologies. Under the
union proposal, the high ``total benefit'' rate would continue to be
set based on ECI ``size-of-establishment'' data for large firms
(establishments with 100 or more employees). However, the Department's
use of ``size-of-establishment'' data was successfully challenged in
proceedings before the BSCA. Though the specific challenge was to the
use of ECI ``size-of-establishment'' data as a basis for the low
``insurance'' rate, the Department believes that any legal shortcomings
identified in that action would likely apply as well to the use of such
data in establishing the ``total benefit'' level. Neither the comments
nor the Department's own survey provided evidence to refute the
Department's statement in its Notice of Proposed Rulemaking (61 FR
19773) that the major problem with the continued use of ``size-of-
establishment'' data is that there is little evidence to show that the
average benefit level for small firms corresponds best to benefits paid
by private employers on contracts similar to most SCA contracts, or
that the benefit level paid by large firms corresponds to the rates
paid by employers on contracts to which the ``total benefit'' package
has been applied under SCA. Thus, just as there is questionable
justification for relying upon ``size-of-establishment'' data as the
basis for the ``insurance'' rate, there is equally questionable basis
for relying upon such data in setting the ``total benefit'' rate.
Finally, the union proposal would continue to raise concerns about the
potential for inconsistent and subjective application of the two
levels.
The Department also rejected the alternative suggested by the FIBI.
Like the union alternative, this alternative had not been offered for
public comment. It has the distinct advantage of being consistent with
many employers' reported practice of providing one insurance benefit
package to their employees, while providing pension or other benefits
at a level varying with wages. However, the Department is concerned
that this proposal would be difficult and burdensome to administer,
requiring detailed recordkeeping.
IV. Comments and Analysis of Other Fringe Benefit Issues
Variance Under Section 4(b) of the Act
Approximately ten organizations commented regarding the
Department's proposal to issue a variance under Section 4(b) of the Act
from the statutory requirement that the Secretary determine prevailing
fringe benefits for the various classes of service employees in the
locality.
Johnson Controls stated that using a single nationwide rate ``does
not reflect the economic factors of the local geographic areas for the
prevailing benefits from a competitive and comparability standpoint.
Nationwide average data is skewed and does not reflect a valid
depiction of benefits when compared with local geographic prevailing
benefit data.'' However, Johnson Controls did not identify any source
of locality-based fringe benefit data nor did it support the use of
regional data as proposed in Alternative III. Rather, Johnson Controls
opposed use of such regional data because it would not take into
consideration ``the economic fringe benefit differences within the
region.''
SEIU stated that the absence of available data that could be used
to set the fringe benefit rates on a locality basis is universally
recognized. SEIU therefore supported the Department's proposal that ``a
variance be permitted to establish national fringe benefit rates on the
grounds that there is no reliable locality data available which would
permit the department to establish fringe benefit rates on a locality
basis.'' The AFL-CIO believed that ``only a national `insurance level'
rate is practical and consistent with the SCA.'' The AFL-CIO favored
nationwide rates not only because of the absence of reliable locality-
based data, but also because many insurance plans operate on a national
basis and Federal service contractors often operate in multiple
locations.
District No. 5--ITPE, NMU/MEBA (AFL-CIO) stated that they strongly
support the position of the AFL-CIO that the fringe benefit rates
should be uniform throughout the nation. In addition, the CSA
recommended that the Department continue to issue health and welfare
benefits on a national level stating that employers typically provide
similar benefits regardless of location. Most of CSA's member companies
felt that the utilization of locality-based fringe benefit data for
selected metropolitan areas is not a desirable practice. Further, they
felt that the benefits derived from collecting the data on a locality
basis would not be worth the considerable survey costs.
The Air Force also did not favor using locality-based fringe
benefit data for certain metropolitan areas. In their opinion, the
resulting disparity in fringe benefit rates for large metropolitan
areas versus the remainder of the nation would be inequitable and
discriminatory to those workers outside the metropolitan areas.
Pony Express stated that any plan should take into account the
differences in pay and fringes by region or locality.
After review of the comments, the Department has concluded that it
is
[[Page 68657]]
appropriate to issue a variance from the statutory requirement in
Section 2(a)(2) of the Act that the Secretary determine the fringe
benefits to be prevailing for the ``various classes of service
employees'' ``in the locality.'' Fringe benefit data simply are not
available for specific classes of employees or localities. Furthermore,
it is evident from the comments that there would be significant
administrative burdens to employers in providing fringe benefit plans
which vary by locality or by class of employee. Such a system would be
contrary to the reportedly common practice by employers, as evidenced
by the comments, of providing one fringe benefit package to most
employees. Any other system would likely also result in significant
morale problems among employees.
Therefore, the Department has determined that a variance is
necessary and proper in the public interest. Furthermore, the
Department has determined that in light of the reportedly common
practice of employers providing the same fringe benefit plan to most
employees, a variance to provide a uniform nationwide level of benefits
would be in accord with the remedial purposes of the Act to protect
prevailing labor standards.
Different Benefit Levels for Certain Industries
The National Star Route Mail Contractors' Association and their
member organizations support the current method used by the Department
for setting wage and fringe benefit rates for the mail hauling
industry. The Department sets wage and fringe benefit rates for the
mail hauling industry for four geographic regions based on a special
survey by the U.S. Postal Service. Wage determinations applicable to
this industry contain monetary amounts due for health and welfare and
pension benefits.
In addition, both the Department of the Army and the Department of
the Navy supported having variation in fringe benefit rates under
certain circumstances. Specifically, the Army stated that if a national
rate were the standard, it would be important that the contracting
agencies have the ability to challenge that one rate by industry.
Moreover, if rates are found to be significantly lower for a particular
industry, then the DOL should deviate from that one rate and set a
lower rate for that industry. The Department of the Navy supported
having a single health and welfare benefit rate for all SCA wage
determinations. At the same time, however, it suggested use of the
Section 4(b) variance procedure to prevent impairment of the
Government's business where the agency can show that the fringe benefit
rate determined under these regulations ``would prevent adequate
contract competition.''
After review of the comments, and in consideration of the limited
circumstances where special wage rates and fringe benefit rates are
currently issued for certain industries, the Department has determined
that it is appropriate to allow variances to permit industry-specific
fringe benefits in certain limited circumstances upon application of
the contracting agency. Such variations from the single nationwide rate
will be allowed only on a showing that the variation is necessary and
proper in the public interest or to avoid the serious impairment of
government business. This might be satisfied, for example, where an
agency is unable to obtain contractors willing to bid on the services
because the service will be performed at the contractor's facility by
employees performing work for the Government and other customers, and
as a result, paying the required SCA fringe benefits would cause undue
disruption to the contractor's own work force and pay practices. In all
cases, in order to obtain a variance, it will also be necessary for the
contracting agency to provide comprehensive data from a valid survey
demonstrating the prevailing fringe benefits for the specific industry
(not broad ECI data), in order to demonstrate that the variance is in
accordance with the remedial purpose of the Act to protect prevailing
labor standards.
This variance procedure does not constitute an opportunity to
request a separate fringe benefit package for every class of employee
or industry, but rather will require a showing of special
circumstances. As discussed, it is evident from the ECI that practices
do in fact vary widely among industries and occupations. Such an
industry-by-industry or occupation-by-occupation approach has already
been rejected through the consideration of the various alternatives and
the decision to issue fringe benefit determinations without regard to
occupation and based on cross-industry data.
If the criteria for granting a variance are met, and industry-
specific data are found to be adequate for establishing an alternative
prevailing fringe benefit determination, the party presenting such data
will be responsible for updating the data on a regular basis. If the
data are not regularly updated, then future procurements will be
subject to the standard cross-industry determination.
Significant support was received for continuing the special fringe
benefit determination for the mail transportation industry. The
regulation acknowledges the appropriateness of industry determinations
under certain conditions; the specific merits of such an approach for
the mail industry is not appropriately an issue for this rulemaking
proceeding, but will receive the Department's prompt attention.
Average Cost
Approximately 15 organizations commented regarding the average cost
issue. Under the Department's regulations at Sec. 4.175, fringe benefit
contributions (or cash payments in lieu thereof) must ordinarily be
made with respect to each service employee in the amount specified on
the wage determination for all hours worked on the contract up to 40
hours per week. However, the regulations at Sec. 4.175(b) prescribe a
different compliance rule where the wage determination specifically
identifies the benefit as an ``average cost.'' Under the ``average
cost'' fringe benefit determination, a contractor's contributions to a
``bona fide'' fringe benefit plan may vary among employees so long as
total contributions for all hours worked (not just hours up to 40 in a
workweek) by service employees on a particular contract average at
least the specified amount per hour per service employee. In practice
this average cost methodology is used only for the high ``total
benefits'' fringe benefit rate.
CSA (and its 35 or so member organizations which filed comments in
general support of CSA's comments) supported the average cost concept
because of the flexibility it permits employers in the establishment of
fringe benefit plans. Specifically, the CSA (and CSA member
organizations which concurred with CSA's comments) stated that average
cost is the preferred method because it allows companies to offer
benefits in a comprehensive package that provides a variety of options.
It allows for flexible benefit design for employees and helps service
contractors to remain competitive. CSA stated that the average cost
concept is the basis for the development of group insurance premiums,
and that it allows for more efficiency in auditing. CSA believed that
eliminating average cost would cause such an administrative burden on
larger employers with self-insured medical plans that such an option
would no longer be feasible. CSA also believed that the average cost
concept allows small companies to obtain relief from administrative
burdens by ``outsourcing benefits administration and/or
[[Page 68658]]
purchasing `packaged service contract benefit plans.' ''
National Star Route Mail Contractors' Association and seven member
organizations strongly oppose the use of an average cost concept. While
acknowledging that some type of average cost concept ``may be
advisable,'' National Star Route believes that any advantages would be
outweighed by the significant administrative and bookkeeping
difficulties inherent in such a system, especially in circumstances
where ``an employee works on several contracts covered by different
wage determinations.'' National Star Route was also concerned that use
of average cost would result in substantial decreases in benefits for
large numbers of service employees, would not guarantee equal benefits
to all employees, and would create the possibility that some employees
would not be provided with any benefits (e.g., employees not working
enough hours to become eligible for medical coverage). In short,
National Star Route believes that ``[i]nstead of averaging, employees
should be benefitted on their individual basis.''
National Star Route also believes that an averaging system would
necessitate delay in some fringe benefit payments, since that averaging
process would have to await the closing of the pay period. Finally,
National Star Route expressed strong opposition to any methodology that
would require its members to make fringe benefit payment for hours
worked over 40. It stated that this would create such an increase in
their overall labor costs that they might be rendered non-competitive
against railroads, airlines and ``various transportation groups within
the U.S. Postal Service itself,'' thus causing the trucking industry to
lose its market share of mail transportation.
Other commenters opposed to the average cost concept stated that
the unequal division of benefits would unfairly disadvantage single
versus married employees and short-term versus long-term employees.
Some commenters foresaw the possibility that ``a handful of very
compensated employees could tilt the average high enough to meet the
minimum average benefit with little or no contributions to the
`average' employee.''
The Air Force also opposed the average cost concept in conjunction
with any of the proposed fringe benefit methodologies. The Air Force
believes that average cost allows some workers to receive preferential
compensation based on personal circumstances, and that some companies
use average cost to ``exclude specific workers or to cause portions of
their work force to suffer at the expense of more favored groups.'' The
Air Force is of the opinion that it is more appropriate ``for workers
with higher risks or with more costly health care plans to pay these
costs individually and not cause other workers to pay disproportionate
shares of earnings or benefits to subsidize others.'' The Air Force
also recommends that regulations be adopted to limit the hourly fringe
benefit contributions to the standard 40 hour work week since ``this is
routinely done for both the private sector and government sector
benefit plans.''
The Department has concerns as to whether it is appropriate to
expand the average cost concept to the basic fringe benefit level to be
established under Alterative I. The Department is concerned that this
concept, which would involve a radical change for most contractors, did
not receive sufficient attention in the comments to warrant further
action at this time. The Department is also concerned about the
inequities of averaging, which allows contractors to make arbitrary
determinations to deny fringe benefits altogether to some workers or
classes of workers. Currently this system, which may be difficult to
understand and administer for small contractors, is utilized primarily
by sophisticated major contractors. Furthermore, the average cost
concept requires payments or contributions at the prescribed fringe
benefit level with respect to all hours worked, including hours over
40. Therefore this method could increase the costs of some contracts
where the employees work a significant amount of overtime.
On the other hand, the Department recognizes the advantages of
allowing averaging across a workforce where a contractor has an
elaborate fringe benefit system with variable costs based on factors
such as choice of health benefit plans, and pension and sick leave
contributions, and payments which vary based on wages. The Department
is considering further rulemaking on this issue and would welcome
additional comments, including comments on any revisions to the current
averaging method which may be appropriate. If there is significant
support, the Department will consider further rulemaking. In the
meantime, the Department is making no change in the regulation at
Sec. 4.175(b).
V. Comments and Analysis of Other Issues
Time-Frame for Section 4(c) Substantial Variance Hearings
The SCA and the regulations provide a procedure to request a
determination that collectively bargained wages and fringe benefit
rates required to be paid pursuant to Section 4(c) of the Act are
``substantially at variance'' from prevailing local wages or fringe
benefits. The Department requested comments on a proposal suggested by
the National Performance Review (NPR) that the regulations be tightened
to provide a 60-day time-frame for completion of substantial variance
hearings.
Seven organizations commented concerning the Section 4(c) variance
issue. SEIU, AFL-CIO, CSA, District No. 5--ITPE, NMU/MEBA (AFL-CIO),
and the LIUNA strongly opposed the proposal to reduce the 60-day time
limit to conduct the entire Section 4(c) hearing process. They believed
that the proposed restricted time frame for the completion of
substantial variance hearings is totally impractical and should,
therefore, be rejected. In fact, they believe the current time-frame of
60 days from the issuance of an Order of Reference until the opening of
the hearing to be too short; they recommended that if any changes in
the time-frames were to be made, the deadline should be extended.
The unions stated that this ``fast track'' approach, suggested by
the National Performance Review without input from workers and unions,
ignores the practical difficulties of litigation. They point out that
in most instances where the contracting agency requests a substantial
variance hearing, ``the agency has enjoyed the benefit of months spent
assembling the data that it will use to challenge the wage rates
negotiated between the service contractor and the unions. The new time
frame suggested essentially forces the service contractor or union to
proceed to the substantial variance hearing without the time necessary
to assemble the supportive evidence.''
The Army suggested that the time frame be expanded to within 90 to
120 days. They stated that the current system can take years and
affords no relief to the agencies.
In contrast, the Air Force strongly supported any effort to reduce
the amount of time in the substantial variance process. The Air Force
stated that reducing the time-frames will force the parties to address
the issues in a prompt manner, while simplifying the process, and
stated that an unbiased third party should be able to look at the
[[Page 68659]]
facts and determine if the data supports the existence of a substantial
variance. They assert that the fact that the contractor must continue
to pay the rates being challenged in the hearing makes it imperative
that a timely and final decision be made. Finally, the Air Force
recommended that regulations be implemented to stay the payment of
rates that are being challenged until the final decision is made. In
this regard, the Air Force stated as follows:
The current structure forces the contracting agency into paying
the cost of the increased rate or rates until a decision is made.
This leaves the contracting agency no way to recover funds paid on
rates that are ultimately determined to be substantially at
variance. If rates are deemed to be at variance, this results in
legal victory without proper cost recovery. If the rates were
temporarily frozen this would not result in a loss if the final
determination was made that rates did not substantially vary. It
would simply delay the payment long enough for that decision to be
made and applied.
The regulations currently provide a period of only 85 days from the
date of the Order of Reference to the Chief Administrative Law Judge to
appoint an administrative law judge (ALJ) to conduct a hearing, to the
date of the ALJ decision. It is believed that this time-frame, if
followed, provides a sufficiently fast track for proceedings. In
addition, the Department has initiated a procedure to alert affected
parties (union, contractor and agency, as appropriate) when a request
for a substantial variance proceeding is received, in order to allow
additional preparation time.
Other Proposals
The Department also proposed certain minor, technical modifications
necessitated by amendments to the FLSA, a 1985 court decision, a 1983
treaty, and a 1986 intergovernmental compact. The Department received
no comments on these minor proposals and has decided to proceed with
these proposed minor changes.
In order to conform to more recent amendments to the FLSA
establishing a new minimum wage, Sec. 4.2 is revised to delete the
reference to now out-of-date minimum wage rates; likewise, the tip
credit example in Section 4.6(q) is modified to delete the language in
the proviso that is based on the minimum wage rates provided by the
1978 amendments to the FLSA.
The text of Sec. 4.112, which was invalidated by the 1985 court
decision in AFL-CIO v. Donovan, 757 F.2d 330 (D.C. Cir. 1985), is
modified to reinstate the language of the previous regulations as they
appeared in the July 1, 1983, edition of the CFR. Final regulations
published on October 27, 1983 (48 FR 49736), among other things,
established a new provision in 29 CFR 4.112 that would have excluded
from the Act's coverage contracts under which only a minor or
incidental portion of the services would be performed within the
geographical limits of the United States as defined in the Act. The
D.C. Circuit held that this new provision had been adopted in violation
of the notice-and-comment requirements of the Administrative Procedure
Act. Under the restored language, which conforms to the Department's
practice in the administration of this provision since the 1985
decision, if a service contract is performed in part within and in part
outside the United States, any portion performed in the United States
is covered.
In addition, the restored regulatory language includes changes that
were necessary to conform to more recent enactments pertaining to the
geographic scope of the SCA. As indicated in Sec. 4.112, the SCA covers
contract services furnished ``in the United States,'' as that phrase is
defined in Section 8(d) of the Act. The geographical area included
within this definition was changed in the invalidated 1983 regulation
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, 1983,
by excluding Canton Island. The regulations are further amended to take
into consideration changes necessitated by the 1986 Compact of Free
Association between the United States and the Governments of Marshall
Islands and the Federated States of Micronesia, set forth at 48 U.S.C.
1901 note, to exclude the Eniwetok Atoll, and the Kwajalein Atoll. In
addition, pursuant to the Covenant to Establish a Commonwealth of the
Northern Mariana Islands in Political Union with the United States of
America, set forth at 48 U.S.C. 1801 note, all laws not explicitly
dealt with elsewhere in the Covenant which are applicable to Guam and
are of general application to the States, are applicable to the
Commonwealth of the Northern Mariana Islands (CNMI). Because the SCA is
applicable to Guam, the regulation is amended to add the CNMI.
VI. Conclusion
For the foregoing reasons and after consideration of all of the
comments submitted in response to the proposed rule published on May 2,
1996, in the Federal Register (61 FR 19770) and the preliminary
regulatory impact analysis published in the Federal Register on October
25, 1996 (61 FR 55239), the Department is making the following changes
in the regulations:
The Department has decided to issue a new Sec. 4.52 \10\ to set
forth the methodology for determining future prevailing fringe benefit
determinations. The Department is adopting the methodology provided in
Alternative I as the appropriate methodology for establishing minimum
health and welfare benefit rates under the SCA. Pursuant to this
methodology, the fringe benefit rate will be based on nationwide ECI
data for all employees in private industry, and will include all
benefits (excluding holidays and vacation, ``benefits otherwise
required by law'', and supplemental pay such as shift differentials,
considered to be wages under SCA).
---------------------------------------------------------------------------
\10\ Existing 4.52 and subsequent sections are renumbered
accordingly.
---------------------------------------------------------------------------
This methodology replaces the current methodology of issuing two
benefit rates, ``insurance'' and ``total benefit,'' based on ECI size-
of-establishment data, which have applied to SCA contracts on the basis
of the nature of the contract. However, the Department has decided to
``grandfather'' the current ``total benefit'' rate at its present level
($2.56) until the rate determined in accordance with Alternative I
equals or exceeds $2.56. This grandfathered rate will apply to those
contracts which currently are subject to the ``total benefit'' level,
and to future solicitations for such contracts; the grandfathered rate
will not apply to solicitations for new services.
The regulations will also allow for a four-year ``phase-in'' period
under which only one-quarter of the difference between the current
``insurance'' rate and the new all-industry rate will be implemented
for wage determinations issued on or after June 1, 1997. One-third of
the remainder of the increase would be implemented the following year,
and one-half of the remainder the following year. Beginning June 1,
2000, the new methodology will be fully implemented.
The Department has also decided that it is necessary and proper in
the public interest and in accordance with the remedial purposes of the
Act to protect prevailing labor standards to issue a variance pursuant
to Section 4(b) of the Act and Sec. 4.123 of the regulations from the
Act's provisions that require fringe benefit determinations be made for
various classes of workers in the locality. Pursuant to this variance,
the Department will issue a nationwide level of benefits applicable to
all classes of employees. The Department has also
[[Page 68660]]
provided a procedure to permit contracting agencies to request a
variance to allow industry-specific fringe benefits in certain limited
circumstances. Finally, the regulation will continue to recognize as
prevailing those situations (ordinarily where the provisions of a
collective bargaining agreement are found to prevail) where a single
fringe benefit rate is paid with respect to a majority of the workers
in an occupation in a locality.
VII. Executive Order 12866/Small Business Regulatory Enforcement
Fairness Act
On the assumption that the change in methodology for determining
prevailing fringe benefits would have an annual impact on the economy
of $100 million or more, the Department prepared and sought comments on
its preliminary regulatory impact analysis (61 FR 55239 (October 25,
1996)). As discussed below, the Department has now completed its final
regulatory impact analysis and has concluded that this rule, after full
implementation, will have an annual effect on the economy of $100
million or more. Therefore the Department has concluded that the rule
is economically significant within the meaning of Executive Order
12866, and that the rule is a major rule within the meaning of Section
804(2) of the Small Business Regulatory Enforcement Fairness Act.
However, the rule does not require an economic impact analysis under
Section 202 of the Unfunded Mandates Reform Act of 1995 because it will
not require State, local, or tribal government, or private sector
expenditures, in excess of $100 million in any one year; rather, the
costs of the increases in fringe benefits will be borne by the Federal
government.
Discussion of Comments
Five commenters provided specific comments regarding the Wage and
Hour Division's SCA Occupational Employment Survey and Impact Analysis:
the AFL-CIO, the Contract Services Association, the Navy, the Air
Force, and the Army. Their comments concerned six areas:
Survey Purpose: The Army and Navy were critical of the survey for
being directed exclusively toward Federal contractors whose wages and
benefits are already established by DOL's own wage determinations, not
by the labor market of the locality where the services are performed.
At the same time, the Navy contended that ``prevailing benefits are
unattainable by any reasonable or affordable survey effort.'' The Air
Force criticized the survey because it did not survey ``prevailing
rates'' in the locality labor market.
These comments reflect a misunderstanding of the purpose of the
survey. The survey only sought information on occupational employment
under the SCA, along with the relevant wage determination issued for
each contract. As stated in several communications with each Federal
agency asked to participate in the survey, its purpose was to
``estimate the distribution of employment by occupation on contracts
covered by the McNamara-O'Hara Service Contract Act.'' As noted in the
preliminary impact analysis, wage data utilized in the analysis were
from the Bureau of Labor Statistics, Employment Cost Index, not from
the fringe benefits paid by these contractors or from the wage
determinations used for these contracts.
Survey Procedures: The Army, Navy and Air Force were critical of
the survey procedures. Specifically, the Navy contended that receipt of
the survey material was the first notification contracting agencies
received from DOL that such a survey was being conducted. The Navy also
contended that the survey methodology had not been discussed or
coordinated ahead of time with the contracting agencies. The Air Force
claimed that the survey was developed without agency Labor Advisor
input. The Army stated that there was not meaningful coordination and
communication between DOL and the Army.
As summarized in the preliminary impact analysis, the then U.S.
Army Labor Advisor fully participated in the work group that helped
design the survey procedures and materials. Staff of the Office of
Federal Procurement Policy also participated in this process, which was
initiated in April 1995. In June 1995, the U.S. Air Force and General
Services Administration Labor Advisors participated in pilot testing
the survey process and materials, and were specifically requested to
provide ideas for improvement. The initial survey mailing was to each
Federal Procurement Agency's Federal Procurement Executive, in
September 1995. In that transmittal from the Wage and Hour
Administrator, top agency procurement officers were asked to
``designate a data collection coordinator to assume overall
responsibility for your agency's role in this special study.'' Several
of these designees were the agency Labor Advisor, or comparable agency
staff. These coordinators were asked to ``contact each of the offices
responsible for contracts selected for this survey * * * and ensure
that data collection instructions are properly followed).'' Throughout
the course of the survey, written and telephone contacts were
maintained between the Wage and Hour Division and participating survey
coordinators.
Survey Universe: The Contract Services Association, Navy, and Air
Force had concerns regarding the reliability of the survey universe.
The Contract Services Association and the Air Force stated that the
universe under represents the actual population of covered FTEs,
especially contracts under $25,000. At the same time, the Navy claimed
that the universe overstated the number of contracts, by including
procurements that actually were not covered by SCA.
The preliminary impact analysis acknowledges that the FPDS excludes
certain segments of the contract universe. ``For example, it does not
contain data from the U.S. Postal Service, Air Force/Army Exchange
Service, and most contracts under $25,000. Therefore, since the impact
analysis is based upon a sample drawn from the FPDS population,
estimates made only represent the covered contracts included in the
FPDS, and should not be considered as representing the universe of all
covered contracts. For this reason, the focus of the Impact Analysis
was on the relative differences among costs likely to be generated by
each alternative listed.'' (61 FR 55246) As with many large surveys, it
should be expected that some sampled units may be wrongly included
because they should not have been included in the population.
Therefore, the questionnaires returned with notation by the contracting
offices indicating that the contract was not covered by SCA were
excluded from the survey and were used to correct the population of
SCA-covered contract obligations by SIC. These corrections were based
upon an assumption by the Wage and Hour Division that those closest to
contract administration are best informed regarding SCA coverage.
Survey Findings: Both the Air Force and the Navy contended that the
survey overestimates the number of contracts assigned the current high
($2.56) health and welfare benefit level and underestimates the number
assigned the low ($0.90) level. The Navy stated: ``If one were to
accept the contention made in DOL's survey impact report, that the
``high'' health and welfare benefit level is paid on a large percentage
of all service contracts, that conclusion would be due in part to DOL's
own historical practice of applying that benefit level artificially.''
The Navy further stated that the majority of contract workers are paid
at or near the low health and
[[Page 68661]]
welfare benefit level, while an Air Force internal study concluded that
64 percent of FTEs are at the low level and 19 percent at the high.
In fact, the survey did not find a large number of contracts at the
high health and welfare benefit level. Table 4 of the preliminary
impact analysis clearly shows 80.7 percent of contracts at the low
level, 14.3 percent at the high level, and 5.0 percent set by
collective bargaining agreement pursuant to Section 4(c) of the Act.
The survey did find 42.5 percent of FTEs at the high level, 34.1
percent at the low, and 23.4 percent under Section 4(c). Of course,
there is no reason to believe that such ratios are necessarily the same
for all agencies.
Survey Reliability: Four of the five commenting parties questioned
survey reliability. The Contract Services Association, Air Force, and
AFL-CIO expressed concern over the survey's ``7 percent'' response
rate. In addition, the Contract Services Association and the Air Force
questioned the size and representativeness of the sample. The AFL-CIO
claimed that nonresponse to the survey was a source of systematic bias
and error, resulting in population estimates not reflective of the SCA
population.
As explained in the preliminary impact analysis, the survey usable
response rate was 20.2 percent of the sample (not 7 percent). The
sample, which was selected by contract value within industry group,
represented 35 percent of the number of contracts in the population,
and 63 percent of population contract value. Usable responses to the
survey represented 7.2 percent of population contracts and 19 percent
of contract value. At the same time, the apparent similarity to the
FPDS data in the universe by industry appears to limit the potential
for bias of the estimates obtained from the sample data. The process
whereby FTE/contract value ratios (by occupational group within
industry group), once established, were applied to the population (not
the sample) to estimate FTE totals would also tend to limit the
potential for bias caused by the low response rate.
Impact Analysis: The Air Force claimed that the survey
underestimates the number of FTEs at the low health and welfare benefit
level, and therefore that the impact analysis underestimates cost
increases associated with the various alternatives. Based on its survey
of Air Force contracts, the agency developed its own estimate of the
cost of the current size-of-firm methodology ($612,202,240) and of the
cost of Alternative I, based on increasing the low benefit to $1.89
($970,503,040). The Air Force then compared its estimate of the cost of
Alternative I to its calculation of the DOL estimates 11
($720,462,080 and $961,800,320, respectively, according to the Air
Force). Therefore, the Air Force concludes that a total annual cost
increase of $358,300,800 would be incurred by accepting ``DOL's
proposed single fringe benefit alternative of $1.89 per hour,'' and not
the ``DOL estimate'' of $241,338,240.
---------------------------------------------------------------------------
\11\ The Department's proposed impact analysis as published in
the Federal Register did not set forth a total cost for the various
methodologies, but rather advised the public of the cost per FTE.
Therefore the Air Force did its own calculations of the Department's
estimated cost.
---------------------------------------------------------------------------
Even assuming that the results of Air Force's survey of the number
of contracts/employees subject to the two current fringe benefit rates
could be generalized to other agencies, the Air Force analysis appears
to be incorrect in four respects: (1) In doing its calculations of the
DOL estimate, the Air Force seems to have mistakenly multiplied the low
benefit health and welfare amount ($0.90) times the high benefit FTE
total (117,200), and the high benefit amount ($2.56) times the low
benefit FTE total (94,100). Therefore the Air Force underestimated the
DOL current cost estimate by $79,741,585. (2) By underestimating
current costs by almost $80 million, alternative cost increases were
overestimated by a like amount. (3) The Air Force cost computations for
Alternative I assumed the Department would continue to issue the high
rate for contracts currently receiving that rate. Although comments
were solicited on the issue of grandfathering the high rate, the
Department's estimate was not based on this assumption. (4) The Air
Force computations for combining the $2.56 with a $1.89 level appear to
have understated costs by over $5 million.
Final Regulatory Impact Analysis
After review of the comments, the Department has concluded that
there is no reason to change its estimates of the relative costs of the
various alternatives projected, as set forth in the preliminary
regulatory impact analysis.
The Department has now obtained 1996 ECI data, which shows that the
all-private-industry, all-employee rate under Alternative I would
increase from $1.89 (1995 data) to $1.91 (1996 data) per hour. The
Department therefore has computed the cost of the alternative selected
utilizing 1996 data, and based on the survey projection that 44.5
percent of covered employees (94,048 FTE) are employed on contracts
currently subject to the low ($.90) benefit, and 55.5 percent (117,215
FTE) are employed on contracts currently subject to the high ($2.56)
benefit:
1. The cost of prevailing fringe benefits determined in accordance
with the current methodology:
Cost for employees receiving benefits of $.90 per hour: $.90 x
94,048 FTE x 2080 hrs. = $176,057,856
Cost for employees receiving benefits of $2.56 per hour: $2.56 x
117,215 FTE x 2080 hrs. = $624,146,432
Cost of current methodology: $176,057,856 + $624,146,432 =
$800,204,288 ($3788 per FTE)
2. The first-year increase in the cost of the new methodology,
i.e., the cost of increasing the fringe benefits for employees
currently receiving $.90 per hour by $.25 per hour (one-fourth of the
increase to $1.91): $.25 x 94,048 FTE x 2080 hrs. = $48,904,960
($231 per FTE)
Thus the first-year increase in costs caused by the new methodology
would be less than $50 million per year. In succeeding years it can be
anticipated that the increase in fringe benefits costs for employees
receiving the low rate may be somewhat higher than $.25 per hour as the
cost of fringe benefits varies from year to year. However, it is
anticipated that this increase will be more than offset by savings
where contracts currently requiring fringe benefits of $2.56 are not
succeeded by new contracts for substantially the same services;
contracts for new services which would have received the $2.56 rate
under the former procedures will receive the new ``all-industry, all-
employee'' rate at the rate it is being phased in.
By the fourth year, if the $1.91 rate were to hold, the increased
annual cost would be approximately: $1.01 x 94,048 FTE x 2080 hrs.
= $197,576,038 ($935 per FTE)
The administrative burden, if any, of the various alternatives
proposed is discussed in some detail in the preamble above. From the
comments, it is evident that the alternative chosen is among the least
burdensome of the various alternatives, since it does not involve
paying different benefits to different workers on the same contract or
in different regions of the country. However, during the period where
both rates are issued, those contractors which have contracts subject
to both rates (as is sometimes currently the case) will continue to
have the burden of administering two benefit programs. In addition, the
change in the fringe benefit rate will involve the administrative
burden of contractors making changes in their fringe benefit plans to
accommodate changed fringe
[[Page 68662]]
benefit rates, both during the transition period and as prevailing
benefits change over time.
The Department has not been able to obtain data which would allow
it to quantify the benefits to the affected workers and to society of
providing workers prevailing fringe benefits, or to quantify any
indirect effects on jobs, productivity, or the Federal deficit, and no
such data was provided by commenters. A significant issue raised in the
comments, as discussed above, is the concern that the current low
``insurance'' rate is not high enough to provide meaningful health
insurance to employees. The Department believes, as stated by many
commenters, that the rate established through the selected methodology
will allow employers to provide meaningful health benefits, with the
concomitant direct benefit to the employees and indirect benefit to
society from a healthier work force, including reduced pressure on
public health resources.
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 a
final regulatory flexibility analysis that describes the anticipated
impact of a rule on small entities. After review of the comments
received and consideration of the various alternatives, the Department
has prepared the following regulatory flexibility analysis regarding
this rule:
(1) The need for and objectives of the rule.
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 health and welfare 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
decisions 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)). Based
on the Board's decisions, the Department decided that the best process
for developing a methodology to establish prevailing SCA fringe
benefits consistent with statutory requirements would be to propose
various alternatives through rulemaking. 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)).
On May 2, 1996, the Administrator of the Wage and Hour Division
published a Notice in the Federal Register (61 FR 19770) proposing for
public comment various alternative fringe benefit determination
methodologies. As explained in the proposed rule, however, it was not
feasible to publish a regulatory impact analysis for comment with the
proposed rule. At the time the Department was completing the
development of data on the occupational mix of service contract
employees in order to provide a basis for the impact analysis. That
analysis was completed and published for comment on October 25, 1996
(61 FR 55239). In the meantime, the Court set a deadline for
publication of the final rule of December 24, 1996. SEIU v. Reich, CA
No. 91-0605 (August 27, 1996).
(2) Summary of significant issues raised by the public comments in
response to the initial regulatory flexibility analysis.
The Department received a number of comments regarding the economic
impact analysis and the survey that was conducted to determine the
occupational mix on Federal service contracts. Those comments are
specifically addressed in the economic impact analysis section above.
No comments were received on the initial regulatory flexibility
analysis.
(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.12
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\12\ 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.13
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\13\ U.S. Department of the Treasury, Internal Revenue Service,
SO 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
[[Page 68663]]
prime contractors.14 Small firms accounted for more than one-half
(51.3 percent) of the value of contracts under $25,000, but only 14.1
percent of those over $25,000 in FY 1989.15 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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\14\ The State of Small Business, supra at 220.
\15\ 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 1989.16
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\16\ Id., pp. 223, 226 & 235-237.
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This FPDS 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.17 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.18 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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\17\ Federal Procurement Data System Standard Report, Fiscal
Year 1992, Fourth Quarter, pp. 74-75.
\18\ 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.19)
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\19\ Id., p. 34.
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(4) Reporting, Recordkeeping and Other Compliance Requirements of
the Rule.
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.
This final 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 new reporting, recordkeeping, or other compliance
requirements applicable to small businesses. Although some of the
proposed alternatives likely would have involved additional
recordkeeping obligations, the alternative selected does not require
any additional recordkeeping. In fact, contractor comments regarding
the ease of administration and compliance under this alternative were
an important factor in selecting the alternative.
(5) Description of the steps taken to minimize the significant
economic impact on small entities consistent with the objectives of the
Service Contract Act.
As noted in the discussion of the various alternatives, the
methodology selected (Alternative I) was clearly the alternative
favored by most employers, many of which were small businesses. The
factual, policy and legal reasons for selecting Alternative I and the
reasons for rejecting the other alternatives are fully addressed in the
discussion of the various alternatives. A key factor underlying the
support of Alternative I by many employers, including many small
entities, was the ease of administration and compliance under this
alternative. In addition, this alternative was favored because it
produces a benefit rate that is sufficient to allow all service
contractors to purchase a reasonable benefit package for all contract
workers. Under the current two-tier benefit structure, the low level
benefit has been generally considered to be too low for employers to
purchase even a minimal health and welfare package for their workers.
Proposed Alternatives II--IV were generally viewed by most
commenters as being administratively difficult, especially for small
employers. Notwithstanding the greater administrative burden, these
alternatives were favored by some because they yielded a lower fringe
benefit rate for many workers. For service contractors in general,
however, these alternatives would have imposed significant
administration and compliance difficulties.
List of Subjects in 29 CFR Part 4
Administrative practice and procedures, Employee benefit plans,
Government contracts, Investigations, Labor, Law enforcement, Minimum
wages, Penalties, Recordkeeping requirements, Reporting requirements,
Wages.
Accordingly, for the reasons set out in the preamble, 29 CFR Part 4
is amended as set forth below:
PART 4--LABOR STANDARDS FOR FEDERAL SERVICE CONTRACTS
1. The authority citation for Part 4 continues to read as follows:
Authority: 41 U.S.C. 351, et seq., 79 Stat. 1034, as amended in
86 Stat. 789, 90 Stat. 2358; 41 U.S.C. 38 and 39; 5 U.S.C. 301; and
108 Stat. 4101(c).
2. Section 4.2 of Subpart A is revised to read as follows:
Sec. 4.2 Payment of minimum wage specified in section 6(a)(1) of the
Fair Labor Standards Act of 1938 under all service contracts.
Section 2(b)(1) of the Service Contract Act of 1965 provides in
effect that, regardless of contract amount, no contractor or
subcontractor performing work under any Federal contract the principal
purpose of which is to furnish services through the use of service
employees shall pay any employees engaged in such work less than the
minimum wage specified in section 6(a)(1) of the Fair Labor Standards
Act of 1938, as amended.
3. The introductory text of Sec. 4.6(q) of Subpart A is revised to
read as follows:
Sec. 4.6 Labor standard clauses for Federal service contracts
exceeding $2,500.
* * * * *
(q) Where an employee engaged in an occupation in which he or she
customarily and regularly receives more than $30 a month in tips, the
amount of tips received by the employee may be credited by the employer
against the minimum wage required by Section 2(a)(1) or 2(b)(1) of the
Act to the extent permitted by section 3(m) of the Fair
[[Page 68664]]
Labor Standards Act and Regulations, 29 CFR Part 531. To utilize this
proviso:
* * * * *
Secs. 4.52 through 4.55 [Redesignated as Secs. 4.53 through 4.56]
4. Sections 4.52 through 4.55 of Subpart B are redesignated as
Secs. 4.53 through 4.56 respectively.
5. A new Sec. 4.52 is added to read as follows:
Sec. 4.52 Fringe benefit determinations.
(a) Wage determinations issued pursuant to the Service Contract Act
ordinarily contain provisions for vacation and holiday benefits
prevailing in the locality. In addition, wage determinations contain a
prescribed minimum rate for all other benefits, such as insurance,
pension, etc., which are not required as a matter of law (i.e.,
excluding Social Security, unemployment insurance, and workers'
compensation payments and similar statutory benefits), based upon the
sum of the benefits contained in the U.S. Bureau of Labor Statistics,
Employment Cost Index (ECI), for all employees in private industry,
nationwide (and excluding ECI components for supplemental pay, such as
shift differential, which are considered wages rather than fringe
benefits under SCA). Pursuant to Section 4(b) of the Act and
Sec. 4.123, the Secretary has determined that it is necessary and
proper in the public interest, and in accord with remedial purposes of
the Act to protect prevailing labor standards, to issue a variation
from the Act's requirement that fringe benefits be determined for
various classes of service employees in the locality.
(b) The minimum rate for all benefits (other than holidays and
vacation) which are not legally required, as prescribed in paragraph
(a) of this section, shall be phased in over a four-year period
beginning June 1, 1997. The first year the rate will be $.90 per hour
plus one-fourth of the difference between $.90 per hour and the rate
prescribed in paragraph (a) of this section; the second year the rate
will be increased by one-third of the difference between the rate set
the first year and the rate prescribed; the third year the rate will be
increased by one-half of the difference between the rate set in the
second year and the rate prescribed; and the fourth year and thereafter
the rate will be the rate prescribed in paragraph (a) of this section.
(c) Where it is determined pursuant to Sec. 4.51(b) that a single
fringe benefit rate is paid with respect to a majority of the workers
in a class of service employees engaged in similar work in a locality,
that rate will be determined to prevail notwithstanding the rate which
would otherwise be prescribed pursuant to this section. Ordinarily, it
will be found that a majority of workers receive fringe benefits at a
single level where those workers are subject to a collective bargaining
agreement whose provisions have been found to prevail in the locality.
(d) A significant number of contracts contain a prevailing fringe
benefit rate of $2.56 per hour. Generally, these contracts are large
base support contracts, contracts requiring competition from large
corporations, contracts requiring highly technical services, and
contracts solicited pursuant to A-76 procedures (displacement of
Federal employees), as well as successor contracts thereto. The $2.56
benefit rate shall continue to be issued for all contracts containing
the $2.56 benefit rate, as well as resolicitations and other successor
contracts for substantially the same services, until the fringe benefit
rate determined in accordance with paragraphs (a) and (b) of this
section equals or exceeds $2.56 per hour.
(e) Variance procedure. (1) The Department will consider variations
requested by contracting agencies pursuant to Section 4(b) of the Act
and Sec. 4.123, from the methodology described in paragraph (a) of this
section for determining prevailing fringe benefit rates. This variation
procedure will not be utilized to routinely permit separate fringe
benefit packages for classes of employees and industries, but rather
will be limited to the narrow circumstances set forth herein where
special needs of contracting agencies require this procedure. Such
variations will be considered where the agency demonstrates that
because of the special circumstances of the particular industry, the
variation is necessary and proper in the public interest or to avoid
the serious impairment of government business. Such a demonstration
might be made, for example, where an agency is unable to obtain
contractors willing to bid on a contract because the service will be
performed at the contractor's facility by employees performing work for
the Government and other customers, and as a result, paying the
required SCA fringe benefits would cause undue disruption to the
contractor's own work force and pay practices.
(2) It will also be necessary for the agency to demonstrate that a
variance is in accordance with the remedial purpose of the Act to
protect prevailing labor standards, by providing comprehensive data
from a valid survey demonstrating the prevailing fringe benefits for
the specific industry. If the agency does not continue to provide
current data in subsequent years, the variance will be withdrawn and
the rate prescribed in paragraph (a) of this section will be issued for
the contract.
6. Section 4.112 of Subpart C is revised to read as follows:
Sec. 4.112 Contracts to furnish services ``in the United States.''
(a) The Act and the provisions of this part apply to contract
services furnished ``in the United States,'' including any State of the
United States, the District of Columbia, Puerto Rico, the Virgin
Islands, Outer Continental Shelf lands as defined in the Outer
Continental Shelf Lands Act, American Samoa, Guam, the Commonwealth of
the Northern Mariana Islands, Wake Island, and Johnston Island. The
definition expressly excludes any other territory under the
jurisdiction of the United States and any United States base or
possession within a foreign country. Services to be performed
exclusively on a vessel operating in international waters outside the
geographic areas named in this paragraph would not be services
furnished ``in the United States'' within the meaning of the Act.
(b) A service contract to be performed in its entirety outside the
geographical limits of the United States as thus defined is not covered
and is not subject to the labor standards of the Act. However, if a
service contract is to be performed in part within and in part outside
these geographic limits, the stipulations required by Sec. 4.6 or
Sec. 4.7, as appropriate, must be included in the invitation for bids
or negotiation documents and in the contract, and the labor standards
must be observed with respect to that part of the contract services
that is performed within these geographic limits. In such a case the
requirements of the Act and of the contract clauses will not be
applicable to the services furnished outside the United States.
Signed at Washington, D.C., on this 24th day of December, 1996.
Gene Karp,
Deputy Assistant Secretary for Employment Standards.
[FR Doc. 96-33222 Filed 12-26-96; 10:05 am]
BILLING CODE 4510-27-P