Service Contract Act; Labor Standards for Federal Service Contracts

SUMMARY: The Department of Labor (DOL or the Department) is proposing

alternative approaches for procedures to establish minimum health and

welfare benefits requirements in the regulations issued under the

McNamara-O'Hara Service Contract Act (SCA). Pursuant to Sec. 4(b) of

the SCA, a variance from the SCA's locality and occupational

requirements for determining prevailing health and welfare fringe

benefits is also proposed to reflect the limitations of available

fringe benefit data. Comments are also requested on revisions to

timeframes for section 4(c) substantial variance proceedings.

The United States District Court for the District of Columbia has

set a deadline for the Department of July 31, 1996, to complete this

rulemaking process. SEIU v. Reich, CA No. 91-0605 (D.D.C. January 29,

1996). To aid in the selection of the most appropriate methodology, the

Department is in the process of developing data on the occupational mix

of service contract employees. This data will help provide a basis for

the regulatory impact analysis. Due to the time constraints imposed by

the district court, however, it is not feasible to publish the impact

analysis for comment with the proposed rule. Instead, the analysis will

be published as soon as possible for comment. Comments on the analysis

will be reviewed prior to promulgation of a final rule.

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

ADDRESSES: Submit written comments to Maria Echaveste, Administrator,

Wage and Hour Division, Employment Standards Administration, U.S.

Department of Labor, Room S-3502, 200 Constitution Avenue NW.,

Washington, DC 20210. Commenters who wish to receive notification of

receipt of comments are requested to include a self-addressed, stamped

postcard, or to submit them by certified mail, return receipt

requested. As a convenience to commenters, comments may be transmitted

by facsimile (``FAX'') machine to (202) 219-5122 (this is not a toll-

free number). If transmitted by facsimile and a hard copy is also

submitted by mail, please indicate on the hard copy that it is a

duplicate copy of the facsimile transmission.

FOR FURTHER INFORMATION CONTACT: William Gross, Director, Division of

Wage Determinations, Wage and Hour Division, Employment Standards

Administration, U.S. Department of Labor, Room S-3506, 200 Constitution

Avenue NW., Washington, DC 20210; telephone (202) 219-8353. This is not

a toll-free number.

SUPPLEMENTARY INFORMATION:

I. Paperwork Reduction Act

The Department is proposing alternative procedures for determining

prevailing health and welfare fringe benefits under SCA and seeks

comments on each alternative. The Department does not intend, with this

notice, to introduce new or added reporting or recordkeeping

requirements subject to the Paperwork Reduction Act of 1980 (Pub. L.

96-511). The existing information collection requirements contained in

Regulations, 29 CFR Part 4 were previously approved by the Office of

Management and Budget under OMB control number 1215-0150. The general

Fair Labor Standards Act (FLSA) recordkeeping requirements which are

restated in Part 4 were approved by the Office of Management and Budget

under OMB control number 1215-0017.

II. Background

The McNamara-O'Hara Service Contract Act of 1965 (SCA) (41 U.S.C.

351, et seq.) applies to Federal contracts with the principal purpose

of furnishing services through the use of service employees. For

service contracts in excess of $2,500, the Department of Labor is

required to make determinations of prevailing wage rates and fringe

benefits that must be paid as a minimum by contractors and

subcontractors to employees employed on covered contacts ``* * * in

accordance with prevailing rates for such employees in the locality, *

* *'' (see sections 2 (a)(1) and 2(a)(2) of the Act).1

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\1\ The prevailing wage and fringe benefit determination scheme

provided by sections 2 (a)(1) and 2(a)(2) of the Act was modified by

amendments to the Act in 1972. As a result of a new Sec. 2(a)(5),

the Department, in making prevailing determinations, is also

required to give due consideration to the rates that would be paid

to the various classes of service employees if directly hired by the

Federal agency. In addition, prevailing determinations are not

applicable where the employees of a predecessor contractor are

covered by a collective bargaining agreement. In such cases,

collectively bargained wages and fringe benefits are specified in

determinations pursuant to section 4(c) of the Act.

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Section 4(b) of the Act as amended in 1972 authorizes the Secretary

of Labor to ``provide such reasonable limitations'' and to ``make such

rules and regulations allowing reasonable variations, tolerances, and

exemptions to and from any or all provisions of this Act (other than

Sec. 10), but only in special circumstances where * * * necessary and

proper in the public interest or to avoid the serious impairment of

Government business, and is in accord with the remedial purposes of

this Act to protect prevailing labor standards.''

Federal agencies award contracts for a large variety of services

which are performed for a specific period, typically one year with

options for additional years.2 Upon the expiration of such

contracts, through new solicitations for bids or requests for

proposals, follow-on contracts are commonly awarded to continue the

services at the same locality or localities. When new contracts are

awarded, the employees of predecessor contractors often routinely go to

work for the new contractors.3 Continuity of services and,

generally, employees from year to year makes consistency in wage and

fringe benefit determinations a key concern of contracting agencies,

contractors, and service employees. Although the statutory requirements

for issuing both prevailing wage rate and fringe benefit determinations

are the same, different procedures have been used since the Act's

enactment in 1965 to implement them. These procedures have been shaped

by the availability of wage and fringe benefit data, the need for

consistency and continuity over time, and the common practice of

employers in the service contracting industry to provide uniform fringe

benefit packages to all workers.

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\ 2\ Option periods are deemed wholly new contracts for wage

determination purposes and must include new or updated wage

determinations (see 29 CFR 4.145).

\ 3\ Experience with this general practice underlies Executive

Order 12933, signed by President Clinton on October 20, 1994. While

successor contractors on service contracts for the maintenance of

public buildings typically hire the majority of the predecessor's

employees, the executive order seeks to minimize the disruption in

services that otherwise would occur if a successor contractor hires

a totally new work force. The executive order, among other things,

requires solicitations for building service contracts for public

buildings to include a clause that requires the successor contractor

to offer certain employees of the predecessor a right of first

refusal to employment on the new, follow-on contract.

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Prevailing wage rates are based primarily on cross-industry surveys

[[Page 19771]]

conducted by the Bureau of Labor Statistics (BLS), either under its own

Area Wage Survey program (currently under review) or under contract

with the Department's Employment Standards Administration. These

surveys are designed to provide earnings data for selected occupations

common to many manufacturing and nonmanufacturing industries, using a

standard set of job descriptions, within a particular local labor

market usually described in terms of a metropolitan area. Since 1965,

the Department has routinely issued locality-based, occupation-specific

prevailing wage rate determinations.

Since 1965, the fringe benefit levels specified in prevailing

determinations have been applicable to all of the listed occupational

classes in a particular determination. The locality surveys conducted

by BLS, in addition to data on the wages paid to workers in selected

occupations, provide information on the overall prevalence of certain

fringe benefits, such as life insurance, sickness and accident

insurance plans, hospitalization, surgical and medical insurance plans,

accidental death and dismemberment insurance, long-term disability

insurance, sick leave, retirement plans, civic and personal leave, and

other benefits. These surveys also provide information on the numbers

of holidays and vacation days provided by the surveyed employers.

Unlike wage data, the fringe benefit information from these surveys is

not currently collected on an occupation-by-occupation basis; nor is

data on the cost of such benefits collected. In the past, the

Department has found that reliable data by locality or by occupation

could not be obtained due to prohibitive costs.

It has been the Department's general practice to include locality-

based holiday and vacation benefits in determinations, based on

information obtained from the locality surveys. However, due to the

absence of locality-based data up to this time, health and welfare

fringe benefits 4 have always been specified in a determination as

a monetary amount based on survey data collected on a nationwide

basis.5 Until 1976, the Department routinely issued a single,

national ``insurance'' benefit level for all occupations of service

employees throughout the country,6 based primarily on data from

the BLS' Biennial Survey of Employee Compensation in the Private

Nonfarm Economy.7 This ``insurance'' benefit level was limited to

the average cost per hour of providing life, accident, and health

insurance in all industries, based on available information which

indicated that this fringe benefit package was the most prevalent of

the various benefits provided by employers, particularly small

employers, and was stated in determinations as a fixed hourly payment

amount due for each hour paid (up to a maximum of 40 hours per week and

2,080 per year) on behalf of each service employee.

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\4\ The term ``health and welfare'' fringe benefits refers to

all benefits provided to workers not required by law except vacation

and holiday benefits.

\5\ BLS is currently in the process of redesigning its system

for collecting fringe benefit data to potentially allow for the

collection and publication of health and welfare benefit information

for several of the country's largest metropolitan areas. The number

of localities for which such data will be published is uncertain at

this point and clearly would not include all localities for which

the Department issues wage determinations under the SCA. Such data

is currently not available and may be several years from

publication.

\6\ This did not include pension or other benefits because BLS

locality surveys indicated that such benefits did not ordinarily

prevail.

\7\ When information available for a geographic area indicated

that collectively bargained wage rates and fringe benefits were

furnished to a majority of the employees in a particular occupation,

such wage rates and fringe benefits were adopted as prevailing.

Studies of employee compensation practices in particular industries,

in contrast to those conducted as cross-industry area wage studies,

were also sometimes used in the past for determinations issued for

service contracts in that industry, e.g., mail hauling.

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In the early 1970s, several large Federal service contractors and

some contracting agencies asked the Department to consider an

alternative methodology because the contractors were having difficulty

hiring and retaining highly skilled workers, and remaining competitive,

at the ``insurance'' only benefit level. In response, a second health

and welfare benefit level was developed that took into account not only

insurance, but all types of benefits not legally required, since these

were commonly provided to employees by larger employers. This ``total

benefits'' level has since been applied primarily to solicitations for

large base support service contracts, solicitations (for OMB Circular

A-76 actions) with potential for displacement of federal civilian

workers, and solicitations that require bidders to be large, national

corporations, or providers of highly technical services. The ``total

benefits'' level includes the all-industry average hourly cost of not

only life, accident, and health insurance, but also sick leave, pension

plans, civic and personal leave, other leave, severance pay, and

savings and thrift plans. Rather than a fixed payment for each hour

worked, the ``total benefit'' level is expressed in terms of average

cost--which allows variable contributions to employees (e.g.,

contributions to a health insurance plan typically vary depending upon

the individual employee's marital or employment status)--so long as

total contributions for all service employees average at least the

specified amount per hour for each service employee. (See 29 CFR

4.175(b).)

From 1966 to 1979, the BLS Biennial Survey of Employee Compensation

in the Private Nonfarm Economy was the primary source for the

nationwide cost data on the health and welfare benefit level, for both

the ``insurance'' and the ``total benefit'' levels. However, in 1979,

BLS discontinued this survey. Absent a new survey data base, benefit

levels were not adjusted between 1980 and 1986. In 1986, updated fringe

benefit levels were based on BLS Employment Cost Index (ECI) data

showing the percentage increase in benefit costs between 1980 and 1986,

which was applied to the 1980 base rates. At that time, the

``insurance'' benefit level was increased from $0.32 to $0.59 per hour,

and the ``total benefit'' level from $1.08 to $1.84 per hour.

When BLS published ECI survey data on fringe benefit levels for the

first time in 1987,8 the average employer's cost of the various

fringe benefit components did not correspond with the SCA health and

welfare fringe benefit levels then being issued (i.e., the ECI data

would have significantly increased the ``insurance'' benefit level and

comparably decreased the ``total benefit'' level). It was decided to

evaluate alternative methodologies which might better reflect the

practices of the type of employers who perform contracts subject to

SCA. As a consequence, health and welfare fringe benefits levels again

were not adjusted until 1991 (see below).

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\8\ Employer costs for employee compensation are developed from

data collected for the Bureau of Labor Statistics Employment Cost

Index (ECI) during a March sample. The report, ``Employer Costs for

Employee Compensation,'' is published once a year, and covers all

occupations in private industry (excluding farms and households) and

state and local governments. It is a measure of the average cost to

employers per employee hour worked for wages and salaries and

employee benefits. See BLS Handbook of Methods, Bulletin 2414, for a

full background discussion concerning the ECI. The ECI has been

designated as a principal Federal economic indicator by the Office

of Management and Budget and ``is the only measure of labor costs

that treats wages and salaries and total compensation consistently,

and provides consistent subseries by occupation and industry.'' Id.,

p. 63.

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On March 21, 1991, the Service Employees International Union (SEIU)

filed a lawsuit against the Department in the U.S. District Court for

the District of Columbia, seeking to compel the Secretary of Labor to

immediately raise

[[Page 19772]]

the fringe benefit amounts specified in prevailing wage determinations.

At the time, the Department was completing the development of a new

methodology for setting health and welfare fringe benefit levels

utilizing newly published ECI size-of-establishment breakouts. In

evaluating the new BLS ECI fringe benefit cost data, the Department

concluded that cost distributions by size-of-firm best approximated

fringe benefit levels and practices among the types of establishments

that performed SCA-covered contracts, and would preserve continuity and

consistency for Federal agencies, service contractors, and service

employees. Accordingly, the health and wealth fringe benefit level

issued for most service contracts, which was based only on the

``insurance'' component, was raised from $0.59 to $0.74 per hour in

September 1991, based on 1990 data for employers with less-than-100

employees. The new BLS ECI data on total benefits for firms with 100-

or-more employees was used to increase the ``total benefits'' level

from $1.84 to $2.07 per hour.

Actual BLS ECI fringe benefit cost data by size-of-firm was also

used as a basis for updating the health and welfare levels in 1992,

1993, and 1994. Applying the same principles adopted for the 1991

updates, the ``insurance'' level was raised to $0.83 per hour in July

1992, to $0.89 in August 1993, and to $0.90 in August 1994.

Correspondingly, the ``total benefit'' package was raised to $2.23 per

hour in July 1992, to $2.39 in August 1993, and to $2.56 in August

1994.9

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\9\ The following year (1995), Wage and Hour decided to keep the

health and welfare benefits levels the same as were issued in August

1994, even though the BLS ECI fringe benefit cost data, published in

March 1995, showed decreases in both the ``insurance'' and ``total

benefits'' levels (to $0.82 and $2.32, respectively). The rationale

behind this decision was three-fold. First was the concern that

issuance of decreased health and welfare benefit rates would be

disruptive to the federal services procurement community. Second, it

was perceived to be inappropriate to decrease health and welfare

benefit rates based on a methodology which was uncertain to continue

in light of the Board's remand order (see below) and the pending

litigation which challenged the methodology. Third, Wage-Hour was

aware that BLS was considering significant revisions to its survey

methodology.

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After the issuance of updated health and welfare fringe benefit

levels in September 1991, SEIU amended its complaint to seek review of

the Department's fringe benefit methodology, in particular the use of

BLS ECI fringe benefit data for employers with less-than-100 employees

for the ``insurance'' level. In addition to challenging the size-of-

establishment methodology, SEIU also challenged a number of other

aspects of the existing methodology, including the issuance of

nationwide rather than locality-based health and welfare fringe benefit

determinations, the use of private industry data only (the ECI covers

private industry and also state and local governments), and the lack of

consideration of fringe benefit costs in the Federal sector. Because no

administrative review within the Department was sought by SEIU relating

to the size-of-establishment methodology adopted for the September 1991

updates, the District Court dismissed the case without prejudice,

directing SEIU to exhaust its administrative remedies before the

Department of Labor. See SEIU v. Martin, CA No. 91-0605 (JFP) (D.D.C.

April 1, 1992).

The size-of-establishment procedures were subsequently reaffirmed

by the Acting Administrator of the Wage and Hour Division on July 8,

1992, and SEIU appealed the decision to the Department's Board of

Service Contract Appeals (BSCA). In a decision dated August 28, 1992,

the BSCA generally affirmed fringe benefit practices, including the

issuance of fringe benefits on a nationwide basis, but remanded the

issue of using size-of-establishment data as a basis for fringe benefit

rates.10 The BSCA directed Wage and Hour to either better support

the use of the size-of-establishment data or develop an alternative

methodology for setting fringe benefit rates. On remand, Wage and Hour

conducted a study of service contracts subject to the SCA and examined

other available data. This research indicated that the great

preponderance of service establishments employs fewer than 100 workers,

and the Acting Administrator, by letter to SEIU dated May 28, 1993,

reaffirmed the use of BLS ECI size-of-establishment data in the

development of prevailing fringe benefits under the Act.11

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\10\ SEIU re Nationwide Fringe Benefit Determinations, BSCA Case

No. 92-01 (August 23, 1992).

\11\ Wage and Hour reasoned that cost data for firms with fewer

than 100 employees approximated the cost of providing health and

welfare benefits to employees furnishing services of the kind

required under the vast majority of SCA-covered contracts, and that

data for firms with 100 or more employees best approximated the cost

experience of employers with SCA-covered contracts involving large

base support contracts and other contracts involving competition

among major corporations or for highly technical tasks.

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In response to SEIU's review petition, the BSCA decided on

September 23, 1993, that Wage and Hour had not provided sufficient

justification for its departure from the practice of basing the

``insurance'' and ``total benefit'' components on all industry data

(prior to 1991) without regard to size-of-establishments. While the

BSCA acknowledged that the size-of-establishment methodology addressed

certain concerns such as consistency, ease of administration, and the

ability to update on a regular basis, it was not convinced that these

attributes and objectives were ``characteristic only of a system that

utilizes size-of-establishment data or whether those same objectives

can be also achieved by using other data to set the SCA rates.'' While

the BSCA upheld the use of BLS ECI data in general and concluded that

the lack of reliable locality data was reasonable justification for

issuing nationwide benefit rates, it again remanded the matter to Wage

and Hour for reconsideration; the Board was not satisfied that the

size-of-establishment data justified departure from the previous

practice of basing the fringe benefit rates on all-industry data, or

that other data might not achieve the desired objectives.12

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\12\ See SEIU re Nationwide Fringe Benefit Determinations, BSCA

Case No. 93-08 (September 23, 1993).

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Because of the variety of alternatives that could be used to

determine prevailing fringe benefits, and the potential effects of each

of these alternatives, the Department concluded that resolution of the

issues in the pending litigation would be best accomplished through

rulemaking.

In the meantime, SEIU moved in district court to reopen its case

against the Department. SEIU asked the court to enjoin the use of the

1991 methodology and direct DOL to immediately begin setting minimum

fringe benefit rates in accordance with the methodology used prior to

1991. The district court, by Order dated January 29, 1996, dismissed

the case without prejudice to SEIU's right to reopen for

reconsideration upon a showing that DOL has not adopted a final rule in

this matter by July 31, 1996. The court declined to order reinstatement

of the Department's pre-1991 methodology, stating that it would not

``impose a disruptive interim rule that will itself be displaced by the

full participation exercise of rulemaking.'' SEIU v. Reich, CA No. 91-

0605 (CRR) (D.D.C. January 19, 1996)

The Department has given careful consideration to a number of

alternative methodologies involving the use of BLS ECI fringe benefit

cost data (as the best currently available data source) and,

accordingly, is proposing to use one of the approaches described below

in determining prevailing health and welfare benefits under the SCA in

the

[[Page 19773]]

future. In order to assist the Department in establishing the most

appropriate method, the Department requests commenters to consider the

optional fringe benefit methodologies discussed below and seeks

information on ease or difficulty of compliance; administrative and/or

recordkeeping burdens; economic and budgetary impact from the point of

view of service contractors, service employees and Federal procurement

agencies; transitional difficulties in departing from the current

methodology, including the appropriateness of a phase-in alternative

for such methodologies; the nature of SCA-covered contracts and the

fringe benefit practices typical of service contractors; the effects on

contracting activity and employment; and any other areas of concern

that the Department should take into consideration in deciding this

matter.

If commenters favor continued use of the current methodology based

on size-of-establishment data, comments should include data or other

evidence that the methodology in fact is consistent with industry

practices. Commenters are also invited to comment on any alternative

approach for which reliable fringe benefit cost data are available

through the ECI or otherwise, including a discussion of how the

approach would result in fringe benefits which would better indicate

prevailing fringes on SCA contracts, as well as the other issues raised

below.

Commenters are also requested to comment on whether they would

favor utilization of locality-based fringe benefit data for certain

selected metropolitan areas, should such data become available in the

future (see note 5, supra), within the framework of any of the

following proposed methodologies favored by the commenter.

III. Alternative Proposed Methodologies

Alternative I: Issue a Single Benefit Level Based Upon ECI Data for

Workers in Private Industry

This methodology would utilize employer costs per hour worked for

all benefits (excluding holidays, vacations, and benefits otherwise

required by law, such as social security, unemployment insurance, and

workers' compensation payments) as reported annually by the BLS ECI

study of employer costs for employee compensation in the private sector

(all workers, all industries, all establishment sizes, and all

occupations). Under this ``total benefits'' approach, the Department

would issue a single nationwide health and welfare fringe benefit level

applicable to all employees engaged in the performance of SCA-covered

contracts, based on the average cost 13 for the following

compensation components:

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\13\ The cost of the benefit components in the BLS ECI study are

an average based on data of all employers in the survey, including

employers that do not provide the particular benefit. Because

averaging in the ``zeros'' is another way of showing prevalence, the

proposal is not limited to only those benefits that prevail. Data is

not currently available that computes the cost of benefits provided

by only employers with benefit plans. The Department is currently

exploring the possibility of obtaining such data, and if it can be

obtained, will consider its use under the various alternatives for

those benefits that prevail.

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(1) Sick and other leave (excluding vacation and holiday leave);

(2) Insurance, consisting of life, health, and sickness and

accident insurance plans;

(3) Retirement and savings, consisting of pension and savings and

thrift plans; and

(4) Other benefits not otherwise required by law.

Based on March 1995 BLS ECI data, this alternative would result in

a single fringe benefit rate of $1.89 per hour. This alternative would

increase the current benefit level (from $0.90 to $1.89 per hour) for

those SCA-covered contracts now subject to prevailing determinations

containing the ``insurance'' fringe benefit level, and would result in

a benefit level reduction (from $2.56 to $1.89 per hour) for SCA-

covered contracts currently subject to the ``total benefit'' fringe

benefit level.

In basing the fringe benefit level on the average compensation

level for all employees, this alternative is consistent with the

approach generally used in determining prevailing wages in that it does

not differentiate by size of firm, and in determining prevailing fringe

benefits in the past. It would eliminate the two-tier benefit levels

that have been difficult to defend in the legal proceedings before the

BSCA described above. This approach would apply the same minimum hourly

benefit level for all service employees and would not require any

subjective judgments as to which benefit level to apply based on the

type of contract or employee. This determination method would be simple

to understand and to comply with, and relatively simple to administer

and enforce by the Department. It would allow all service contractors

to offer health benefits for their employees, whereas at present some

employers cannot purchase health benefits at the current ``insurance''

benefit level.

Service employees currently employed on contracts subject to the

``total benefit'' level could experience a reduction in fringe benefits

and not return to the current level for several years. Further, this

approach does not recognize the real differences in types of SCA-

covered contracts that are apparent from the occupational data. As

demonstrated by the data by occupational groupings, discussed below,

privately-employed service employees in relatively low-skilled, low-

wage service occupations do not generally receive this level of fringe

benefits. On the other hand, privately-employed high-skilled service

workers, such as aircraft mechanics, generally receive fringe benefits

above this level.

In addressing this alternative, comments are specifically sought on

the appropriateness of mitigating any disruption (and the short-term

costs) caused by the increase in the current ``insurance'' level by

phasing in the changes during a transition period; whether or not the

current ``total benefit'' level should be grandfathered at its present

level until it is overtaken by the all-industry, all-occupation average

rate; and, whether such actions would be consistent with statutory

requirements.

Alternative II-A: Issue a Single Benefit Level for Each of Six Major

Occupational Groupings Based on ECI Data for All Workers in Each

Grouping in Private Industry

The BLS ECI reports employer fringe benefit costs for employees in

broad occupational groups compatible with the ``Standard Occupational

Classification Manual.'' Of these occupational groupings, six account

for most of the classifications used in the performance of SCA-covered

contracts: (1) Professional, specialty and technical; (2)

Administrative support, including clerical; (3) Precision production,

craft and repair; (4) Transportation and material moving; (5) Handlers,

cleaners, helpers, laborers; and (6) Service workers.

Under this alternative, the ``total benefit'' level for each of

these six occupational groupings would be specified in prevailing

determinations. Thus, a benefit amount would be specified for each

occupation listed on an SCA-determination with the amount applicable to

a particular occupation determined by the occupational grouping of that

occupation. Based on the data reported by the March 1995 BLS ECI study,

the hourly ``total benefit'' amounts for the six basic

[[Page 19774]]

occupational groupings would be as follows: \14\

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\14\ The listed amounts represent close approximations based on

Wage-Hour's reading of 1995 BLS ECI cost data and may not be exact.

1. Professional, specialty and technical (nurses, computer

systems analysts, etc.)....................................... $3.15

2. Administrative support including clerical (computer

operators, secretaries, typists, clerks, etc.)................ 1.96

3. Precision production, craft and repair (vehicle mechanics,

heavy equipment operators, automotive mechanics, aircraft

mechanics, machinery repairers, electrical and electronic

equipment repairers, heating/air-conditioning/refrigeration

mechanics, etc.).............................................. 2.73

4. Transportation and material moving (motor vehicle operators,

truck drivers, material moving equipment operators, operating

engineers, etc.).............................................. 2.22

5. Handlers, equipment cleaners, helpers and laborers (helpers,

handlers, equipment cleaners, laborers, etc.)................. 1.24

6. Service occupations (guards, food/beverage preparation and

service occupations, health service occupations, janitors and

cleaners, barbers, hairdressers, amusement/recreation facility

attendants, etc.)............................................. 0.62

Utilizing this approach would permit the Department to issue

prevailing health and welfare fringe benefit determinations for various

``classes of service employees'' as contemplated by the Act, thereby

permitting health and welfare benefits to correspond more closely to

the benefits such classes of employees actually receive in the private

sector. Because many service contracts do not involve a broad mix of

different occupations, the administrative difficulty with multiple

fringe benefit determinations for those contracts would be minimized.

Further, it would not result in large differences for highly skilled

employees on many technical service contracts that currently receive

the ``total benefit'' level.

Certain administrative concerns arise under this alternative,

however, especially regarding those SCA-covered contracts that do

involve a mix of employees from different occupational groups. This

alternative envisions that employers would provide different fringe

benefit plans to employees in each occupational group, and thus would

be contrary to what we understand to be the common employer practice of

providing the same benefits to all employees. Not only might it be

difficult for a carrier to provide, and for the employer or the carrier

to administer, up to six different benefit plans, but labor-management

problems would be likely where employees realize that their co-workers

are entitled to different benefits than they are receiving.

Furthermore, an employer administering self-funded plans may be

restricted in providing different benefit plans because of non-

discrimination rules of the Internal Revenue Code which prevent

providing higher-paid employees with better health benefits. See 26

U.S.C. 105(h); 26 CFR Sec. 1.105-11. An employer's alternative, if it

did not want to, or could not, provide different plans, would be to (1)

provide all employees benefits at the lowest level and pay the

difference to other classes of employees in cash; (2) provide all

employees higher benefits and absorb the difference from the employer's

profit margin; or (3) provide employees the same health benefits at the

lowest level, but provide other benefits, such as pension benefits, to

employees in the other classifications.

Therefore, some mechanism such as the use of an average cost

concept, discussed below, with which most small service contractors and

employees are not familiar, or providing benefits to all employees in

accordance with the predominant class, may be advisable. On the other

hand, such a mechanism would entail significant administrative

difficulties for contractors and for the Department in determining

compliance. Further, it would result in a substantial decrease in

benefits for large numbers of service employees in ``service''

occupations, e.g., janitors, guards, food service workers.

Therefore, in particular, comments are sought regarding whether in

fact employers normally provide the same level of fringe benefits to

all classes of employees; on the administrative feasibility of this

alternative; whether or not the current ``insurance'' level should be

grandfathered at its present level until it is overtaken by the

``service'' occupation average rate; and on the practicality of

assigning a single rate to a particular service contract based on the

benefit rate applicable to the predominant occupational group

performing the contract services.

Alternative II-B: Issue a Single Benefit Rate Adjusted To Reflect the

Difference Between the BLS ECI Occupational Universe and the Actual Mix

of Comparable Occupations on SCA-Covered Contracts

As noted above, the BLS ECI data provide a breakout of fringe

benefit costs by broad occupational groupings. The fringe benefit costs

for employees in each of these occupational categories is a component

factor of the all-industry, all-occupation ``total benefit'' costs

calculated for the universe of employees. The distribution of employees

within the six occupational categories in the BLS ECI data (above) may

not correspond proportionately to the actual mix of employees

performing work on SCA-covered contracts in the same occupational

categories, i.e., it is likely that the number of SCA-covered employees

within the BLS ECI service occupation category is proportionately

larger than the number of such employees in the overall BLS ECI

occupational universe. Under this proposed alternative approach, the

distribution of benefit levels in the six BLS ECI occupational

categories would be weighted by the corresponding distribution of SCA-

covered employees in the same occupational categories to arrive at an

adjusted ``total benefit'' level that may better reflect actual

employment experience on SCA-covered service contracts, rather than the

overall employment mix among these occupational groups in the general

economy.

While the benefit level under this approach would be expected to be

somewhat less than the March 1995 BLS ECI ``total benefit'' level of

$1.89, data to compute an actual rate for this level is not yet

available. The Department is in the process of developing information

on the occupational mix of service contract employees utilizing

procurement data in the Federal Procurement Data System (FPDS), and a

survey of SCA-covered contracts is being conducted.

Because the actual mix of occupations on SCA-covered contracts

generally would be a factor in the determination, the benefit

determination would be more reflective of the prevailing benefit level

on SCA-type contracts than the all-industry, all-employee average.

Moreover, the single benefit level that would be established avoids

many of the administrative and compliance complexities associated with

separate levels for each of the occupational groupings, is a simple

determination for contractors to understand and comply with, and,

because the same benefit level would be applied to all employees, does

not require subjective judgment as to which benefit level to use.

On the other hand, this alternative would not be consistent with

past practice of using all-industry, all-employee data for wages and,

until 1991, benefits. Furthermore, this alternative would apply a lower

fringe benefit level to those service employees currently receiving the

``total benefit''

[[Page 19775]]

level, and, thus, requires consideration of what, if any, transition

procedure would be appropriate.

Because the alternative, unlike the others, does not directly apply

BLS ECI data to SCA-covered contracts, the Department is particularly

interested in receiving public comments on its appropriateness. In

commenting on this alternative, comments are also sought on the

appropriateness of mitigating any disruption caused by any increase in

the current ``insurance'' level by phasing in the changes during a

transition period; whether or not the current ``total benefit'' level

should be grandfathered at its present level until it is overtaken by

the new fringe benefit rate; and whether such actions would be

consistent with statutory requirements.

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

the Occupational Groupings

This alternative combines some aspects of both Alternatives II-A

and II-B. Rather than using six occupational groupings as proposed in

Alternative II-A, occupational groups would be combined to result in

only two groupings (or some other number). For example, the ECI

``professional, specialty and technical'' occupational group could be

combined with the ``administrative support, including clerical'' group

to develop a single rate for ``white-collar'' occupations. Similarly,

the ``precision production, craft and repair;'' ``transportation and

material moving;'' ``handlers, cleaners, helpers, laborers;'' and

``service worker'' groupings could be combined to develop a single rate

for production occupations, both skilled and unskilled.

Like the approach proposed under Alternative II-B, Alternative II-C

might weight the ECI data based on the corresponding distribution of

SCA-covered employees in the same occupational categories to arrive at

an adjusted ``total benefit'' level for each of the two occupational

groupings. In the alternative, the ECI data could be weighted in

accordance with the national incidence of the various occupational

groups.

Although this alternative would reduce the potential number of

different benefit levels that might be required on a single contract

from six to two, Alternative II-C still has the potential for applying

different benefit levels to employees working on the same contract.

Therefore, many of the questions and issues identified under

Alternative II-A are also applicable to this alternative. By reducing

the number of occupational groupings, however, the probability of

having all workers employed on the contract fall within the same

occupational grouping increases greatly. Thus, for many contracts the

problem of multiple benefit levels would be unlikely because the

employees performing the contract will be clustered within a single,

broad occupational grouping.

In commenting on the feasibility and desirability of this

alternative, commenters are asked to comment on the appropriate number

of occupational groupings, how the occupational groups should be

combined, and the weighting methodology which should be used.

Commenters are asked to give particular attention to whether this

smaller number of groups would significantly decrease any

administrative and compliance difficulties which might be entailed in

using the six groups.

Alternative III: Issue a Single Benefit Rate for Each of Four

Geographic Regions Based on ECI Data for All Workers in Private

Industry

The BLS ECI data includes average costs for benefit categories in

four broad regions: Northeast, South, Midwest, and West.\15\ This

alternative would result in four benefit levels that would be reflected

in SCA-determinations issued for contracts within each of these

geographic regions. Based on the March 1995 BLS ECI data, the benefit

amount for each area would be as follows:

\15\ These four regions correspond to the four Census regions.

The State composition of the regions is as follows: Northeast--

Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New

York, Pennsylvania, Rhode Island, and Vermont; South--Alabama,

Arkansas, Delaware, District of Columbia, Florida, Georgia,

Kentucky, Louisiana, Maryland, Mississippi, North Carolina,

Oklahoma, South Carolina, Tennessee, Texas, Virginia, and West

Virginia; Midwest--Illinois, Indiana, Iowa, Kansas, Michigan,

Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, and

Wisconsin; and West--Alaska, Arizona, California, Colorado, Hawaii,

Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, and

Wyoming.

1. Northeast--$2.30

2. South--$1.57

3. Midwest--$1.99

4. West--$1.90

4The BLS ECI data base does not cross-correlate fringe benefit

costs by occupational groupings within the four geographic areas, and

this limitation precludes any options that would combine this

alternative with the above occupational approaches, absent a large

increase in sample size and thus survey costs. Utilizing this

alternative would permit the Department to issue prevailing fringe

benefit determinations on a ``locality'' basis, as contemplated by the

Act. The single benefit level for each geographic region would be

simple to administer, and is relatively easy for contractors to

understand and comply with.

This option fails to reflect variations within a region, which we

believe may be more significant than variations among regions.

Furthermore, like the occupational approach, this option is in

potential conflict with our understanding of the common practice that

employers, including service contractors, provide similar fringe

benefits to all employees without regard to either occupation or

geographic location. This alternative also raises unique administrative

questions because some service contracts require performance in a

number of different locations and some service contractors bid on

contracts for similar services at various facilities and installations

throughout the country. Finally, while the option permits all service

contractors to offer meaningful health benefits, it could result in

reduced benefits for those service employees currently employed on

contracts subject to the ``total benefit'' level.

Commenters are asked to address whether service contractors

typically provide similar fringe benefits to all employees without

regard to geographic location, and the administrative feasibility of

this alternative. In particular, comments are sought on what

adjustments, if any, would be appropriate in the case of a service

contract that requires performance in more than one of the four

regions, or in those cases where service contractors customarily bid on

contracts for similar services at various facilities and installations

throughout the country.

Alternative IV: Issue a Single Fringe Benefit Rate (as a Percent of

Wages) Based on the Relationship Between the ECI All-Private Industry

``Total Benefit'' Rate and the ECI All-Private Industry Average Wage

Rate

The BLS ECI data correlates employer fringe benefit expenditures as

a percent of overall compensation. Under this alternative, a single,

nationwide fringe benefit percentage level, determined as the percent

that all industry ``total benefit'' costs represent of total average

wages, would be established. The March 1995 BLS ECI data reports

average straight-time wages and salaries for all workers in private

industry at $12.25 per hour. Based on a ``total benefit'' level of

$1.89, the ratio of the fringe benefit amount to the wage rate under

this methodology would be 15.4 percent, which would be specified in all

SCA-determinations. If the prevailing wage for an occupation were $8.00

per hour, for example, the applicable fringe benefit amount under this

alternative

[[Page 19776]]

would be 15.4 percent of that amount, or $1.23 an hour; a prevailing

wage of $11.00 an hour would require a fringe benefit obligation of

$1.69 an hour; and a prevailing wage of $15.00 an hour would compute to

a fringe benefit obligation of $2.31 an hour.

Because fringe benefits are directly related to locality-based wage

rates, this alternative results in fringe benefit levels that vary by

occupation and location (wages listed in a prevailing determination for

particular occupations are survey-based by locality) and, therefore,

has the advantage of being more consistent with the statutory provision

that contemplates determining prevailing fringe benefits for classes of

service workers in localities than are the other alternatives under

consideration. The ratio of benefits to wages is easy to determine from

BLS ECI data, and should remain relatively consistent over time; many

employers, particularly Federal service contractors, have familiarity

with the concept in connection with contract costing practices.

The alternative is a significant departure from current practices,

and many contractors, particularly smaller ones, may have difficulty

with its administrative requirements, which will be similar to the

problems with separate benefit levels for occupational groupings. It

will also require a more extensive revision of the current regulations

to explain the compliance requirements. Moreover, the methodology

assumes a straight line relationship between wages and benefits.

Finally, the option could be problematic under IRS rules discussed

above and would be inconsistent with the common practice of offering

the same health benefits to all employees without variation based on

individual employees' wage rates.

Because the wage rates paid and the number of workers used to

perform SCA-covered contracts can fluctuate considerably, comments are

requested on the administrative and recordkeeping burdens associated

with this alternative, and how compliance would be determined. Comments

are also sought on whether this alternative should be applied on an

individual employee basis (applying the ratio to the individual's rate

of pay to determine the fringe amount that must be furnished) or on a

payroll basis (for example, by applying the percentage to the total

payroll and dividing by total employment to determine the fringe

benefit amount that must be furnished to each service employee).

Alternative V: Issue Two Fringe Benefit Levels Based on BLS ECI Size-

of-Establishment Data for All Workers in Private Industry

This alternative is essentially the same as the current methodology

that has been used since 1991. In addition, the Department seeks public

comments on the appropriateness and feasibility of a variation of the

current methodology, which also is under consideration:

A. Currently, the ``insurance'' benefit level is issued based on

employers' average cost for providing insurance benefits in

establishments with fewer than 100 employees. The ``total benefit''

level is based on the average cost for providing all benefits in

establishments with 100 employees or more. Although size-of-

establishment data are used to determine the different benefit levels,

in practice the two levels are applied based primarily upon the nature

rather than the size of the contract.16 Based on the March 1994

BLS ECI data, the ``insurance'' benefit level, as established in August

1994, is $.90 per hour, and the ``total benefit'' level is currently

$2.56 per hour.17

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\16\ Currently, the ``total benefit'' level is applied to large

base support contracts, solicitations based on OMB Circular A-76

solicitations, solicitations for highly technical services typically

provided by large corporations, and other selected solicitations

without regard to size of contract. Such contracts are frequently

awarded to large contractors, but not always. In practice, small

contractors are most likely awarded contracts that contain the

``insurance'' level.

\17\ As noted previously, these rates continue to remain in

effect, even though 1995 BLS ECI data for size-of-establishment

would have resulted in somewhat lower rates.

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B. A variation of this methodology would continue the issuance of

two levels but, instead, use the BLS ECI all industry ``total benefit''

data for (1) firms with fewer than 100 employees and (2) firms with 100

or more employees--perhaps to be applied, respectively, to SCA-covered

contracts performed by fewer than 100 employees and those performed by

100 or more employees. On the basis of the March 1995 BLS ECI data, the

``fewer than 100'' level would be established at $1.28 per hour, and

the ``100 or more'' level would be $2.32 per hour. This alternative,

thus, differs from the methodology applied from 1991 through 1994 in

that an amount comprising ``total benefits'' is used instead of an

amount limited to the cost disclosed for ``insurance,'' and the

applicable rate would possibly be applied by the size (rather than the

nature) of the contract.

Both versions of this alternative are consistent with the

longstanding procedure of generally applying a lower fringe benefit

level to small contractors and a total benefit level to large

contractors. Under Alternative A, in accordance with current practice,

the lower fringe benefit rate would be based only on the ``insurance''

component, derived from data from employers with fewer than 100

employees. Under Alternative B, the lower fringe benefit rate would be

based on the ``total benefit'' level, also derived from data from

employers with fewer than 100 employees. In both cases, in accordance

with current practice, the ``total benefit'' level is derived from data

from employers with 100 or more employees. These are the only

alternatives which would not appear to be greatly disruptive to

contractors and employees in that current practices would generally be

continued. Neither would result in any significant reduction of

benefits for employees currently working on SCA-covered contracts--or

significant increase in costs to contractors and to the Government--and

there would be continuity with the benefit levels that have been issued

for the last twenty years.

The major disadvantage of both versions of this alternative is that

there is little evidence to support the rationale for two fringe

benefit levels: i.e., assumptions that the average benefit level for

small firms corresponds best to benefits paid by private employers on

contracts similar to most SCA contracts, and that the level paid by

large firms corresponds to employers which perform contracts to which

the ``total benefit'' package is applied. Although most SCA-covered

contracts involve performance by fewer than 100 employees, there is not

a direct relationship in all cases between the size of an SCA-covered

contract and the fringe benefit package (``less than 100'' and ``100 or

more'' size-of-establishment data divisions) which has been applied.

The second variation ameliorates this problem, but instead would put

small and large contractors on an unequal footing in bidding on

contracts, unless estimated size of contract (instead of size of firm)

is used. Also, both options require a sometimes subjective

determination regarding which contracts are subject to the high level

benefit and which the low level benefit.

In addition to the practical aspects of a two-level fringe benefit

approach, commenters who favor this methodology are also requested to

provide data to support its continued use, including any suggestions on

how the available ECI data, or new data in the long term, could be used

to provide a basis for its continued use consistent with the

requirements of the SCA.

[[Page 19777]]

IV. Average Cost Approach

As noted above, the lower ``insurance'' level has traditionally

been stated in determinations as a fixed payment due for all hours paid

for (up to a maximum of 40 hours per week and 2,080 per year) on behalf

of each service employee. The ``total benefits'' level, on the other

hand, has traditionally been stated in terms of average cost which

allows variable contributions among employees so long as total

contributions for all service employees on a particular contract

average at least the specified amount per hour per service employee.

Explanation of the average cost concept is set forth in 29 CFR

4.175(b).

The average cost concept was intended to provide flexibility to

accommodate variable employee benefit practices. It takes into account

variable contributions based, for example, on an employee's election of

single or family coverage under health insurance plans, or an

employee's election not to participate in health insurance plans or

other supplemental plans that may be offered like those for dental and

eyeglass coverage. It also accommodates variable contributions to

pension or other plans like life insurance that are commonly related to

an employee's wages.18 It is also recognized that certain

employees may receive lesser or even no fringe benefits when the

average cost approach is used by a service contractor, for example,

because they are part-time and not eligible for certain benefits, are

subject to a waiting period before becoming eligible, have elected not

to participate, or for other reasons. Therefore this approach may be

perceived as inequitable. The Department is seeking specific comments

on the use of the average cost concept in conjunction with any of the

above alternative methodologies, or other alternatives suggested by

commenters, and what changes, if any, would be appropriate to

facilitate compliance, reduce administrative burdens, and create

fairness for service employees, consistent with the requirements of the

SCA. In considering the average cost approach in connection with the

above alternatives, or other alternatives suggested by commenters,

comments are also sought on any recordkeeping requirements which would

be necessary to document the average cost, and whether this would

result in a greater burden on conractors, particularly smaller

contractors.

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\ 18\ Under current regulations, service contractors who elect

to pay the specified benefit level as a cash equivalent to each

employee for each hour worked, rather than administer particular

health and welfare plans, are required to pay the amount specified

in the wage determination to each employee. The regulations do not

permit variable cash contributions.

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

In connection with any fringe benefit methodology that may be

adopted as a result of this rulemaking, the Department is further

proposing to provide a corresponding variance pursuant to Sec. 4(b)

from the Act's provisions for making prevailing fringe benefit

determinations for various classes of workers on a locality

basis.19 Under the Department's longstanding procedure, the

vacation and holiday components of the fringe benefit determination

vary based on the locality where the contract services are to be

performed because locality data are available for these components. The

health and welfare component has been issued only on a national basis

due to the current absence of locality-based data (except the large

regional groupings discussed above), and none of the available data

sources on fringe benefits provides any occupational-based information

(except the broad occupational groupings discussed above).

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\19\ A variance from both provisions may not be necessary under

some of the alternatives on which comments are solicited.

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Moreover, the Department has researched all available data sources

over the years to ascertain the existence of any reliable information

that would permit the making of prevailing fringe benefit

determinations on a locality and occupation basis. The Department has

also initiated special pilot studies to test the feasibility of

collecting fringe benefit cost data in specific geographic localities.

Based on the results of these pilot studies by BLS, it has been the

Department's conclusion that significant technical problems would have

to be overcome before such data could be collected and utilized on a

routine basis, and at probably very high cost.20 At this time, the

available BLS ECI fringe benefit cost data is the most comprehensive,

and best information available that shows what employers spend for

different types of fringe benefits furnished to their employees. While

the annual ECI study provides some locality (four geographic regions)

and occupational information (broad occupational groupings), it does

not currently produce cost data by occupation within each of the

geographic regions.

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\ 20\ A September 1987 BLS test survey of fringe benefit costs

in the Madison, Wisconsin, locality, for example, used newly

developed ECI concepts, manuals, and methods. The pilot did not

produce publishable data, and the cost to upgrade the data

collection effort to produce publishable data were viewed at the

time as prohibitive.

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Under these circumstances, the variance discussed above is believed

by the Department to be reasonable, necessary and proper in the public

interest or to avoid the serious impairment of Government business.

Furthermore, because it is our understanding that many employers

normally provide the same fringe benefit package to employees in all

locations and occupations, this variance is believed to be in accord

with the remedial purposes of this Act to protect prevailing labor

standards.

As discussed in footnote 5 above, BLS is currently redesigning its

system for collecting fringe benefit data to potentially allow for

collection and publication of health and welfare benefit information

for several large metropolitan areas. Commenters are therefore

specifically requested to comment on whether they would favor

utilization of locality-based fringe benefit data for selected

metropolitan areas, should such data become available in the future.

Public commenters are requested to specifically include in their

comments particular views on any alternative ways to balance the Act's

``locality'' and ``class of service worker'' requirements with the

practical problems of data availability; and the feasibility, expense,

and burden of collecting fringe benefit cost data in occupational and

locality-based surveys in relation to the benefits derived therefrom.

Commenters are also requested to provide information regarding whether

it is their practice to provide different benefit packages in different

localities or to different classes of workers, and to address the

burden on employers of providing different benefit packages.

VI. General

In considering the various alternatives discussed above, the

Department also seeks comments on the requirement to give ``due

consideration'' to the wage and fringe benefit rates being paid Federal

employees in making wage determinations applicable to SCA-covered

contracts, and what administrative procedure, if any, would be

appropriate in factoring this information into fringe benefit

determinations (see 29 CFR 4.51(d)). Also, see AFGE v. Donovan, 25 WH

Cases (D.D.C. 1982), aff'd 694 F.2d 280 (D.C. Cir. 1982), which

interpreted the SCA's ``due consideration'' clause.

The Department also seeks comments concerning whether state and

local employee data should be included in data compiled in determining

health

[[Page 19778]]

and welfare benefits in the future. The BLS ECI data currently reports

fringe benefit cost information for the civilian workforce which

includes private industry and State and local governments. Under the

current methodology, the ``insurance'' and the ``total benefit'' levels

are based on private industry data. However, the Department has

recently changed its methodology to include both private and public

employee data in determining prevailing wage rates where the data is

available. The insurance component (life, health, and sickness and

accident insurance plans) for all workers in private industry, as

reported by March 1995 BLS ECI data, is $1.15 an hour, whereas the

comparable cost in the State and local government sector is $2.03; the

combined insurance cost for private and governmental civilian workers

is $1.29 an hour. The effect of including State and local governments

cost data is similar in the other fringe benefit components.

Also, the Department requests comments on whether the Department

should explore the cost and feasibility of expanding the ECI survey so

that more refined data could be obtained, or in the alternative,

developing other data bases. For example, should the Department

consider expanding the survey to permit determination of prevailing

fringe benefit levels by occupation within geographic regions; or to

permit determination of whether the individual fringe benefit

components prevail in each occupation? In commenting on whether

expanding the survey should be pursued, commenters are specifically

asked to comment on the value of the more refined data which might be

obtained relative to the potential costs and burden of conducting such

surveys, as well as to consider whether there would be a net benefit to

the Government or to the contractors and service employees subject to

the SCA from obtaining more refined data, thereby presumably permitting

more accurate prevailing fringe benefit determinations.21

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\21\ Of course any expansion of the surveys or development of

more refined data bases would have to be funded and could not be

accomplished immediately. Therefore, if pursued, a fringe benefit

methodology for the short-term would continue to be required.

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Finally, the Department seeks comment on whether it should continue

to recognize different benefit levels for certain industries. Data

limitations and the expense of conducting such surveys make their

widespread use infeasible. Although some special surveys were conducted

in the past, they are rarely used currently except for mail-haul

contracts. The Department notes that these industries would be included

in existing data, and that past practice has been to issue such special

rates for low-benefit industries (and not vice-versa).

VII. Other Proposals

The Department is also seeking comments on the current procedures

for the conduct of substantial variance hearings under Section 4(c) of

the Act. Under existing regulations, the Administrator is required to

respond to the party requesting a hearing within 30 days after receipt

of a request for a hearing (29 CFR 4.10(b)(2)). Upon submission of an

Order of Reference to the Chief Administrative Law Judge, interested

parties must submit a written response to the Chief Administrative Law

Judge within 20 days of the date on which the Order of Reference was

mailed (29 CFR 6.51(b)), and the hearing is to take place within 60

days of the Order of Reference (29 CFR 6.52). The regulations further

provide that an expedited transcript shall be made of the hearing (29

CFR 6.54(f)), and that the Administrative Law Judge's (ALJ) decision

shall be issued within 15 days of receipt of the transcript. Any

aggrieved party within 60 days of the ALJ's decision may appeal to the

Board of Service Contract Appeals (the Board) (29 CFR 8.7(b)). No time

frames are established for issuance of a decision by the Board.

The National Performance Review (NPR) has recommended that the

regulations be revised to require that substantial variance hearings be

held and decisions issued within 60 calendar days.22 In view of

the NPR recommendation, comments are requested on the existing time

frames and how these time frames might be reduced to conform with the

NPR recommendation. In particular, comments are sought on a 60-day time

frame for the completion of substantial variance hearings, and whether

or not this period accords interested parties adequate time to prepare

for the proceeding, obtain a transcript, and file necessary briefs, and

for the ALJ to issue a considered opinion on the merits.

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\ 22\ Creating a Government That Works Better and Costs Less,

Reinventing Federal Procurement (Accompanying Report of the National

Performance Review), Office of the Vice President, September 1993,

page 37.

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Finally, it is proposed that the final rule will include certain

minor, technical modifications necessitated by the 1989 Amendments to

the Fair Labor Standards Act (FLSA), a 1985 court decision, a 1983

treaty, and a 1986 intergovernmental compact. Specifically, Section 4.2

would be revised to delete the reference to dated minimum wage rates,

and the tip credit example in Section 4.6(q) would be modified to

delete the example that is based on the minimum wage rates required by

the 1978 Amendments to the FLSA. Furthermore, the text of Section

4.112, which was invalidated by a 1985 court decision in AFL-CIO v.

Donovan, 757 F.2d 330 (D.C. Cir. 1985), would be modified to reinstate

the previous regulations as they appeared in the July 1, 1983, edition

of the CFR. In addition, necessary changes to address more recent

enactments pertaining to the geographic scope of SCA would be included

in the restored regulatory language.23 Also, the reference ``See

Section 4.6(m)(8)'' in the previously existing Section 4.112(b) would

be deleted since this section was deleted from the regulations issued

October 27, 1983. If commenters have any questions about these planned

changes, information can be obtained as indicated above.

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\ 23\ SCA covers contract services furnished ``in the United

States.'' The geographical area included in this term, as defined in

Sec. 8(d), requires changes to conform to the Treaty of Friendship

Between the United States and the Republic of Kiribati, T.I.A.S. No.

10777, ratified June 21, 19183, and the Compact of Free Association

between the United States and the Governments of Marshall Islands

and the Federated States of Micronesia which was placed into effect

by the President on November 3, 1986, pursuant to Pub. L. 99-239.

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

Act of 1995

The Department is seeking public comment on various optional fringe

benefit methodologies and is not proposing any specific methodology.

The anticipated cost of some alternatives to the existing methodology

for updating SCA health and welfare fringe benefit rates may exceed the

costs associated with the existing methodology. Therefore, adoption of

an alternative methodology may result in increased procurement costs to

Federal agencies who award SCA-covered service contracts, as well as

higher fringe benefits for many of the affected service employees. To

cover that possibility, the Department has reached the preliminary

conclusion that this notice may likely result in a rule deemed an

economically significant regulatory action within the meaning of

Executive Order 12866. However, the rule will not include any Federal

mandate requiring expenditures by State, local or tribal governments of

$100 million or more in any one year. Preparation of the required

analyses under the executive order and

[[Page 19779]]

Unfunded Mandates Reform Act must necessarily await the compilation of

related economic data.

As noted in the discussion under Alternative II-B, the Department

is in the process of developing data to establish more reliable

information on the occupational mix of service employees engaged in the

performance of SCA-covered contracts. Based on data collected by the

Federal Procurement Data System for Fiscal Year 1994, a statistical

survey will provide specific information on service contract employment

by occupation within SIC industry classifications. The information

collected should also provide a basis for more reliable estimates of

the economic impact of the various proposed alternatives.

Due to the time constraints imposed by the district court,

discussed above, it is not feasible to publish the impact analysis for

comment with the proposed rule. Instead, the analysis will be published

as soon as possible for comment. Comments will be reviewed prior to

promulgation of a final rule. In the meantime, if commenters have

empirical evidence which would assist in developing the analysis or

evaluating the data, it would be welcome at this time.

IX. Regulatory Flexibility Act

Under the Regulatory Flexibility Act, Public Law 96-354 (94 Stat.

1164; 5 U.S.C. 601 et seq.), Federal agencies are required to prepare

and make available for public comment an initial regulatory flexibility

analysis that describes the anticipated impact of proposed rules on

small entities. The Department has prepared the following Regulatory

Flexibility Analysis regarding this rule.

(1) Reasons Why Action Is Being Considered

The McNamara-O'Hara Service Contract Act of 1965 (SCA) requires

that the Department of Labor (DOL) determine locally-prevailing wages

and fringe benefits for the various classes of service employees

performing contract work subject to the SCA. Contracts over $2,500 (if

the predecessor contract was not subject to a collective bargaining

agreement) are required to contain wage determinations issued by DOL

that specify the minimum monetary wages and fringe benefits that must

be paid to the various classes of workers who perform work on the

service contract, based upon rates determined by DOL to be prevailing

in the locality where the work is to be performed. As discussed

previously, fringe benefit data are not generally available on an

occupation-specific or on a locality basis, which prompted DOL to issue

fringe benefit determinations for health and welfare based on

nationwide data ever since SCA was enacted.

The Service Employees International Union (SEIU) sued DOL in March

1991 in the United States District Court for the District of Columbia

over the longstanding administrative practice, since 1976, of issuing

two nationwide rates for health and welfare fringe benefits, and for

failure to periodically update SCA H&W fringe benefit levels which, at

that time, had not been updated since 1986 (SEIU v. Martin, CA No. 91-

0605 (JFP) (D.D.C. April 1, 1992)). In this court challenge, the

district court remanded the case to DOL for exhaustion of

administrative remedies and final agency action, which led to the

decision of DOL's Board of Service Contract Appeals that remanded the

matter to the Wage and Hour Division to consider alternative

methodologies for implementing the statutory objectives (BSCA Case No.

92-01 (August 28, 1992) and Case No. 93-08 (September 23, 1993)). The

proposed rulemaking alternatives are being considered in order to

develop a methodology for establishing prevailing SCA fringe benefits

consistent with statutory requirements. In the meantime, SEIU moved the

district court to reopen its case against the Department. The district

court dismissed the case without prejudice to SEIU's right to reopen

for reconsideration upon a showing that DOL has not adopted a final

rule in this matter by July 31, 1996 (SEIU v. Reich, CA No. 91-0605

(CRR) (D.D.C. January 19, 1996)).

(2) Objectives of and Legal Basis for Rule

These regulations are issued under the authority of the McNamara-

O'Hara Service Contract Act of 1965 (SCA) (41 U.S.C. 351 et seq.),

Public Law 89-286, 79 Stat. 1034, as amended by Public Law 92-473, 86

Stat. 789; by Public Law 93-57, 87 Stat. 140; and by Public Law 94-489,

90 Stat. 2358. The objective of these regulations is to provide

effective procedures for implementing SCA's statutory requirement that

DOL determine prevailing health and welfare fringe benefits that are to

be specified in wage determinations included in SCA-covered service

contracts, which benefits are required to be furnished to the various

classes of service employees performing work on SCA-covered contracts.

(3) Number of Small Entities Covered Under the Rule

The definition of small business varies considerably depending upon

the policy issues and circumstances under review, the industry being

studied, and the measures used. The Small Business Administration's

Office of Advocacy generally uses employment data as a basis for size

comparisons, with firms having fewer than 100 employees or fewer than

500 employees defined as small.24

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24 The State of Small Business: A Report of the President

Transmitted to the Congress (1991), Together with The Annual Report

on Small Business and Competition of the U.S. Small Business

Administration (United States Government Printing Office,

Washington, D.C., 1991), p. 19. A more detailed breakdown also used

is: under 20 employees, very small; 20-99, small; 100-499, medium-

sized; and over 500, large. In general, a business bidding on a

government contract is regarded as small if it has fewer than 500

employees (see p. 221).

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Statistics published by the Internal Revenue Service indicate that

in 1990, an estimated 20.4 million business tax returns were filed for

4.4 million corporations, 1.8 million partnerships, and 14.2 million

sole proprietorships, most of which are ``small''--fewer than 7,000

would qualify as large businesses if an employment measure of 500

employees or less is used to define small and medium-sized

businesses.25

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\25\ U.S. Department of the Treasury, Internal Revenue Service,

SOI Bulletin (Spring 1990) Table 19; reprinted by SBA in The State

of Small Business (1991), Id., p. 21.

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Federal procurement data are compiled and reported by the Federal

Procurement Data Center (FPDC) in the Federal Procurement Data System

Federal Procurement Report (Washington, D.C.: U.S. Government Printing

Office). The value of Federal contracts and volume of contract

``actions'' are currently reported individually to the FPDC for

contract actions exceeding $25,000; actions of less than $25,000 are

reported only in the aggregate. A contract ``action'' differs from an

initial contract ``award'' because a single contract may involve more

than one action--for example, a modification to an initial contract

award is reported to the FPDC as a separate action and may involve the

obligation or de-obligation of funds.

Small businesses were awarded $58.8 billion of the $184.2 billion

spent by the Federal government on goods and services in Fiscal Year

(FY) 1989, including $31.6 billion awarded directly to small firms and

$27.2 billion awarded to small subcontractors by Federal prime

contractors.26 Small firms accounted for more than one-half (51.3

[[Page 19780]]

percent) of the value of contracts under $25,000, but only 14.1 percent

of those over $25,000 in FY 1989.27 Since FY 1979 when the FPDC

first began reporting procurement data regularly, the share of Federal

procurement dollars awarded to small firms has fluctuated between 14

and 16 percent over the entire period--for FY 1989 it was 14.1 percent

overall.

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\26\ Id., p. 220.

\27\ Ibid.

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Of the major product/service categories under which contract

actions are reported to the FPDC, the ``other services'' category

(which includes a variety of non-construction activities ranging from

technical, sociological, administrative, and other professional

services, to installation, maintenance, and repair of equipment)

amounted to 28.9 percent of the total Federal prime contract actions

reported individually in FY 1989. Small businesses were awarded $6.8

billion or 14.7 percent of the contract dollars awarded for services in

FY 1989.28

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\28\ Id., pp. 223, 226 & 235-237.

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This FPDC data on small business awards does not correlate

precisely with the number of contract actions or contract dollars

awarded that are subject to the SCA. However, the ``services'' category

can be considered a reliable proxy for analyzing the universe of SCA-

covered contracts reported to the FPDC that may be awarded to small

businesses. Of a total 502,138 contract actions valued at $177.8

billion that were individually reported to the FPDC in FY 1992 (i.e.,

actions over $25,000 each), 82,957 contract actions, valued at $18.1

billion, were classified as subject to the SCA.29 Of these awards,

we estimate that $2.66 billion (14.7 percent) went to small businesses.

These figures, however, do not include any portion of the contract

actions not individually reported but reported in summary to the FPDC,

which totaled 19.6 million contract actions valued at $22.02

billion.30 Based upon the percentage of contract actions and

contract dollars in the services category that were reported

individually to FPDC as being subject to SCA, we estimate that an

additional 2,905,696 actions, valued at $2.2 billion, of the actions

reported in summary to the FPDC were subject to SCA. Of these awards,

we estimate that $1.1 billion (50 percent) went to small businesses.

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\29\ Federal Procurement Data System Standard Report, Fiscal

Year 1992, Fourth Quarter, pp. 74-75.

\30\ Id., p. 74.

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No current employment data are available by size of business that

would relate to Federal contracts awarded subject to SCA. (The SBA

measures employment change on a current basis for each small-or large-

business-dominated industry using Bureau of Labor Statistics payroll

data.31)

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\31\ Id., p. 34.

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(4) Reporting, Recordkeeping and Other Compliance Requirements of the

Rule

This proposed rule, which relates to the procedures to be followed

by DOL for determining prevailing health and welfare fringe benefits to

be paid to service employees working on Federal service contracts

covered by SCA, contains no reporting, recordkeeping, or other

compliance requirements applicable to small businesses. However, some

of the proposed alternatives may involve additional recordkeeping. All

SCA-covered contractors (including small businesses) are required to

maintain records specified under 29 CFR Part 4 that demonstrate

compliance with the statutory requirements to furnish equivalent fringe

benefits or cash equivalents at not less than prevailing rates.

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

the Rule

There are currently no Federal rules that duplicate, overlap or

conflict with this proposed rule.

(6) Differing Compliance or Reporting Requirements for Small Entities

This proposed rule, as noted, relates to DOL procedures for

determining prevailing health and welfare fringe benefits for service

employees on SCA-covered service contracts. At this time, the rule

contains no reporting, recordkeeping, or other compliance requirements

applicable to small businesses. Moreover, the requirement to provide

prevailing fringe benefits applies to all contracts in excess of

$2,500, and establishing different requirements for small entities is

not a valid alternative under the terms of the statute. However, under

the express terms of the statute, all SCA-covered contractors may

discharge their obligations to furnish prevailing fringe benefits under

SCA ``* * * by furnishing any equivalent combinations of fringe

benefits or by making equivalent or differential payments in cash under

rules and regulations established by the Secretary * * *,'' which are

set forth at 29 CFR Sec. 4.177.

(7) Clarification, Consolidation and Simplification of Compliance and

Reporting Requirements

As noted, this proposed rule pertaining to DOL procedures for

determining prevailing fringe benefits under SCA contains no new

compliance or reporting requirements for small entities.

(8) Use of Other Standards

Given the stated objectives of the statute, compliance by

contractors can only be achieved through performance rather than design

standards--i.e., the Secretary is required by the Act to determine the

prevailing wages and fringe benefits to be paid by service contractors.

The available alternative methodologies that are being considered and

put forth in this proposed rule are discussed in the preamble above and

are not repeated here.

(9) Exemption From Coverage for Small Entities

Exemption from coverage under this rule for small entities would

not be appropriate given the statutory mandate of SCA that all

contractors (large and small) performing on SCA-covered contracts

furnish prevailing fringe benefits to service employees performing on

Federal service contracts. Further exclusion of such small businesses

from data collected to determine prevailing fringe benefits would also

be impractical, and would distort determinations of prevailing fringe

benefits, possibly to the detriment of small businesses.

Summary

Based upon the foregoing analysis, the revised procedures contained

in this proposed rule are expected to have a ``significant economic

impact on a substantial number of small entities'' within the meaning

of the Regulatory Flexibility Act. This impact is mitigated in some

respects by the statutory authority for SCA-covered contractors to

discharge their obligations to furnish prevailing fringe benefits by

furnishing any equivalent combinations of fringe benefits or by making

equivalent or differential payments in cash.

Document Preparation

This document was prepared under the direction and control of Maria

Echaveste, Administrator, Wage and Hour Division, Employment Standards

Administration, U.S. Department of Labor.

List of Subjects in 29 CFR Part 4

Administrative practice and procedures, Employee benefit plans,

[[Page 19781]]

Government contracts, Investigations, Labor, Law enforcement, Minimum

wages, Penalties, Recordkeeping requirements, Reporting requirements,

Wages.

Signed at Washington, DC, on this 26th day of April, 1996.

Maria Echaveste,

Administrator, Wage and Hour Division.

[FR Doc. 96-10797 Filed 5-1-96; 8:45 am]

BILLING CODE 4510-27-P