ESA Proposed Rule

Service Contract Act; Labor Standards for Federal Service Contracts [05/02/1996]

DEPARTMENT OF LABOR

Employment Standards Administration
Wage and Hour Division

29 CFR Part 4

RIN 1215-AA78

Service Contract Act; Labor Standards for Federal Service
Contracts

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

ACTION: Notice of proposed rulemaking; request for comments.

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

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

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

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

SUPPLEMENTARY INFORMATION:

I. Paperwork Reduction Act

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

II. Background

The McNamara-O'Hara Service Contract Act of 1965 (SCA) (41 U.S.C.
351, et seq.) applies to Federal contracts with the principal purpose
of furnishing services through the use of service employees. For
service contracts in excess of $2,500, the Department of Labor is
required to make determinations of prevailing wage rates and fringe
benefits that must be paid as a minimum by contractors and
subcontractors to employees employed on covered contacts ``* * * in
accordance with prevailing rates for such employees in the locality, *
* *'' (see sections 2 (a)(1) and 2(a)(2) of the Act).<SUP>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.<SUP>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.<SUP>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 <SUP>4 have always been specified in a determination as
a monetary amount based on survey data collected on a nationwide
basis.<SUP>5 Until 1976, the Department routinely issued a single,
national ``insurance'' benefit level for all occupations of service
employees throughout the country,<SUP>6 based primarily on data from
the BLS' Biennial Survey of Employee Compensation in the Private
Nonfarm Economy.<SUP>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,<SUP>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.<SUP>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.<SUP>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.<SUP>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.<SUP>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 <SUP>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.<SUP>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.<SUP>17
---------------------------------------------------------------------------

\16\ Currently, the ``total benefit'' level is applied to large
base support contracts, solicitations based on OMB Circular A-76
solicitations, solicitations for highly technical services typically
provided by large corporations, and other selected solicitations
without regard to size of contract. Such contracts are frequently
awarded to large contractors, but not always. In practice, small
contractors are most likely awarded contracts that contain the
``insurance'' level.
\17\ As noted previously, these rates continue to remain in
effect, even though 1995 BLS ECI data for size-of-establishment
would have resulted in somewhat lower rates.
---------------------------------------------------------------------------

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

[[Page 19777]]

IV. Average Cost Approach

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

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

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

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

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

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

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

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

VI. General

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

[[Page 19778]]

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

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

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

VII. Other Proposals

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

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

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

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

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

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

[[Page 19779]]

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

IX. Regulatory Flexibility Act

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

(1) Reasons Why Action Is Being Considered

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

(2) Objectives of and Legal Basis for Rule

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

(3) Number of Small Entities Covered Under the Rule

The definition of small business varies considerably depending upon
the policy issues and circumstances under review, the industry being
studied, and the measures used. The Small Business Administration's
Office of Advocacy generally uses employment data as a basis for size
comparisons, with firms having fewer than 100 employees or fewer than
500 employees defined as small.<SUP>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.<SUP>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.<SUP>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.<SUP>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.<SUP>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.<SUP>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.<SUP>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.<SUP>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