The McNamara-O’Hara Service Contract Act (SCA) is a federal law that governs the compensation of workers on federal service contracts, including with the United States Postal Service. It is one of the most misunderstood and overlooked aspects of government contracting, particularly for transportation suppliers.

Consider the following two hypothetical scenarios:

A senior executive of a large government buyer of transportation services pays a surprise visit to your office. During the visit, the official begins asking your staff about the company’s compliance with the SCA. One person after another appears to have no familiarity with the statute or what compliance entails. Eventually, after the damage is done and your company’s contracts are in jeopardy, your company produces a document, with a cursory reference to the SCA, asserting that it is compliant. Too little; too late.

In your office, it is just another day of providing transportation services to a government client. Meanwhile, unbeknown to you or your team, the Department of Labor (DOL) has received a call reporting that your company does not incorporate the SCA into its subcontracting agreements. The caller is a potential subcontractor who spoke with a member of your team, heard no mention of the SCA, and saw no SCA requirements in the proposed subcontract. This, too, gets back to your government client, which starts to wonder about your company’s operations.

These scenarios are hypothetical, but some iteration of them occurs regularly. What is so remarkable is that these SCA compliance disruptions to your business are entirely avoidable. They occur primarily because of misconceptions about the SCA and the challenge of incorporating compliance into federal transportation contracting.

Below are five common misconceptions that, if addressed, can prevent your company from running afoul of both your government client and the DOL.

1. No Drivers. No Problem.

For transportation companies that subcontract to motor carriers, it seems illogical, if not impossible, for the prime contractor to be responsible for SCA compliance, which after all governs how the subcontractor’s employees and contractors are paid. Unfortunately, as counterintuitive as it may be to a transportation company, that is precisely how the SCA works. The prime contractor is jointly and severally liable with its subcontractors for any underpayment of their drivers, and that obligation is not relieved by shifting the work to someone else.¹ There is no contracting around SCA compliance by subcontracting.

The same is true when the subcontractor is an owner-operator. The SCA covers individuals performing work on the contract without regard to any contractual relationship alleged to exist between the individual and the contractor or subcontractor.² An independent contractor agreement may serve other purposes, but it does not by itself take a driver outside the SCA.

Including the SCA in every subcontract is mandatory.³ But that flow-down is the first of several steps your company must take to protect itself from liability, not a shield on its own. Your subcontracts should also give your company the right to review subcontractor payroll and fringe benefit records and should require subcontractors to indemnify your company for SCA liability they create.

2. The Bottom Line is What Matters.

The SCA may, at its simplest interpretation, be a minimum wage law. But it also incorporates a variety of notice, recordkeeping, and compensation requirements that make compliance about more than simple math.⁴ Yet many transportation suppliers ignore the statute’s fine print under the false belief that so long as enough total money is paid to a subcontractor, sufficient compliance has been achieved.

Not so. The DOL looks at more than total compensation and enforces strict compliance with SCA notice and recordkeeping requirements. Worse still: even if your company has overpaid its subcontractor, the failure to provide proper records for each driver enables the DOL to argue that your company has not complied and must make additional monetary recompense.⁵

When it comes to SCA compliance, the specifics matter.

3. Pay Now or Pay Later. What Is the Difference?

Some suppliers appear to believe that the worst that can happen in the event of an adverse DOL audit is that they will have to pay the amount of money that their subcontractor should have paid to its drivers in the first place. Often that is the case. But there are two reasons why transportation companies should not be so cavalier.

First, in conducting an audit and determining that there has been an SCA violation, the DOL creates a record of your company’s noncompliance. That record will follow your company into future audits and, as discussed below, weighs heavily against it if debarment is on the table. Second, the consequences of an SCA violation go far beyond back wages intended to make the drivers whole. The government may withhold payments due not only on the contract at issue but on any other contract your company holds with the federal government.⁶ The contracting agency may also cancel the contract and charge your company any additional cost of completing the work.⁷ A company found to have willfully violated the SCA can be barred from receiving federal contracts for three years and that bar extends to any entity in which the violator has a substantial interest.⁸ Corporate officers and managers who control contract performance can also be held personally liable for the underpayments.⁹

This is where demonstrating good faith to the DOL matters. In deciding whether to debar a company, the DOL looks at factors such as the contractor’s compliance history, its cooperation in the investigation, and its efforts to ensure compliance. Ignorance of the SCA’s requirements, failure to keep required records, and attempts to shift blame to subordinate employees will not help a company avoid debarment.¹⁰ A company that has incorporated SCA compliance before the DOL arrives is far better positioned to avoid a negative record and the worst penalties than one that scrambles to do so afterward.

4. SCA Compliance Is Too Complicated and Will Cost My Company Business.

Even setting aside the adverse consequences of noncompliance, SCA compliance is often seen as an impediment to competing for government contracts. In reality, particularly for companies that subcontract transportation, SCA compliance is neither overly complex nor burdensome. It can be incorporated into your company’s day-to-day operations with minimal disruption. Standard SCA terms in every subcontract, routine collection of subcontractor payroll and fringe benefit records, periodic spot checks against the applicable wage determination, and basic training for the staff who deal with subcontractors and government officials are all straightforward steps a company can take.

But one thing is for certain: every pay period of noncompliance adds to your company’s exposure, and that exposure does not expire quickly. SCA records must be kept for three years after the work is completed,¹¹ and the government generally has six years to sue to recover underpayments that withheld contract payments do not cover.¹² The longer a company delays implementation, the larger the liability on its books grows.

5. The DOL Is Not Prioritizing SCA Enforcement Within the Postal Transportation Network.

To be fair to transportation suppliers that have adopted this belief, there was a time not too long ago during which the DOL did not seem to be enforcing the SCA as aggressively as it had in the past. To the extent that was true, it may have reflected the challenge the DOL faced enforcing the SCA as the postal transportation network rapidly changed.

That is not the case today. The DOL is aggressively pursuing SCA noncompliance throughout the postal transportation network. And because an investigation can begin with a single call from a driver or subcontractor, your company’s exposure does not depend on the DOL’s audit priorities alone. If your company is providing a significant amount of transportation services to the Postal Service, it is only a matter of time before your company crosses the DOL’s radar.

Whether your company has adopted any of these misconceptions, early and periodic review of its SCA compliance efforts will help keep it out of trouble with both its government clients and the Department of Labor.

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¹ 29 C.F.R. § 4.114(b).
 

²  41 U.S.C. § 6701(3)(B).

³  29 C.F.R. § 4.114(b).

⁴ 41 U.S.C. § 6703(1), (2), (4); 29 C.F.R. § 4.6(b), (e), (g).

⁵  29 C.F.R. § 4.6(g)(1), (3).

⁶  41 U.S.C. § 6705(b)(1); 29 C.F.R. § 4.187(a).

⁷ 41 U.S.C. § 6705(c).

⁸  See 41 U.S.C. § 6706(b); 29 C.F.R. § 4.188(a), (c).

⁹  29 C.F.R. § 4.187(e).

¹⁰  29 C.F.R. § 4.188(b).

¹¹  29 C.F.R. § 4.185.

¹²  41 U.S.C. § 6705(b)(2); 29 C.F.R. § 4.187(c) (applying the six-year limitations period of 28 U.S.C. § 2415).