Employment Standards Administration: Service Contract Act-Labor Standards for Federal Service Contracts

Published by the Government Accountability Office on 1997-01-16.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Office of the General Counsel


      January 16, 1997

      The Honorable James M. Jeffords
      The Honorable Edward M. Kennedy
      Ranking Minority Member
      Committee on Labor and Human Resources
      United States Senate

      The Honorable William F. Goodling
      The Honorable William L. Clay
      Ranking Minority Member
      Committee on Education and the Workforce
      House of Representatives

      Subject:   Department of Labor, Wage and Hour Division, Employment Standards
                 Administration: Service Contract Act; Labor Standards for Federal
                 Service Contracts

      Pursuant to section 801(a)(2)(A) of title 5, United States Code, this is our report on
      a major rule promulgated by the Department of Labor, Wage and Hour Division,
      Employment Standards Administration (DOL), entitled "Service Contract Act; Labor
      Standards for Federal Service Contracts" (RIN: 1215-AA78). We received the rule on
      January 2, 1997. It was published in the Federal Register as a final rule on
      December 30, 1996. 61 Fed. Reg. 68647.

      The final rule adopts a new methodology for establishing minimum health and
      welfare benefits requirements under the McNamara-O'Hara Service Contract Act.
      The fringe benefit rate will be based on nationwide Bureau of Labor Statistics'
      Employment Cost Index data for all employees in private industry and will include
      all benefits. The rule also contains a variance, pursuant to Section 4(b) of the Act,
      to reflect the Department of Labor's practice of issuing prevailing fringe benefit
      determinations on a nationwide basis, rather than separately for classes of
      employees and localities.

Enclosed is our assessment of the DOL's compliance with the procedural steps
required by section 801(a)(1)(B)(i) through (iv) of title 5 with respect to the rule.
Our review indicates that the DOL complied with the applicable requirements.

If you have any questions about this report, please contact James Vickers, Senior
Attorney, at (202) 512-8210. The official responsible for GAO evaluation work
relating to the Department of Labor, Wage and Hour Division, Employment
Standards Administration is Carlotta Joyner, Director, Education and Employment
Issues. Ms. Joyner can be reached at (202) 512-7014.

Robert P. Murphy
General Counsel


cc: Bernard E. Anderson
    Assistant Secretary of Labor for Employment Standards
    Department of Labor

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      ANALYSIS UNDER 5 U.S.C. § 801(a)(1)(B)(i)-(iv) OF A MAJOR RULE
                               ISSUED BY
                            (RIN: 1215-AA78)

(i) Cost-benefit analysis

The Department of Labor (DOL) conducted a cost analysis in its Regulatory Impact
Analysis of the eight methodologies under consideration. Alternative I, which was
selected, provides for a single benefit level, i.e. "total benefits," and would raise the
benefit level of those workers currently receiving the "insurance" fringe benefit level
of $.90 per hour over a 4-year period until the employees' benefit level reaches that
of workers currently receiving $2.56 per hour for "total benefits." The costs
associated with this alternative are estimated to be $48,904,960 for the first year and
rise to $197,576,038 in the fourth year.

The benefits which DOL find will result from the rule are the application of the
same benefit level for all service employees regardless of the type of contract or
employee involved, thereby being simpler for industry to understand and apply and
for the DOL to administer and enforce. In addition, 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.

(ii) Agency actions relevant to the Regulatory Flexibility Act, 5 U.S.C. §§ 603-605,
607 and 609

Section 603: Initial Regulatory Flexibility Analysis

In its Notice of Proposed Rulemaking (61 Fed. Reg. 19779), DOL included its Initial
Regulatory Flexibility Analysis, which, in accordance with section 603(b)(1) and (2),
describes the reasons for the proposed agency actions and its objectives and legal
basis. With regard to sections 603(b)(3) and (4), DOL states that it employed the
size standards of the Small Business Administration and discusses the percentage
and dollar volume of federal service contracts held by small entities and the
reporting and recordkeeping requirements of the rule as they relate to small entities.

DOL also finds that there are currently no federal rules that duplicate, overlap or
conflict with the rule and that because of the mandate of the Service Contract Act

that all contractors furnish prevailing fringe benefits to service employees
performing on federal service contract, small entities should not be exempted from
the rule.

Finally, DOL concludes that the proposed rule will have a significant economic
impact on a substantial number of small entities but that the impact will be
mitigated by the small business contractors ability to discharge their obligations
under the Service Contract Act by furnishing any equivalent combinations of fringe
benefits or by making equivalent or differential payments in cash.

Section 604: Final Regulatory Impact Analysis

DOL published its Final Regulatory Flexibility Analysis in the preamble to the final
rule (61 Fed. Reg. 68662, December 30, 1996), and in addition to stating the need
and objective of the rule, provides a discussion of the comments received regarding
its economic impact analysis. It notes that no comments were received concerning
the Initial Regulatory Impact Analysis. Included in the preamble is a discussion of
the eight alternatives considered and the reasons why the rule adopts Alternative I.

DOL describes the compliance requirements of the rule and notes that the
alternative selected does not impose any new or additional recordkeeping
requirements on small entities.

Both quantitative and descriptive statements are used to describe the effect of the
rule as suggested by section 607 of the Act.

(iii) Agency actions relevant to sections 202-205 of the Unfunded Mandates Reform
Act of 1995, 2 U.S.C. §§ 1532-1535

While the final rule will have an annual effect on the economy of more than $100
million, it is not subject the provisions of the Act because it does not impose an
intergovernmental mandate on state, local or tribal governments or the private
sector. Rather, the costs for the increases in the fringe benefits will be borne by
the federal government.

(iv) Other relevant information or requirements under Acts and Executive orders

Administrative Procedure Act, 5 U.S.C. §§ 551 et seq.

The rule was promulgated under the notice and comment procedures of 5 U.S.C.
§ 553. On May 2, 1996, DOL published a Notice of Proposed Rulemaking in the
Federal Register (61 Fed. Reg. 19770) proposing various methodologies based on
data from the Employment Cost Index. On October 25, 1996, DOL published the
Regulatory Impact Analysis of the proposed rule and requested comments.

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DOL received 80 comments on the proposed rule from various federal agencies,
unions and major government contractors among others. In the preamble to the
final rule (61 Fed. Reg. 68648), DOL discusses the comments received and the
reasons why it chose the alternative it selected.

Paperwork Reduction Act, 44 U.S.C. §§ 3501-3520

The final rule does not contain any new or additional information collections
subject to the Paperwork Reduction Act.

Statutory authorization for the rule

The rule was promulgated pursuant to the McNamara-O'Hara Service Contract Act
(41 U.S.C. § 351 et seq.) and in particular sections 2(a)(1) and (2) (41 U.S.C. §§
351(a)(1) and (2)) and section 4(b) (41 U.S.C.§ 353(b)) of the Act.

Executive Order No. 12866

The rule was reviewed by the Office of Management and Budget under the
Executive Order and determined to be "economically significant." The Office of
Information and Regulatory Affairs of OMB approved the rule as complying with the
requirements of the Order based on the information supplied by DOL, including a
planned regulatory action document describing the reason for the rule and an
assessment of the costs and budgetary impact of the rule.

In its submission, DOL did not identify any other statute or executive order
imposing procedural requirements relevant to the rule.

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