The Service Contract Act for Software Companies: Wage Determinations and Who They Cover

Most software companies never think about labor law when they bid on a federal contract. Then a solicitation arrives with FAR clause 52.222-41 in it and a twenty-page attachment listing minimum hourly wages for “Computer Operator III” and “Personal Computer Support Technician” in a particular county.

That attachment is a wage determination, and the clause is the Service Contract Labor Standards, still widely called the Service Contract Act or SCA. When it applies, it sets the minimum you must pay covered employees on the contract, in wages and in fringe benefits. This guide covers when it applies to software work, which of your staff it covers, how exemptions work, and what it changes in pricing and compliance. It is written for founders, finance leads and whoever prices federal proposals.

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What the law requires

The McNamara-O’Hara Service Contract Act of 1965, now codified at 41 U.S.C. chapter 67, applies to federal contracts over $2,500 whose principal purpose is furnishing services in the United States through service employees. The Department of Labor administers it under 29 CFR part 4, and the FAR implements it in Subpart 22.10 and the clause at 52.222-41.

On a covered contract, the contractor must:

• pay at least the wage rates and fringe benefits in the wage determination for each covered class of employee;
• notify employees of the required wages and benefits, by posting the notice or giving each employee a copy;
• keep records of wages, benefits and hours for each covered employee;
• flow the clause down to subcontracts that are themselves subject to the Act.

Contracts at or below $2,500 are not subject to the wage determination requirements, though federal minimum wage law still applies.

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Does it apply to software work?

Coverage turns on the principal purpose of the contract. A purchase of software licenses or a SaaS subscription is generally a purchase of a product, not of labor, and is not ordinarily a service contract under the Act. Work bought as labor is different. Contracts that look like these are where the clause tends to appear:

• help desk and end-user support staffed by technicians;
• operations and maintenance of systems on site, especially with operator roles;
• data entry, records and document processing;
• training delivery and other support services bundled into a larger contract.

A single contract can mix both. A subscription with a support and training component may carry the clause because of the labor portion. The agency makes the coverage call when it writes the solicitation, so the practical test is simple: look for 52.222-41 and an attached wage determination. If you see them and believe the Act does not apply, raise it in writing during the question period, before you price around it.

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Which of your employees are covered

The Act protects service employees. It excludes people who qualify as bona fide executive, administrative or professional employees under 29 CFR part 541, and part 541 includes a specific test for computer employees, such as systems analysts, programmers and software engineers whose primary duties are system design, development, analysis or testing. Those employees, if they meet the duties and pay tests, are generally outside the wage determination.

Many roles on a software contract do not meet that test. The Department of Labor’s directory of occupations, which wage determinations use, lists classes such as computer operators, peripheral equipment operators and personal computer support technicians. Front-line support staff are the most common covered employees for a software company.

The test turns on what someone actually does and how they are compensated, not on their title. Calling a help desk technician an “engineer” does not change the classification.

If you employ someone on the contract in a covered role that the wage determination does not list, the contractor uses the conformance process: you propose a classification and rate, and the contracting officer submits it to the Department of Labor for approval, normally on Standard Form 1444.

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How a wage determination works

The Department of Labor’s Wage and Hour Division issues wage determinations and publishes them on SAM.gov. Each one covers a geographic area and lists:

• minimum hourly wages by occupation class;
• a health and welfare fringe benefit rate per hour;
• vacation and holiday requirements.

The contracting officer attaches the applicable determination to the solicitation and the contract. Where a predecessor contractor had a collective bargaining agreement with its service employees, the successor is generally bound, under 41 U.S.C. 6707(c), to at least the wages and fringe benefits in that agreement. Our guide to recompetes and incumbent transitions covers how follow-on contracts change hands.

Fringe benefits can be met by providing equivalent benefits or by adding the amount to the hourly wage. Either way, they are a real cost per covered hour and belong in your price.

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Exemptions for commercial services

FAR 22.1003-4 lets certain contracts be exempted from the Act when they meet strict conditions. Two matter most for software companies:

• Maintenance, calibration or repair of certain equipment, including automated data processing equipment and office information systems. Among the conditions, the equipment must be used regularly for non-government purposes and sold to the general public in substantial quantities, the services must be offered at established catalog or market prices, and the contractor must use the same compensation plan for these employees as for its commercial work. The clause is FAR 52.222-51.
• Certain other commercial services listed in the regulation, with similar conditions plus a requirement that each employee performing the work spend only a small portion of their time on the government contract. The clause is FAR 52.222-53.

These exemptions depend on a certification you make in your offer, and the contracting officer must also determine that the conditions are met. Our guide to representations and certifications covers how certifications in your offer bind you. Do not assume an exemption from your commercial model alone. Read the conditions, confirm each one, and get advice before you certify.

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What it changes in pricing

• Price covered labor at the wage determination, not your market rate. Wage determinations in some areas sit above what you would otherwise pay for support roles. Check the specific determination for the place of performance.
• Add the fringe benefits. Health and welfare, vacation and holidays are owed per covered hour and are easy to underprice.
• Plan for increases. On multiple-year and option contracts, the contracting officer incorporates the current wage determination at each option or anniversary. FAR 52.222-43 allows an adjustment to the contract price for the increased wages and benefits the new determination requires. It does not cover increases you choose to give beyond the minimum. Our guide to contract options and option years covers how renewals work.
• Check that the adjustment clause is there. The FAR calls for 52.222-43 in covered fixed-price, time-and-materials and labor-hour contracts that run multiple years or carry options. If a multi-year solicitation includes 52.222-41 without it, ask during the question period.
• On a GSA Schedule, identify covered labor. Schedule pricing for services identifies the labor categories subject to the Act. Our guide to GSA Schedule pricing covers how Schedule rates are set.

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Compliance and the cost of getting it wrong

The Department of Labor enforces the Act. When a contractor underpays covered employees, the government can withhold contract payments to cover the wages owed, and the contractor is liable for the underpayment. A contractor found in violation is generally ineligible for federal contracts for three years unless the Secretary of Labor finds unusual circumstances. Our guide to suspension and debarment covers what exclusion means.

The basics keep you out of trouble:

• Classify each person on the contract by duties, and document why exempt staff are exempt.
• Post the notice or give each covered employee a copy.
• Keep payroll records that show hours, wages and fringe benefits for covered employees.
• Flow the clause down to subcontractors that provide covered services, and check that they comply. Our guide to teaming and subcontracting covers flow-down generally.
• Read the current rule text. The FAR is being rewritten under the Revolutionary FAR Overhaul, so section numbers and wording may change. Confirm the clauses in each solicitation, and get advice from counsel on classification questions.

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What this means for a software company

• A subscription usually is not covered, labor often is. The Act follows the principal purpose of the contract and the people who perform it.
• Engineers are usually exempt, support staff often are not. The part 541 computer employee test decides, based on duties and pay.
• The wage determination is part of the price. Read it before you bid and include fringe benefits.
• Exemptions are narrow. They require commercial sales, the same compensation plan and a certification you can stand behind.

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Where this fits

Labor standards are one of many clauses that decide whether a federal contract fits your company. Before you bid, it helps to know how your company looks across the categories federal buyers review, from compliance posture to registration and federal track record. Score your company’s federal readiness to see where you stand.

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Related reading

• Federal Contract Types for Software Companies: Fixed-Price, T&M, Cost-Type and IDIQ
• Contract Options and Option Years for Software Companies: How Federal Renewals Work
• GSA Schedule Pricing for Software Companies: Commercial Sales Practices, Price Reductions and TDR
• Recompetes and Incumbent Transitions for Software Companies: How Follow-On Contracts Work
• Micro-Purchases and Purchase Cards: The Fastest First Federal Sale for SaaS
• Glossary: SAM.gov · GSA Schedule · MAS