Service Contract Act Should Not Apply to Service Employees of ADP and High-Technology Companies

The Service Contract Act of 1965 protects workers' wages on federal contracts when the contracts' principal purpose is to provide services in the United States using service employees. Minimum wages and fringe benefits must be based on rates that the Secretary of Labor determines as prevailing for service employees in the locality. The Department of Labor notified the General Services Administration (GSA) that the maintenance and repair services specifications of all federal contracts for the purchase or rental of supplies or equipment were subject to the act. Soon thereafter, several major automatic data processing (ADP) and other equipment manufacturers announced their refusal to accept any government contract subject to the act. Labor later issued an interim, nationwide wage determination covering ADP maintenance and repair services which accepted currently paid wages and fringe benefits as prevailing for such services. Nevertheless, major ADP and other equipment manufacturers continued to reject government contracts subject to the act. Labor then developed a proposed average entrance-level wage rate that could be paid to the industry's service technicians subject to the act. Labor's attorneys raised serious legal and policy questions concerning use of a nationwide entrance-level wage rate, thus Labor shelved the rate and issued wage determinations that extend and expand the interim determination, while Labor officials continue to study the matter.

Labor's decision could seriously affect maintenance and repair of the government's computers, many of which are critical to national defense and security. GAO believes Labor's position is not supported by the act's language and legislative history, Labor's regulations, or its administrative manual. The act was not intended to cover maintenance services related to commercial products acquired by the government. ADP, high-technology, and other commercial product-support service contracts, where government sales represent a relatively small portion of a company's total sales, do not have the same characteristics or incentives for contractors to deliberately pay low wages to successfully bid on government contracts. The industries' argument, that the act's application to such services is not needed, has merit. Industry compliance would be counterproductive and costly. The administrative burdens and operating costs of each corporation would be increased. Merit pay systems and staff assignment practices would be disrupted. The application of the act could also have an inflationary impact on the industries' wage rates.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

Director: Franklin A. Curtis Team: General Accounting Office: Human Resources Division Phone: (202) 275-5451