Debarment for Service Contract Act Violations: Reversals are “Unusual”

The Service Contract Act (SCA) imposes a three-year debarment for a contractor’s failure to pay its employees prevailing wage rates and fringe benefits specified by the Department of Labor. 

Because the SCA regulations impose debarment for all violations of the Act unless the contractor can show “unusual circumstances,” debarment for SCA violations is theoretically the norm, not the exception.  This threat should be troubling for service contractors. As evidenced by the recent International Services, Inc. decision, contractors debarred from federal contracting for SCA violations face tough odds appealing their sanctions. 

Last week, the U.S. District Court for the Southern District of New York upheld the debarment of International Services, Inc. (ISI), a California-based security firm, and its owner/CEO. ISI was accused of underpaying its employees by a total of $631,000 in wages and benefits. As a result of its debarment, the firm was added to the Excluded Parties List System (see our post on the weakness of this system) - meaning government agencies can not award it new contracts or exercise options on existing contracts for a period of three years. 

Unlike suspension and debarment under the Federal Acquisition Regulation (FAR), the SCA’s language imposes an automatic penalty for violations (though enforcement of this provision has not been automatic). Under the FAR, suspension and debarment officials have the discretion to weigh “the seriousness of the contractor’s acts or omissions” and “remedial measures or mitigating factors should be considered in making any debarment decision.” This is not the case under the SCA.
The District Court in ISI noted that:

“Unless the Secretary [of Labor] otherwise recommends because of unusual circumstances,” the SCA imposes the sanction of a three-year debarment on federal contractors found by the Secretary to have violated the SCA. 41 U.S.C. §354(a). It is the contractor’s burden to prove that unusual circumstances warrant relief from debarment.

Once the firm was debarred, ISI could only contest its debarment by demonstrating the existence of “unusual circumstances” proving that the penalty was “wholly disproportionate to the offense.” Though ISI had (1) paid its employees the back wages and benefits owed; and (2) cooperated with Labor in remediating the payment issues, the District Court found that ISI’s numerous and repeated violations of the SCA foreclosed further inquiry into the existence of “unusual circumstances.” 

What does this mean for service contractors? First, be proactive in obtaining the proper wage determination (WD) for your contract, including updates. The WD defines your obligations to your employees. Second, develop a compliance system to ensure adherence to these terms and the special recordkeeping requirements of the SCA (and the Fair Labor Standards Act). Third, if you identify a potential SCA violation, you may be able to negotiate with the Department of Labor to avoid debarment and minimize liability for back wages and benefits. Although Labor is more aggressively enforcing the SCA than ever before, the Department is willing to settle with contractors that have existing compliance plans and have taken sufficient remedial actions. Since debarment under the SCA may, as a practical matter, be non-appealable, compliance is essential.   

This article was authored by Samuel W. Jack, and J. Eric Whytsell, Jackson Kelly PLLC.