The Dire Need for a Meaningful Fringe Increase

Annually, in the early summer, The Department of Labor (DOL) issues a new memorandum modifying the fringe benefit rate on contracts covered by the McNamara-O’Hara Service Contract Act (SCA). For the thousands of federal contractors working under SCA regulations, that number is crucial for employee morale and the strength of an employer’s benefits package. All eyes are on the fringe!

The fringe rate is based on the latest Bureau of Labor Statistics Employment Cost Index summary of Employer Cost of Employee Compensation (ECEC). For better or worse, the fringe rate dictates what employers are able to spend on health and welfare benefits. In the current market, benefits are incredibly influential over the finances of employees’, talent retention, and recruiting efforts.

In essence, there are two fringe rates. The higher of the two does not include the paid sick leave as outlined in Executive Order 13706. The second rate does include provisions for sick leave and Executive Order 13706. On July 16^th 2021, the DOL issued All Agency Memorandum 237 which set the fringe rates at $4.60 per hour and $4.23 per hour, respectively. This adjustment came in at a mere $0.06, only 1.3%, higher than the previous rate for a fringe rate without the sick leave requirements under EO 13706. For rates that did include sick leave, that increase amounted to $0.01 – less than 1% more than the previously issued rate in 2020. When considering that 2020 fringe rates saw no increase over those in 2019, the numbers paint a dire picture.

Regrettably, the reality is that contracts have averaged less than a one percent increase in the fringe rate over a two-year period, now going on three years. It is unclear whether the federal government maintains that benefit costs are transitory or, perhaps, those analyzing the data did not account for the impact that the Covid-19 pandemic would have on benefit claims and costs. It is an undeniable truth that health costs have risen.

When examining benefit costs over the past three years, even if one took a conservative view the result is that health benefit costs have increased 10% over that period. In health insurance – which makes up a primary component of the bona fide fringe rate – a ten percent increase easily translates into a $1000 increase in a yearly deductible. Without the fringe rate increasing alongside benefit costs, most employees working under an SCA contract have felt the pressure of increased out of pocket expenses. For contractors with higher than normal claims, or worker populations that have persistent health issues, this has had a direct impact on their recruiting efforts. When benefits are an expected perk and are in high demand, a high out of pocket cost translates into a less attractive offering overall. As of now, federal contractors are locked in a downward spiral that makes it increasingly difficult to compete with the private sector in terms of recruiting top talent. Something’s got to give.

Optimistically, 2022 feels primed for change. Across industries costs are going up, up, up and the entire country is watching. For contractors everywhere, all eyes are on the Department of Labor’s Wage & Hour Division and the hope that rising costs across the board encourage a closer look at the costs associated with providing benefits. With any luck, the DOL may take a more favorable approach to a desperately needed fringe rate increase.

The hope is for the DOL to take a higher increase to the fringe benefit, but with these levels of uncertainty don’t leave anything to chance. Contact the AssuredPartners Government Contracting team today so we can help you plan for changes to the fringe benefit and offer compliant insurance solutions while working under government contracts.