For employers performing work under covered federal service contracts, wage and hour compliance extends beyond the Fair Labor Standards Act (FLSA). The Service Contract Labor Standards (SCLS)—formerly known as the Service Contract Act (SCA)—requires contractors and subcontractors performing covered federal service contracts generally exceeding $2,500 to pay covered service employees at least the applicable prevailing wage rates and fringe benefits established by the U.S. Department of Labor. 

Common SCLS compliance mistakes include: 

• Misclassifying employees into the wrong labor category.  

  
  

• Paying less than the applicable wage determination.  

  
  

• Failing to provide the required health and welfare fringe benefit.  

  
  

• Using outdated wage determinations after a contract renewal or option year.  

  
  

• Failing to post the applicable wage determination at the worksite.  

  
  

• Maintaining inadequate payroll and labor records to demonstrate compliance.  

Unlike many private-sector wage and hour issues, SCLS violations can affect both your workforce and your federal contract. Noncompliance may result in back wage liability, withheld contract payments, contract disputes, or even debarment from future federal contracting opportunities in serious cases. 

Your First SCLS Contract 

For new government contractors subject to SCLS, the biggest compliance mistakes usually happen because they treat SCLS like a normal benefits or payroll issue. It is really a contract compliance obligation that affects HR, payroll, accounting, contracts, and operations. Highlights include: 

Confirm Whether the Contract Is Covered by SCLS - Not every federal contract requires SCLS compliance.  

Before applying SCLS requirements, contractors should confirm: 

• The contract is a covered service contract.  

  
  

• The contract value exceeds the applicable threshold (generally $2,500).  

  
  

• The contract incorporates the required SCLS clauses and Wage Determination.  

Obtain and Review the Correct Wage Determination - The Wage Determination is the foundation of SCLS compliance. Do not use an old Wage Determination from a previous contract or assume the same rates apply to all employees.  Always review the Wage Determination at contract award/renewal/modification for:  

• Geographic location covered by the contract.  

  
  

• Labor classifications.  

  
  

• Minimum hourly wages.  

  
  

• Health and welfare fringe benefit requirements.  

  
  

• Vacation and holiday requirements.  

  
  

• Effective dates.  

Properly Classify Employees - Choosing the lowest-cost labor category without confirming duties align with the classification can lead to compliance issues. Employees must be matched to the correct labor category based on their actual duties—not simply their job title. For example an employee titled "Administrative Assistant" may actually perform duties that align with a different Wage Determination classification. 

Track SCLS Hours Separately - SCLS obligations are generally tied to hours worked on covered contracts and contractors should not apply one company-wide payroll approach without distinguishing SCLS-covered employees.. Contractors should be able to identify: 

• Which employees worked on covered contracts.  

  
  

• Hours worked under each contract.  

  
  

• Applicable Wage Determination.  

  
  

• Benefits provided for those hours.  

Understand Health & Welfare Fringe Benefit Administration - The H&W fringe benefit is one of the most misunderstood areas. Contractors should assume employee enrollment in a company benefit plan automatically satisfies the H&W obligation. Contractors should: 

• Reconcile required H&W amounts against qualifying benefits provided.  

  
  

• Maintain documentation supporting benefit costs.  

  
  

• Address any shortfalls through additional benefits or cash equivalent payments.  

Do Not Overlook Vacation Benefits - Unlike typical private-sector PTO policies, SCLS vacation benefits may be a contractual obligation. Issues arise if contractors apply the standard company PTO policy to SCLS-covered employees without reviewing the Wage Determination:  

• Review the Wage Determination vacation requirements.  

  
  

• Track employee eligibility.  

  
  

• Recognize predecessor contractor service when applicable.  

  
  

• Maintain separate records for SCLS vacation accrual.  

Maintain Required Payroll Records - SCLS-covered contractors must maintain accurate records, including: 

• Employee name and address.  

  
  

• Job classification and wage rates paid.  

  
  

• Fringe benefits provided.  

  
  

• Hours worked and payroll deductions 

Train Supervisors and Program Managers - Supervisors should understand: 

• Employees cannot work outside recorded hours.  

  
  

• Employees cannot perform higher-level duties without review.  

  
  

• Time must be accurately reported.  

  
  

• Changes in assignments may impact classifications.  

Review Contract Changes - Continuing old payroll practices after a contract modification changes requirements as contract modification can change SCLS obligations. Contractors should review: 

• Option year renewals.  

  
  

• New Wage Determinations.  

  
  

• Additional labor categories.  

  
  

• Changes in work location.  

  
  

• Increased contract scope.  

Compliance Spotlight 

A U.S. Government Accountability Office (GAO) review of DOL enforcement found that between FY 2014-2019: 

• The DOL completed more than 5,000 Service Contract Act (now SCLS) investigations.  

  
  

• Approximately 68% of investigations resulted in violations.  

  
  

• Employers agreed to pay approximately $224 million in back wages.  

  
  

• 60 employers were debarred from receiving new federal contracts for three years.  

Service Contract Labor Standards (SCLS) violations can have consequences beyond back wages. In one case, a federal food service contractor was ordered to pay more than $1.4 million in back wages to employees and was debarred from bidding on federal contracts for three years after the Department of Labor found it failed to pay the required prevailing wages and fringe benefits.

More recently, the Department's Administrative Review Board affirmed another three-year debarment where a contractor failed to timely implement a revised wage determination after a contract modification—even though the contractor ultimately paid the affected employees. These cases underscore the importance of reviewing wage determinations whenever a contract is awarded, renewed, or modified.  

Health and Welfare Fringe Benefits 

The health and welfare fringe benefit is one of the most commonly misunderstood SCLS requirements. For example, if an employee works 2,000 hours on an SCLS-covered contract during the year, a $5.36/hour fringe benefit requirement equates to $10,720 annually in required fringe benefits. Failing to account for this cost when pricing a government contract can significantly reduce—or eliminate—the contract's profitability. 

Before submitting a proposal—or whenever a contract is renewed or modified—verify the applicable wage determination, confirm employee labor classifications, review fringe benefit calculations, and ensure payroll is aligned with current contract requirements. For additional guidance on SCLS compliance, the U.S. Department of Labor offers several employer resources: 

• Service Contract Labor Standards Guidance 

  
  

• Service Contract Labor Standards Overview 

  
  

• Employment Law Guide – Prevailing Wages in Service Contracts 

  
  

• FAR Subpart 22.10 – Service Contract Labor Standards 

Example: Service Contract Labor Standards (SCLS) Wage Determination 

A federal contractor is awarded a janitorial services contract  

for a federal office building in Fairfax County, Virginia.  

The solicitation includes a U.S. Department of Labor Wage Determination  

applicable to that geographic area. 

*Illustrative example only. Wage rates and fringe benefit requirements vary by Wage Determination, location, and contract. Employers should always refer to the Wage Determination incorporated into their federal contract. 

If a contractor hires a Janitor to perform work under this contract, the employee generally must receive at least: 

• $22.15 per hour in wages, and  

  
  

• An additional $5.36 per hour in fringe benefits, which may be provided through bona fide benefits (such as health insurance or retirement contributions) or, if permitted, paid as cash in lieu of benefits.  

  
  

If the employer pays only $20.00 per hour and does not provide the required fringe benefit, the contractor may owe back wages and fringe benefits for every hour worked under the contract. 

The Department of Labor's Wage Determinations are available through the official SAM.gov Wage Determinations database. Employers can search by contract type, state, county, or locality to identify the prevailing wages and fringe benefits applicable to a federal contract. 

• SAM.gov Wage Determinations  

  
  

• DOL Service Contract Labor Standards Resources  

  
  

Vacation Benefits 

Vacation benefits are one of the biggest differences between SCLS-covered employees and non-SCLS employees, and they are also one of the most common compliance issues for government contractors. Under the Service Contract Labor Standards (SCLS), vacation is not simply an employer policy. If the applicable Wage Determination includes a vacation benefit (most do), the contractor is legally required to provide that vacation benefit to covered service employees who meet the eligibility requirements. This is separate from—and in addition to—the health and welfare fringe benefit. }

Key Differences 

Suppose a Wage Determination provides: 

• 2 weeks of paid vacation after one year of service  

  
  

• 3 weeks after five years  

  
  

• 4 weeks after fifteen years  

If a contractor's standard PTO policy provides only one week of vacation after one year, that policy would not satisfy the SCLS requirement for covered employees. The contractor would need to provide at least the vacation benefit required by the Wage Determination to employees performing work on the covered contract. 

Successor Contractor Rule 

Another unique SCLS requirement is that an employee's length of service may carry over when a federal contract changes contractors. For example: 

• Contractor A loses the contract.  

  
  

• Contractor B wins the recompete and hires many of the incumbent employees.  

  
  

• An employee has 8 years of continuous service on that contract.  

  
  

For vacation purposes, Contractor B generally must recognize that prior service rather than treating the employee as a new hire. This is a significant departure from most private-sector PTO policies, where vacation is typically based only on service with the current employer. Because vacation under SCLS is tied to the applicable Wage Determination and, in many cases, an employee's continuous service on the contract, many government contractors: 

• Maintain separate PTO/vacation policies for SCLS-covered employees.  

  
  

• Track SCLS service dates separately from company hire dates.  

  
  

• Configure payroll and HRIS systems to apply different accrual rules for covered employees.  

  
  

• Review vacation entitlements whenever a contract is awarded, renewed, or transitions to a successor.  

  
  

When onboarding a new SCLS contract, identify which employees are covered by the Wage Determination and review both the required health and welfare fringe benefit and the required vacation schedule. If your organization hires incumbent employees from the previous contractor, obtain documentation of their qualifying service so vacation benefits are administered correctly from day one. 

Health and Welfare Fringe Benefit Reconciliation 

One of the most common SCLS compliance challenges involves properly administering and tracking the required health and welfare (H&W) fringe benefit. Contractors must ensure that covered employees receive at least the fringe benefit amount required by the applicable Wage Determination for every eligible hour worked on the contract.  

Because H&W benefits are often provided through a combination of employer-paid benefits and cash payments, contractors should periodically reconcile their fringe benefit obligations to confirm compliance. A proper reconciliation helps identify whether the value of qualifying benefits provided to employees meets or exceeds the required SCLS fringe benefit rate. A periodic H&W reconciliation should include: 

• Reviewing the applicable Wage Determination to confirm the required H&W rate. 

  
  

• Calculating the total H&W obligation based on covered employee hours worked. 

  
  

• Comparing required fringe obligations against qualifying employer-paid benefits, such as health insurance premiums, retirement contributions, or other allowable benefits. 

  
  

• Identifying any shortfalls that may require additional payments to employees. 

  
  

• Maintaining documentation supporting the benefit calculations and payments. 

For example, if an employee works 1,800 SCLS-covered hours during a contract year and the applicable Wage Determination requires a $5.36 per hour H&W fringe benefit, the contractor has a fringe benefit obligation of $9,648 for that employee. If the contractor only provided $8,500 in qualifying benefits, the remaining balance may need to be paid to the employee such as an employer retirement contribution, or a properly documented cash equivalent payment.  

Contractors should establish a regular review process—such as monthly, quarterly, or at contract milestones—to reconcile SCLS H&W obligations. Regular monitoring helps prevent small discrepancies from accumulating into significant back wage liabilities during a Department of Labor investigation. 

How C2 Essentials Can Help 

Maintaining compliance with the Service Contract Labor Standards (SCLS) requires more than processing payroll correctly. Contractors must ensure employees are properly classified under the applicable Wage Determination, receive the required prevailing wages and fringe benefits, administer vacation benefits correctly, and maintain accurate payroll and contract records. Regular reviews of contract modifications, wage determinations, and payroll practices can help identify compliance issues before they become costly liabilities. 

C2 Essentials partners with government contractors to navigate the complexities of SCLS compliance by assisting with wage determination reviews, employee labor classifications, fringe benefit administration, payroll compliance, and HR policy guidance. If your organization has questions regarding SCLS requirements or needs assistance evaluating its compliance practices, contact your HR Business Partner or Payroll Team before a minor oversight results in back wages, contract disputes, or a Department of Labor investigation. 

The U.S. Department of Defense (DoD) has announced that it is suspending implementation of Cybersecurity Maturity Model Certification (CMMC) Phase 2 while conducting a 60-day review of the program. Although this announcement has created uncertainty for many federal contractors, it should not be interpreted as a signal that cybersecurity requirements are going away. Instead, the DoD is evaluating how to streamline and improve the CMMC program while continuing to protect sensitive government information. 

For small and medium-sized government contractors, now is the time to remain focused on cybersecurity readiness rather than delaying compliance efforts. 

What Is Changing? 

Phase 2 of the CMMC program was expected to expand the number of contractors required to obtain third-party cybersecurity certifications before being awarded certain DoD contracts. Under the announced pause, the DoD will review the certification framework, implementation process, and associated costs to determine whether reforms are necessary. 

The review is expected to focus on reducing unnecessary administrative burdens while maintaining appropriate safeguards for Federal Contract Information (FCI) and Controlled Unclassified Information (CUI). 

What This Means for Contractors 

While the certification timeline may shift, the underlying cybersecurity obligations have not been suspended. Contractors should remember that: 

• Existing cybersecurity requirements under DFARS clauses remain in effect.  

  
  

• Contractors handling Controlled Unclassified Information (CUI) are still expected to implement the security controls outlined in NIST SP 800-171.  

  
  

• Future DoD solicitations may continue to include cybersecurity requirements even if formal CMMC certification dates change.  

Waiting until the review concludes could leave contractors scrambling if implementation resumes with little notice. 

Recommended Actions 

Government contractors should use this period to strengthen their cybersecurity posture by: 

• Reviewing compliance with NIST SP 800-171 security controls.  

  
  

• Identifying and remediating gaps in cybersecurity policies and technical safeguards.  

  
  

• Updating the organization's System Security Plan (SSP) and Plan of Action & Milestones (POA&M).  

  
  

• Maintaining documentation that demonstrates ongoing cybersecurity efforts.  

  
  

• Monitoring DoD announcements regarding the outcome of the reform review.  

Organizations that continue preparing now will likely be in a much stronger position regardless of how the final CMMC framework evolves. 

HR's Role in Cybersecurity Compliance 

Although CMMC is often viewed as an IT initiative, Human Resources plays an important supporting role. HR departments should ensure that: 

• Cybersecurity awareness training is provided to employees.  

  
  

• New hire onboarding includes required security policies and acceptable use acknowledgments.  

  
  

• Employee terminations include timely removal of system access.  

  
  

• Personnel responsible for handling sensitive information understand their cybersecurity responsibilities.  

  
  

• Security-related policies remain current and are consistently enforced.  

Strong administrative controls complement technical safeguards and help demonstrate an organization's commitment to protecting sensitive information. 

Looking Ahead 

The DoD's 60-day reform review introduces some short-term uncertainty, but the long-term direction is clear: cybersecurity will remain a critical requirement for companies doing business with the federal government. Contractors that continue investing in compliance, documentation, and employee awareness will be better positioned to compete for future contracts while reducing operational and security risks. 

How C2 Essentials Can Help 

Navigating federal contractor compliance requires more than understanding HR regulations. C2 Essentials partners with government contractors to support policy development, employee training, onboarding and offboarding procedures, documentation practices, and other administrative controls that complement your organization's cybersecurity compliance efforts. While technical cybersecurity implementation should be managed by qualified IT and security professionals, C2 Essentials helps ensure your workforce practices support your overall compliance strategy and readiness for future federal requirements. 

For many employers, wage and hour compliance seems straightforward—pay employees accurately and on time. However, the U.S. Department of Labor's (DOL) Wage and Hour Division routinely investigates employers for violations of the Fair Labor Standards Act (FLSA), and many findings result from common administrative mistakes rather than intentional misconduct. 

Enforcement Spotlight 

The U.S. Department of Labor continues to aggressively enforce the Fair Labor Standards Act. In Fiscal Year 2025 alone, the Wage and Hour Division recovered more than $259 million in back wages for nearly 177,000 employees nationwide—the highest annual recovery since 2019. Common violations included unpaid overtime, employee misclassification, and failure to compensate employees for all hours worked.  

While many investigations involve large employers, small and mid-sized businesses are frequently investigated after an employee complaint. The DOL does not limit investigations to Fortune 500 companies—any employer covered by the Fair Labor Standards Act may be subject to an audit. 

Government contractors may face additional wage compliance risks. In addition to the Fair Labor Standards Act, many federal contractors must comply with prevailing wage requirements under laws such as the Davis-Bacon Act or the McNamara-O'Hara Service Contract Act (SCLS). Timekeeping errors, employee misclassification, or improper overtime calculations can create contractual issues in addition to DOL wage and hour liability.  

For government contractors, where contract compliance and accurate labor reporting are already under increased scrutiny, maintaining sound wage and hour practices is essential. 

1. Misclassifying Employees as Exempt from Overtime 

One of the most common compliance issues involves incorrectly classifying employees as exempt from overtime. Paying an employee a salary alone does not make them exempt from the FLSA's overtime requirements. Most exemptions require employees to satisfy both a salary basis test and a duties test. Positions that have evolved over time—or employees whose responsibilities have changed—should be reviewed periodically to ensure they continue to qualify for an exemption. 

Tip: Conduct periodic exemption reviews, especially following promotions, reorganizations, or significant job duty changes. 

2. Failing to Pay for All Hours Worked 

The FLSA generally requires employers to pay nonexempt employees for all hours they are "suffered or permitted" to work. This may include work performed before or after scheduled shifts, responding to emails after hours, completing mandatory training, or performing work during meal periods. Remote and hybrid work environments have increased the likelihood of employees performing work outside their scheduled hours. 

Tip: Establish clear policies for recording all hours worked and train supervisors not to allow off-the-clock work. 

3. Incorrectly Calculating Overtime 

Overtime calculations can become more complicated when employees receive nondiscretionary bonuses, shift differentials, commissions, or multiple hourly rates. These forms of compensation often must be included when determining an employee's regular rate of pay for overtime purposes. Errors frequently occur when payroll systems or manual calculations fail to account for these additional earnings. 

Tip: Periodically review payroll calculations and ensure overtime is computed using the employee's correct regular rate of pay. 

4. Poor Timekeeping Practices 

Accurate time records remain one of an employer's strongest defenses during a wage and hour investigation. Missing, incomplete, or altered time records can make it difficult to demonstrate compliance. Employers should ensure employees accurately record all hours worked and that supervisors understand they may not modify time records without a legitimate business reason and appropriate documentation. 

Tip: Conduct periodic audits of timekeeping records and promptly investigate missing punches, recurring edits, or unusual patterns. 

5. Assuming Federal Law Is the Only Requirement 

Many states have wage and hour laws that provide greater protections than federal law. Depending on where employees work, employers may need to comply with state-specific requirements related to overtime, meal and rest breaks, final pay, minimum wage, or employee recordkeeping. For employers with remote employees or operations in multiple states, compliance should be evaluated under both federal and applicable state law. 

Tip: Review wage and hour policies whenever expanding into a new state or hiring remote employees. 

Helpful DOL Resources 

The U.S. Department of Labor provides several excellent compliance resources for employers: 

• Fair Labor Standards Act (FLSA) Handy Reference Guide 

  
  

• Overtime Pay Requirements Fact Sheet #23 

  
  

• Wage and Hour Division Overtime Resources 

  
  

• Overtime Fact Sheets Library 

How C2 Essentials Can Help 

Maintaining wage and hour compliance requires more than accurate payroll processing. Proper employee classification, timekeeping practices, supervisor training, and periodic HR audits all play an important role in reducing compliance risk.

C2 Essentials works with employers to review exempt classifications, evaluate wage and hour practices, assist with policy development, and help clients navigate federal and state employment law requirements. If your organization has questions regarding overtime eligibility, employee classification, or wage and hour compliance, contact your HR Team before a small issue becomes a costly investigation.