Contractor pay is a government issue

Prevailing wage laws are in need of an overhaul.

Earlier this month, the Florida Phoenix reported that a handful of workers at several customer call centers operated by contractors for the Centers for Medicaid and Medicare Services walked off the job to push for higher pay and protest layoffs. It would be easy enough to dismiss this as just another in a long string of recent stories about labor-management disputes. But this one is different, and it highlights a systemic challenge that needs to be addressed.

Contractors don’t decide on wages and benefits for work such as that performed by the CMS call centers; the federal government does. Wage levels are established by the Labor Department through the Service Contract Act. Under the SCA, wages are based on local or regional averages for the same or similar work. (Full disclosure: I consult on a range of matters to a number of companies that do SCA-covered work, including the company at the core of the CMS issue).

The SCA, enacted five decades ago, serves an important purpose. It is designed to protect workers by preventing what some call “wage arbitrage” from becoming the principal determinant in government procurement decisions. This is particularly relevant in procurements for hourly labor, where workers can be the most vulnerable. But despite the array of forces that have fundamentally altered the world of work, the SCA hasn’t been significantly modernized. As a result, while it protects workers on one level, it also creates a set of challenges that are, at their core, unfriendly to workers and constrain their pay.

For example, while wage determinations establish a floor beneath which federal contractor pay cannot go, they are also a ceiling. After all, if a competition for a contract is heavy on labor hours and highly dependent on price—which most of this work is—anyone bidding a higher wage would only price themselves out of the competition. And beyond the competitive realities companies have to deal with, there are no incentives (and many disincentives) for the government to pay higher than the Labor Department’s wage determination. In simple terms, when a contractor workforce believes their wages or benefits are unfairly low, the only actual remedy is through the government, not the company.

The problem is further complicated in regions where the government, via its contractors, is the largest provider of certain services. In those cases, including some of the CMS centers, SCA wages are artificially constrained because the data being used to determine the regional averages for the same or similar work is dominated by the SCA wages themselves.

Similarly, the SCA prescribes what must be spent on health and welfare benefits. Here, the problem is one of analytics: The current levels required under the SCA do not come close to matching the actual costs of basic health insurance through either the Affordable Care Act exchanges or on the open market. The SCA’s underlying analytic models long pre-date the modern health insurance environment.

It’s also important to note that the workers at the call centers, who are paid an average of about $16 per hour, are asking for an increase to a “living wage” of $25 per hour. That introduces yet another wrinkle. The SCA is not designed to establish a living wage. Its focus is on prevailing regional wages.

This is not to suggest that the workers at the CMS call centers do not have cause to be upset. But the remedies they seek are not likely to be found in the company involved, or with any company. Instead, they are to be found at the Labor Department. 

The good news is that there are adjustments that can be made which would help alleviate some of the challenges presented by the SCA, as currently constructed.  

For one thing, if Congress agreed, the federal minimum wage (which is now $15 per hour) could be replaced by a living wage baseline upon which pay rates are determined. Health and welfare benefits levels could be tied to the current market costs of basic health insurance (which might even be possible without statutory changes). And in an era of increased remote work, wage determinations could be tied to where an employee lives rather than where the work is based.

These are just a few ways in which the system could be improved to enhance workforce opportunity and equity. It is far from a complete list. But to date, there has been little political will or incentive, in either party, to seriously explore new models and methodologies that are more aligned with today’s realities. Unfortunately, absent such action, workers across the country will continue to feel undervalued, companies (including those with the best of intentions) will continue to be caught in the middle, and the full potential of the SCA will remain unrealized.

Stan Soloway is president and CEO of Celero Strategies, former president of the Professional Services Council and former deputy undersecretary of Defense for acquisition reform.