Overtime on Government Contracts
By: John Ford, Senior Consultant, Government Contractor Services Group
The use of overtime to perform government contracts can be a contentious topic, particularly in regard to uncompensated overtime. This article will address the following issues in regard to overtime on government contracts:
- The basic statutory requirements concerning overtime including what is an overtime premium;
- Overtime on cost reimbursement contracts;
- Overtime on time and materials (T&M) contracts;
- Overtime on contracts subject to the Service Contract Act (SCA); and
- Uncompensated overtime.
The primary statute addressing overtime is the Fair Labor Standards Act (FLSA; “the Act”). The FLSA is administered by the Department of Labor, which has promulgated regulations implementing the Act in title 29 of the Code of Federal Regulations (CFR). General rules for payment of overtime are discussed in section 778. Workers who are covered by the FLSA are entitled to be paid an overtime premium, defined in Federal Acquisition Regulation (FAR) 2.101 as meaning “the difference between the contractor’s regular rate of pay to an employee for the shift involved and the higher rate paid for overtime,” for overtime worked. For these purposes, hours worked in excess of 40 hours per week are generally considered to be overtime hours. An employee is entitled to be paid at one and one half times his/her normal rate of pay for each overtime hour worked in a week. However, the Act exempts certain employees from its coverage. These include employees employed in a bona fide executive, administrative or professional capacity, or in the capacity of an outside sales employee. The Act also exempts computer systems analysts, computer programmers, software engineers, and other similarly skilled computer employees. A full discussion of these exemptions is found in 29 CFR 541.
Turning to the FAR, overtime is covered in FAR 22.103. There, it is stated that “[c]ontractors shall perform all contracts, so far as practicable, without using overtime, particularly as a regular employment practice, except when lower overall costs to the government will result or when it is necessary to meet urgent program needs.” To further this policy, the FAR prescribes the use of FAR 52.222-2, Payment of Overtime Premiums, in cost reimbursement contracts.
This clause covers two scenarios where overtime might be used. The first is when prior to contract award, the contractor anticipates the use of overtime and the payment of an overtime premium. In this case, the contracting officer is to negotiate a maximum amount that will be paid for overtime premiums and insert that amount in paragraph (a) of the clause. It should be noted that paragraph (a) does not prohibit the use of overtime in performing a contract, but only places a limit on the amount of overtime premiums the government will pay for anticipated overtime.
The second scenario contemplated by the clause is that overtime will become necessary to meet unexpected situations, described in paragraph (b) of the clause, that arise after contract award. In these situations, if the contractor wishes to recover the overtime premium cost it will incur, it must identify the amount of those costs to the contracting officer and get approval to claim the premium.
It should be noted that both scenarios deal with the payment of overtime premiums. If the contractor will not incur a premium, such as would be the case when overtime is performed by an FLSA exempt employee, or the contractor does not wish to recover the premium from the government, approval of overtime would not be required.
Turning to T&M/labor hour (LH) contracts, FAR 52.232-7, which covers payments under such contracts, states that:
Unless the Schedule prescribes otherwise, the hourly rates in the Schedule shall not be varied by virtue of the Contractor having performed work on an overtime basis. If no overtime rates are provided in the Schedule and overtime work is approved in advance by the Contracting Officer, overtime rates shall be negotiated. . . . If the Schedule provides rates for overtime, the premium portion of those rates will be reimbursable only to the extent the overtime is approved by the Contracting Officer.
This language makes it clear that contractors are entitled to be paid the basic hourly rate specified in the contract for each hour of overtime unless an overtime rate is provided for in the contract. Further, contracting officer approval for the use of overtime is not required unless the overtime is to be charged at an overtime rate.
As regards overtime under the SCA, it should be noted that the SCA does not contain overtime provisions. Thus, whether an employee is entitled to receive an overtime premium for overtime worked will be determined by the FLSA. In this regard, it must be recalled that an employee is entitled to be paid not less than the minimum wages and fringe benefits called for by the applicable wage determination for the first 40 hours worked on an SCA covered contract in a week. This can present some interesting issues in regard to overtime. For example, if an employee subject to the FLSA works 40 hours on an SCA covered contract, but spends two hours that week working on a proposal, the employee would be entitled to the SCA mandated wages and fringe benefits for the 40 hours worked on the SCA contract and an overtime premium for the two hours worked on the proposal. However, if the same employee worked 42 hours in a week on an SCA covered contract, the employee would be paid the SCA mandated wages and fringe benefits for the first 40 hours worked. For the two overtime hours, (s)he would be paid 150 percent of the SCA mandated hourly wage rate, however, the employer would not be required to, but could if it wanted to, provide the fringe benefits mandated by the wage determination for those hours.
Finally, we must consider uncompensated overtime (UCOT), i.e., hours worked in excess of 40 hours in a week for which the employee is not paid additional compensation above his/her regular pay. UCOT generally becomes an issue when the cost of the employee’s time will be allocated to two or more contracts; one of which must be a cost reimbursement or Cost Accounting Standards covered (CAS) contract. In this case, the cost principles and CAS require costs to be allocated to contracts on an equitable basis. Therefore, in this case, the contractor must generally compute an abated labor rate by dividing the amount the employee was paid for the week by the number of hours worked, and then to allocate hours among the projects based upon the abated rate.
UCOT can also be an issue in regard to T&M/LH contracts, even when all of an employee’s time is charged to a single contract. FAR 52.232-7 states that the “Contractor shall substantiate vouchers by evidence of actual payment . . .” Some government personnel interpret this to mean that an employee must be paid something for each hour worked before the contractor is compensated for that hour by the government. In the UCOT situation, this would require that the contractor pay the employee something additional for the UCOT hours. However, the Armed Services Board of Appeals has held that the salary an FLSA exempt employee receives covers all hours worked and that the contractor does not have to pay the employee any extra compensation for the overtime work.
Please contact us if we can be of assistance in working with overtime situations.
Topics: Code of Federal Regulations "CFR", Fair Labor Standards Act "FLSA", Federal Acquisition Regulation "FAR", Labor Hour Contracts "LH", Service Contract Act "SCA", Time and Materials Contracts "T&M"