What Is Health and Welfare Pay for Government Contractors?

Health and welfare pay for government contractors is an hourly fringe benefit that federal service contractors must provide to every covered service employee on top of the required SCA prevailing wage. As of July 7, 2025, the standard rate is $5.55 per hour, with a lower rate of $5.09 per hour on contracts covered by Executive Order 13706.¹ The obligation comes from the McNamara-O’Hara Service Contract Act and applies to federal service contracts over $2,500.² Getting it wrong can mean withheld contract payments, back-pay liability, or a three-year debarment from federal contracting.

H&W is separate from the prevailing cash wage. Paying a higher hourly wage does not satisfy it, and wages and fringe benefits must be tracked as distinct line items in both pricing and payroll.

Current Rates and When They Apply

The Department of Labor publishes the required H&W rate and typically adjusts it once a year based on Bureau of Labor Statistics employment cost data. The rate that governs a specific contract is the one written into the wage determination incorporated into that contract.³

The rates effective July 7, 2025 are:

$5.55 per hour for contracts not subject to Executive Order 13706.
$5.09 per hour for contracts that require paid sick leave under Executive Order 13706.

Both are published in All Agency Memorandum No. 250. Separate reduced rates apply in Hawaii because the state’s Prepaid Health Care Act already mandates certain coverage; contractors performing work there should check the memorandum for the applicable figure.¹

A new annual rate does not automatically apply to running contracts on the publication date. The contracting officer must modify the contract to incorporate the updated wage determination. If an effective modification arrives after award on a sealed-bid or negotiated contract, the contracting officer modifies the contract retroactively and adjusts the price to account for any change in cost.⁴ Until that modification happens, the rate in the current wage determination controls.

Fixed-Cost vs. Average-Cost Wage Determinations

Wage determinations come in two types, and the type dictates how you calculate what you owe.

Fixed Cost

Odd-numbered wage determinations require H&W contributions on a per-employee, per-hour basis. The contractor owes the specified rate for every hour the employee is paid, including paid vacation, sick leave, and holidays, capped at 40 hours per week and 2,080 hours per year on each contract.⁵ The word “paid” is doing real work: an employee who works 32 hours and receives 8 hours of holiday pay earns H&W on all 40 hours that week.

Average Cost

Even-numbered wage determinations use an average-cost method. Rather than tracking each employee individually, the contractor must ensure that total H&W contributions across all service employees on the contract average at least the required hourly rate. Contributions can vary by employee based on factors like marital or employment status, and the calculation uses hours actually worked. Paid leave and holidays are excluded.³

Applying fixed-cost rules to an average-cost contract, or the reverse, is one of the fastest routes to noncompliance.

How to Satisfy the Obligation

Contractors have three paths: provide qualifying fringe benefits, pay the cash equivalent, or combine both.

Bona Fide Fringe Benefits

The most common approach is contributing to a legitimate benefit plan. To count, the plan must be a legally enforceable arrangement with a written description communicated to employees, a definite formula for contributions and benefits, and irrevocable contributions paid to a trustee or third party.⁶ The contractor cannot recapture contributions once made. Qualifying benefits include health, dental, and vision insurance; life and disability insurance; and retirement plan contributions such as 401(k) matches or employer-funded IRAs.

Employee contributions do not count. If workers pay toward their own premiums through payroll deductions, none of that money can be credited against the contractor’s H&W obligation.

Cash in Lieu of Benefits

If the cost of provided benefits falls short of the required rate, the contractor must pay the difference to the employee as additional cash. If the required rate is $5.55 per hour and the employer’s benefit contribution works out to $4.00 per hour, the employee is owed $1.55 per hour in cash. Paying the entire H&W amount as cash is permissible but generally more expensive, because the full amount becomes taxable wages.

What Does Not Count

Two categories of spending are excluded regardless of cost. The employer’s share of Social Security, Medicare, unemployment insurance, and workers’ compensation are statutory obligations, not fringe benefits under the SCA.⁷ Costs that primarily benefit the contractor also fall out: relocation expenses, tools, travel, recruitment bonuses, and the cost of furnishing or laundering required uniforms are business expenses.

Administrative costs draw a finer line. The contractor’s own costs for running a plan (payroll processing, recordkeeping, issuing W-2s) are never creditable. Fees charged by a third-party fiduciary that actually administers and delivers benefits can count. Insurance premiums paid to a carrier are the clearest example of a creditable cost, because the carrier uses them to pay claims and administer the plan.⁸

Paid Leave, Holidays, and Overtime

Under fixed-cost wage determinations, H&W is owed on all hours paid, not just hours worked. A paid vacation week generates 40 hours of H&W. An employee who works 32 hours and receives 8 hours of holiday pay generates H&W on all 40. The weekly 40-hour cap still applies, so an employee who works 35 hours and gets 8 hours of holiday pay triggers 40 hours of H&W, not 43.⁵ Under average-cost determinations, only hours worked count; paid leave and holidays are out.

On overtime, the H&W obligation caps at 40 hours per week no matter how many hours the employee works. If someone works 50 hours, H&W is owed on 40. A separate rule helps on the overtime premium itself: contractors may exclude bona fide fringe benefit contributions and qualifying cash-in-lieu payments from the regular rate of pay used to calculate overtime, so the premium is computed on the base wage alone.⁹

Part-Time and Temporary Employees

Part-time and temporary service employees are entitled to H&W on a pro-rated basis. A part-time worker on a regular 20-hour week receives half the fringe benefit amount a full-time worker would. If the wage determination requires $5.55 per hour and the employee works 20 hours, the contractor owes H&W for those 20 hours.¹⁰ The pro-rating extends to vacation and other paid leave: a part-time employee working roughly a quarter of full-time hours earns a quarter of the full-time vacation entitlement.

Failing to provide pro-rated benefits to part-time employees is one of the most common SCA violations DOL finds on audit.⁸

Contracts Under Executive Order 13706

Executive Order 13706 requires contractors on certain federal contracts to provide paid sick leave. When it applies, the DOL publishes a lower H&W rate, currently $5.09 per hour, because the standard rate already accounts for sick leave costs that these contractors are now providing separately.¹

Two rules catch contractors off guard. Paid sick leave required by EO 13706 cannot be credited toward the H&W obligation at all; the two are entirely separate. And contractors who are not obligated to provide EO 13706 sick leave are not entitled to the lower rate. They must use the standard rate.¹¹ A contractor that voluntarily provides more sick leave than EO 13706 requires may be able to credit the excess with DOL approval, but the mandatory portion never is.

Successor Contracts with a Predecessor CBA

When a new contractor takes over a service contract from an incumbent whose employees were covered by a collective bargaining agreement, the successor must pay service employees no less than the wages and fringe benefits they would have received under the predecessor’s CBA. This obligation is self-executing under Section 4(c) of the Act, meaning it applies as a direct statutory requirement whether or not the contracting officer incorporates the predecessor’s rates into a new wage determination.¹²

The successor can satisfy the fringe portion with equivalent benefits, cash, or a mix. Only wages and fringe benefits carry over. Seniority, grievance procedures, and work rules do not. If DOL finds the bargained rates substantially out of line with prevailing local rates, it can issue a new wage determination that supersedes the CBA terms.

Recordkeeping and Employee Notice

Contractors must post Department of Labor Publication WH-1313 at a prominent, accessible location at the worksite before performance begins, and at every worksite for a multi-site contract. The contracting officer furnishes the notice at award along with the applicable wage determination.¹³ The benefit plan itself must also be described in writing to affected employees.

Payroll and benefit records must be kept for three years after the contract work is complete. Required entries include each employee’s name, address, and Social Security number; work classifications; hourly wage rates and fringe benefit amounts provided or cash paid in lieu; total daily and weekly compensation; hours worked; and any deductions.¹⁴ The Wage and Hour Division can inspect at any time within that window.

The most common recordkeeping failure is lumping wages and fringe benefits together on payroll records instead of tracking them separately. When an investigator arrives, the contractor needs to show exactly how much was paid as wages and how much went to H&W for each employee on each contract. Contractors paying cash in lieu should document the calculation showing the gap between the required rate and the benefit cost, along with proof the difference reached the employee.

Enforcement and Penalties

DOL has several tools against contractors who fall short on H&W. Violations can result in withheld contract payments to cover underpayments, contract termination with liability for the government’s resulting costs, legal action to recover unpaid wages and benefits, and debarment from future federal contracts for up to three years.²

Back-pay exposure adds up quickly because the calculation runs across every hour paid for every affected employee across the entire contract period. A $0.50-per-hour shortfall on a 100-employee contract for a year can produce liability exceeding $100,000 before any additional penalties, and the three-year recordkeeping requirement means DOL can look back well after the contract ends.

1
U.S. Department of Labor. 2025 Service Contract Act Health and Welfare Fringe Benefit
2
U.S. Department of Labor. Fact Sheet #67 – The McNamara-O’Hara Service Contract Act (SCA)
3
U.S. Department of Labor. SCA Wage Determinations
4
Acquisition.GOV. 22.404-6 Modifications of Wage Determinations
5
eCFR. 29 CFR 4.175 – Meeting Requirements for Health, Welfare, and/or Pension Benefits
6
eCFR. 29 CFR 4.171 – Bona Fide Fringe Benefits
7
eCFR. 29 CFR Part 4 – Labor Standards for Federal Service Contracts – Section 4.162
8
U.S. Department of Labor Wage and Hour Division. Fact Sheet #67B – Meeting Requirements for Service Contract Act (SCA) Fringe Benefits
9
U.S. Department of Labor. Overtime Pay on SCA Contracts
10
eCFR. 29 CFR 4.176 – Payment of Fringe Benefits to Temporary and Part-Time Employees
11
U.S. Department of Labor. Fact Sheet #84 – Paid Sick Leave for Federal Contractors
12
eCFR. 29 CFR 4.163 – Section 4(c) of the Act
13
Acquisition.GOV. Subpart 22.10 – Service Contract Labor Standards – Section 22.1018
14
eCFR. 29 CFR Part 4 – Labor Standards for Federal Service Contracts – Section 4.6