SERVICE CONTRACT ACT AMENDMENTS, 1972 WEDNESDAY, SEPTEMBER 6, 1972 U.S. SENATE, OF THE COMMITTEE ON LABOR AND PUBLIC WELFARE, Washington, D.C. The subcommittee met, pursuant to notice, at 10:15 a.m., in room 232, New Senate Office Building, Senator Harrison A. Williams, Jr., hairman, presiding. Present: Senators Williams, Randolph, Mondale, Javits, Taft, and Stafford. Committee staff members present: Gerald M. Feder, counsel; Donald E. Elisburg, associate counsel; and Eugene Mittelman, minority counsel. The CHAIRMAN. We will resume our continuing hearings on S. 3827 and H.R. 15376. I believe this will be the concluding session. We have as our first witness Deputy Under Secretary for Procurement, Richard Keegan, Department of the Air Force. Mr. Keegan, I appreciate your being with us. STATEMENT OF RICHARD KEEGAN, DEPUTY UNDER SECRETARY FOR PROCUREMENT, DEPARTMENT OF THE AIR FORCE; ACCOMPANIED BY JAMES MICKLISH, INDUSTRIAL LABOR RELATIONS ADVISER, AND BERT Z. GOODWIN, ASSISTANT GENERAL COUNSEL Mr. KEEGAN. Thank you, sir. Mr. Chairman and members of the subcommittee, I am Richard J. Keegan, the Air Force Deputy Assistant Secretary for Procurement. I have with me today Mr. James Micklish, industrial labor relations adviser and Mr. Bert Z. Goodwin, Assistant General Counsel. I am here today on behalf of the Department of Defense, in response to your invitation to Secretary Laird. We are most grateful for this opportunity to present our views on the pending amendments to the McNamara-O'Hara Service Contract Act of 1965 set forth in S. 3827 and the identical H.R. 15376, which passed the House on August 7, 1972. Contracts subject to the Service Contract Act of 1965 are of significant importance to the Department of Defense. Available information indicates that more than $1 billion per year of our contracts are subject to the provisions of the Service Contract Act. The impact of the amendments now before this subcommittee would be, of course, to drive this figure up even higher, although there appears to be no way to estimate what the increase would be. From our standpoint, as a major contracting agency, the Service Contract Act of 1965 is a fair and equitable approach to protecting service employees under Government contract from excessive pressures. We fully support the Service Contract Act of 1965 as it is presently constituted. It fixes, by reference to an independent standard, a floor below which wages and fringe benefits for service employees are not allowed to fall. This is an approach consistent with the other major examples of fair wage legislation. The exact formula"prevailing rates for such employees in the locality"-puts the Government in precisely the same position as other users of contract services. Wage rates established pursuant to such a formula are neither higher nor lower than the compensation for comparable employment in the surrounding community. By limiting the extent to which the Government can exert its bargaining power, Government contractor service employees are assured of equal treatment with their counterparts in the private sector. In order to assure compliance with the objectives of the Service Contract Act, numerous provisions have been included in our procurement regulations. For example, pursuant to Labor Department guidance, we require contracting officers prior to soliciting offers in procurements subject to the act to seek Department of Labor wage rate determinations for service employees, and to provide that department with all available information to assist it in making such determinations. When such determinations have been made, contracting officers must include them in solicitations and resulting contracts. Furthermore, contracting officers must assist the Department of Labor in enforcing the act against contractors who have violated its provisions. We believe we have made a good faith effort to carry out our responsibilities under the act and the implementing regulations. We recognize that problems have arisen in the administration of the act. However, without attempting to minimize these problems or the subcommittee's legitimate concern for government contractor service employees, we believe that the proposed legislation would have far more serious and disruptive consequences. The combined impact of the amendments would be to legislate into existence a unique upward and continuing escalation of compensation levels, essentially unchecked by normal economic forces, for one group and one group only of employees. The present system of an independent standard would be replaced by a system centered on collective bargaining agreements, the wages and fringe benefits of which would literally be given the force and effect of law, binding alike on the government as well as on successor contractors. The Department of Labor, the agency with primary responsibility for the administration of the act, has gone on record as strongly opposed to the amendments. We believe that Assistant Secretary Grunewald has forcefully presented the numerous administrative and interpretive ambiguities contained in the amendments and the Department of Defense shares the concerns expressed by the Secretary. We would point out that the delays and additional expenses discussed by Assistant Secretary Grunewald will have a direct impact on our performance of our duties in administering the defense contracts of the United States. As viewed by the Department of Defense, the factors weighing most heavily against the amendments are the following: (1) Section 3(a) of the amendments declares it to be "the remedial purpose of this act to protect prevailing labor standards." However, the effect of the amendments will be that government contractors may be by law locked into a position of paying wages for a single category of workers that may be substantially above prevailing local standards, with no recourse to market forces to bring such wages back into line with a fair and independent standard. Of course, these additional costs ultimately will be borne by government contracting agencies. Sections 1 (a) and (b) of the amendments would substitute a twopart standard for the existing single, independent standard governing Department of Labor wage determinations applicable to service employees. However, it is clear upon reflection that the second part of the test-the existence of a collective bargaining agreement—will rapidly tend to become the only relevant standard. Under this test—which is confusing-where apparently any collective bargaining agreement covers any potential service employees, under government contracts minimum wages are to be established by some, all, the most advantageous, the least advantageous, or whatever, such collective bargaining agreement or agreements. In addition, the Secretary of Labor would have discretion to include prospective wage increases provided for in such agreements "as a result of arms-length negotiations." As we read the amendments, inplace service contractors who have not secured renewal of their service contracts will no longer have an economic incentive to bargain in the true sense of the word in regard to wage increases. Any wage or fringe benefit increase granted will ordinarily thereafter be binding on their successors, so that the threat of competition based on independent standards is largely removed. The Department of Defense, which foots the bill, would be locked into a one-way ratchet situation of constantly rising service contract costs, with no resort to independent standards to correct any imbalance. There would be nothing to prevent service employee wages from escalating far beyond the wages of comparable employees in the locality. No other category of government contractor employees would enjoy such a windfall. The mechanisms built into the amendments in an evident effort to alleviate these problems are in our opinion inadequate. For example, we question the effectiveness of the "arms-length negotiations" restriction as applied to prospective wage increases. Give the incidence of lameduck incumbents in the service contract area, we know of no way to enforce such a restriction. In addition, the arms-length negotiation test adopted in the amendments does not cover the case where an incoming contractor must pay the wage and fringe benefit levels agreed to by the predecessor contractor where no prospective wage increases have been granted. Thus, a lame-duck incumbent might agree to raise wages and fringe benefits solely in the hope of forcing default upon his successor-that is, without engaging in real bargaining over the agreed-upon wages and benefits. Under the amendments, the successor contractor has no recourse to challenge those rates. If he refuses to pay the wages and benefits agreed to by his predecessor's employees and refuses to pay the wages and benefits agreed to by the lame-duck incumbent, he risks placing himself in violation 82-582 0-728 of the Service Contract Act. There is no before-the-fact test of the arms-length nature of this pre-existing wage and benefit agreement. In an extreme case, the amendments imply that an incoming service contractor would be required to abide by the pre-established wage and fringe benefit packages, even though he was not a party to the negotiations and intends to bring in many of his own personnel with whom he has a different collective bargaining agreement. This result makes no sense for the incumbent service employees about to be displaced who negotiated the controlling agreement, the incoming contractor, together with his own personnel, or the Government. In sum, the amendments threaten to work a substantial distortion of the market forces normally operating on service employee conpensation levels, to the point that the Department of Defense will be faced with increased costs resulting from an upward spiral of wages applicable to only one category of workers. This is in sharp contrast to the independent standard which was the intent of the original Service Contract Act. (2) The near-term escalatory effects will be ameliorated by existing economic controls. In the long run, however, increases in labor costs, which are the predominant component of most service contracts will, in all probability, result from enactment of these amendments. As prices rise to artificially high levels, freed of the restraints of market mechanisms, alternative methods of satisfying our requirements will have to be considered. What may well occur, in time, is a fundamental shift in the direction of greater reliance on inhouse resources, required by the methodology we use in making these decisions, which is basically cost-oriented. In that event the predictable tendency will be to displace contract services and cause reductions in the very workers the amendments are designed to protect. Contract employees, instead of being protected, may in the end lose jobs, while the Government turns to less flexible means of meeting service requirements. (3) Section 3.(b) of the amendments provides that service contracts may be awarded for up to 5 years subject to annual appropriation acts and if authorized by the Secretary of Labor. This section seems to conflict with present statutory restrictions on DOD procedure. After considering Air Force proposed legislation authorizing service contracts for longer than 1 year, the Congress determined that such authority should be limited to service contracts being procured outside the continental United States, Public Law 90-378, 82 Stat. 289, 10 U.S.C. sec. 2306(g). Thus, all DOD service contracts in the continental United States must today by law be awarded for a period not to exceed 1 year. Under the proposed section, the annual appropriation act provisions would require adjustment before this authority would be available. Moreover, the proposed section is objectionable to the Department of Defense as a contracting agency since it provides that we could procure "for any term of years not exceeding 5" only "if authorized by the Secretary of Labor." This seems to strip contracting agencies of the authority to direct their own procurements. In summary, from the standpoint of Department of Defense procurement managers it is anticipated that the net effect of the proposed legislation would be to: (a) Introduce a new concept of giving wage and fringe benefit provisions of collective bargaining agreements the full force and |