(a) The Act, in section 3(a), provides that any violations of any of
the contract stipulations required by sections 2(a)(1), 2(a)(2), or 2(b)
of the Act, shall render the party responsible liable for the amount of
any deductions, rebates, refunds, or underpayments (which includes non-
payment) of compensation due to any employee engaged in the performance
of the contract. So much of the accrued payments due either on
the contract or on any other contract (whether subject to the Service
Contract Act or not) between the same contractor and the Government may
be withheld in a deposit fund as is necessary to pay the employees. In
the case of requirements-type contracts, it is the contracting agency,
and not the using agencies, which has the responsibility for complying
with a withholding request by the Secretary or authorized
representative. The Act further provides that on order of the Secretary
(or authorized representatives), any compensation which the head of the
Federal agency or the Secretary has found to be due shall be paid
directly to the underpaid employees from any accrued payments withheld.
In order to effectuate the efficient administration of this provision of
the Act, such withheld funds shall be transferred to the Department of
Labor for disbursement to the underpaid employees on order of the
Secretary or his or her authorized representatives, an Administrative
Law Judge, or the Administrative Review Board, and are not paid directly
to such employees by the contracting agency without the express prior
consent of the Department of Labor. (See Decision of the Comptroller
General, B-170784, February 17, 1971.) It is mandatory for a contracting
officer to adhere to a request from the Department of Labor to withhold
funds where such funds are available. (See Decision of the Comptroller
General, B-109257, October 14, 1952, arising under the Walsh-Healey
Act.) Contract funds which are or may become due a contractor under any
contract with the United States may be withheld prior to the institution
of administrative proceedings by the Secretary. (McCasland v. U.S.
Postal Service, 82 CCH Labor Cases para. 33,607 (N.D. N.Y. 1977); G & H
Machinery Co. v. Donovan, 96 CCH Labor Cases para.34,354 (S.D. Ill.
1982).)
(b) Priority to withheld funds. The Comptroller General has afforded
employee wage claims priority over an Internal Revenue Service levy for
unpaid taxes. (See Decisions of the Comptroller General, B-170784,
February 17, 1971; B-189137, August 1, 1977; 56 Comp. Gen. 499 (1977);
55 Comp. Gen. 744 (1976), arising under the Davis-Bacon Act; B-178198,
August 30, 1973; B-161460, May 25, 1967.)
(1) As the Comptroller General has stated, ``[t]he legislative
histories of these labor statutes [Service Contract Act and Contract
Work Hours and Safety Standards Act, 41 U.S.C. 327, et seq.] disclose a
progressive tendency to extend a more liberal interpretation and
construction in successive enactments with regard to worker's benefits,
recovery and repayment of wage underpayments. Further, as remedial
legislation, it is axiomatic that they are to be liberally construed''.
(Decision of the Comptroller General, B-170784, February 17, 1971.)
(2) Since section 3(a) of the Act provides that accrued contract
funds withheld to pay employees wages must be held in a deposit fund, it
is the position of the Department of Labor that monies so held may not
be used or set aside for agency reprocurement costs. To hold otherwise
would be inequitable and contrary to public policy, since the employees
have performed work from which the Government has received the benefit
(see National Surety Corporation v. U.S., 132 Ct. Cl. 724, 728, 135 F.
Supp. 381 (1955), cert. denied, 350 U.S. 902), and to give contracting
agency reprocurement claims priority would be to require employees to
pay for the breach of contract between the employer and the agency. The
Comptroller General has sanctioned priority being afforded wage
underpayments over the reprocurement costs of the contracting agency
following a contractor's default or termination for cause. Decision of
the Comptroller General, B-167000, June 26, 1969; B-178198, August 30,
1973; and B-189137, August 1, 1977.
(3) Wage claims have priority over reprocurement costs and tax liens
without regard to when the competing claims were raised. See Decisions
of the Comptroller General, B-161460, May 25, 1967; B-189137, August 1,
1977.
(4) Wages due workers underpaid on the contract have priority over
any assignee of the contractor, including assignments made under the
Assignment of Claims Act, 31 U.S.C. 203, 41 U.S.C. 15, to funds withheld
under the contract, since an assignee can acquire no greater rights to
withheld funds than the assignor has in the absence of an
assignment. See Modern Industrial Bank v. U.S., 101 Ct. Cl. 808 (1944);
Royal Indemnity Co. v. United States, 178 Ct. Cl. 46, 371 F. 2d 462
(1967), cert. denied, 389 U.S. 833; Newark Insurance Co. v. U.S., 149
Ct. Cl. 170, 181 F. Supp. 246 (1960); Henningsen v. United States
Fidelity and Guaranty Company, 208 U.S. 404 (1908). Where employees have
been underpaid, the assignor has no right to assign funds since the
assignor has no property rights to amounts withheld from the contract to
cover underpayments of workers which constitute a violation of the law
and the terms, conditions, and obligations under the contract. (Decision
of the Comptroller General, B-164881, August 14, 1968; B-178198, August
30, 1973; 56 Comp. Gen. 499 (1977); 55 Comp. Gen. 744 (1976); The
National City Bank of Evansville v. United States, 143 Ct. Cl. 154, 163
F. Supp. 846 (1958); National Surety Corporation v. United States, 132
Ct. Cl. 724, 135 F. Supp. 381 (1955), cert. denied, 350 U.S. 902.)
(5) The Comptroller General, recognizing that unpaid laborers have
an equitable right to be paid from contract retainages, has also held
that wage underpayments under the Act have priority over any claim by
the trustee in bankruptcy. 56 Comp. Gen. 499 (1977), citing Pearlman v.
Reliance Insurance Company, 371 U.S. 132 (1962); Hadden v. United
States, 132 Ct. Cl. 529 (1955), in which the courts gave priority to
sureties who had paid unpaid laborers over the trustee in bankruptcy.
(c) Section 5(b) of the Act provides that if the accrued payments
withheld under the terms of the contract are insufficient to reimburse
all service employees with respect to whom there has been a failure to
pay the compensation required pursuant to the Act, the United States may
bring action against the contractor, subcontractor, or any sureties in
any court of competent jurisdiction to recover the remaining amount of
underpayments. The Service Contract Act is not subject to the statute of
limitations in the Portal to Portal Act, 29 U.S.C. 255, and contains no
prescribed period within which such an action must be instituted; it has
therefore been held that the general period of six years prescribed by
28 U.S.C. 2415 applies to such actions, United States of America v.
Deluxe Cleaners and Laundry, Inc., 511 F. 2d 929 (C.A. 4, 1975). Any
sums thus recovered by the United States shall be held in the deposit
fund and shall be paid, on the order of the Secretary, directly to the
underpaid employees. Any sum not paid to an employee because of
inability to do so within 3 years shall be covered into the Treasury of
the United States as miscellaneous receipts.
(d) Releases or waivers executed by employees for unpaid wages and
fringe benefits due them are without legal effect. As stated by the
Supreme Court in Brooklyn Savings Bank v. O'Neil, 324 U.S. 697, 704,
(1945), arising under the Fair Labor Standards Act:
``Where a private right is granted in the public interest to
effectuate a legislative policy, waiver of a right so charged or colored
with the public interest will not be allowed where it would thwart the
legislative policy which it was designed to effectuate.''
See also Schulte, Inc. v. Gangi, 328 U.S. 108 (1946); United States v.
Morley Construction Company, 98 F. 2d 781 (C.A. 2, 1938), cert. denied,
305 U.S. 651.
Further, as noted above, monies not paid to employees to whom they are
due because of violation are covered into the U.S. Treasury as provided
by section 5(b) of the Act.
(e)(1) The term party responsible for violations in section 3(a) of
the Act is the same term as contained in the Walsh-Healey Public
Contracts Act, and therefore, the same principles are applied under both
Acts. An officer of a corporation who actively directs and supervises
the contract performance, including employment policies and practices
and the work of the employees working on the contract, is a party
responsible and liable for the violations, individually and jointly with
the company (S & G Coal Sales, Inc., Decision of the Hearing Examiner,
PC-946, January 21, 1965, affirmed by the Administrator June 8, 1965;
Tennessee Processing Co., Inc., Decision of the Hearing Examiner, PC-
790, September 28, 1965).
(2) The failure to perform a statutory public duty under the Service
Contract Act is not only a corporate liability but also the personal
liability of each officer charged by reason of his or her corporate
office while performing that
duty. United States v. Sancolmar Industries, Inc., 347 F. Supp. 404, 408
(E.D. N.Y. 1972). Accordingly, it has been held by administrative
decisions and by the courts that the term party responsible, as used in
section 3(a) of the Act, imposes personal liability for violations of
any of the contract stipulations required by sections 2(a)(1) and (2)
and 2(b) of the Act on corporate officers who control, or are
responsible for control of, the corporate entity, as they, individually,
have an obligation to assure compliance with the requirements of the
Act, the regulations, and the contracts. See, for example, Waite, Inc.,
Decision of the ALJ, SCA 530-566, October 19, 1976, Spruce-Up Corp.,
Decision of the Administrator SCA 368-370, August 19, 1976, Ventilation
and Cleaning Engineers, Inc., Decision of the ALJ, SCA 176, August 23,
1973, Assistant Secretary, May 17, 1974, Secretary, September 27, 1974;
Fred Van Elk, Decision of the ALJ, SCA 254-58, May 28, 1974,
Administrator, November 25, 1974; Murcole, Inc., Decision of the ALJ,
SCA 195-198, April 11, 1974; Emile J. Bouchet, Decision of the ALJ, SCA
38, February 24, 1970; Darwyn L. Grover, Decision of the ALJ, SCA 485,
August 15, 1976; United States v. Islip Machine Works, Inc., 179 F.
Supp. 585 (E.D. N.Y. 1959); United States v. Sancolmar Industries, Inc.,
347 F. Supp. 404 (E.D. N.Y. 1972).
(3) In essence, individual liability attaches to the corporate
official who is responsible for, and therefore causes or permits, the
violation of the contract stipulations required by the Act, i.e.,
corporate officers who control the day-to-day operations and management
policy are personally liable for underpayments because they cause or
permit violations of the Act.
(4) It has also been held that the personal responsibility and
liability of individuals for violations of the Act is not limited to the
officers of a contracting firm or to signatories to the Government
contract who are bound by and accept responsibility for compliance with
the Act and imposition of its sanctions set forth in the contract
clauses in Sec. 4.6, but includes all persons, irrespective of
proprietary interest, who exercise control, supervision, or management
over the performance of the contract, including the labor policy or
employment conditions regarding the employees engaged in contract
performance, and who, by action or inaction, cause or permit a contract
to be breached. U.S. v. Islip Machine Works, Inc., 179 F. Supp. 585
(E.D. N.Y. 1959); U.S. v. Sancolmar Industries, Inc., 347 F. Supp. 404
(E.D. N.Y. 1972); Oscar Hestrom Corp., Decision of the Administrator,
PC-257, May 7, 1946, affirmed, U.S. v. Hedstrom, 8 Wage Hour Cases 302
(N.D. Ill. 1948); Craddock-Terry Shoe Corp., Decision of the
Administrator, PC-330, October 3, 1947; Reynolds Research Corp.,
Decision of the Administrator, PC-381, October 24, 1951; Etowah Garment
Co., Inc., Decision of the Hearing Examiner, PC-632, August 9, 1957,
Decision of the Administrator, April 29, 1958; Cardinal Fuel and Supply
Co., Decision of the Hearing Examiner, PC-890, June 17, 1963.
(5) Reliance on advice from contracting agency officials (or
Department of Labor officials without the authority to issue rulings
under the Act) is not a defense against a contractor's liability for
back wages under the Act. Standard Fabrication Ltd., Decision of the
Secretary, PC-297, August 3, 1948; Airport Machining Corp., Decision of
the ALJ, PC-1177, June 15, 1973; James D. West, Decision of the ALJ, SCA
397-398, November 17, 1975; Metropolitan Rehabilitation Corp., WAB Case
No. 78-25, August 2, 1979; Fry Brothers Corp., WAB Case No. 76-6, June
14, 1977.
(f) The procedures for a contractor or subcontractor to dispute
findings regarding violations of the Act, including back wage liability
or the disposition of funds withheld by the agency for such liability,
are contained in parts 6 and 8 of this title. Appeals in such matters
have not been delegated to the contracting agencies and such matters
cannot be appealed under the disputes clause in the contractor's
contract.
(g) While the Act provides that action may be brought against a
surety to recover underpayments of compensation, there is no statutory
provision requiring that contractors furnish either payment or
performance bonds before an award can be made. The courts have held,
however, that when such a bond has been given, including one denominated
as a performance rather than payment bond, and such a
bond guarantees that the principal shall fulfill ``all the undertakings,
covenants, terms, conditions, and agreements'' of the contract, or
similar words to the same effect, the surety-guarantor is jointly liable
for underpayments by the contractor of the wages and fringe benefits
required by the Act up to the amount of the bond. U.S. v. Powers
Building Maintenance Co., 366 F. Supp. 819 (W.D. Okla. 1972); U.S. v.
Gillespie, 72 CCH Labor Cases para. 33,986 (C.D. Cal. 1973) U.S. v.
Glens Falls Insurance Co., 279 F. Supp. 236 (E.D. Tenn. 1967); United
States v. Hudgins-Dize Co., 83 F. Supp. 593 (E.D. Va. 1949); U.S. v.
Continental Casualty Company, 85 F. Supp. 573 (E.D. Pa. 1949), affirmed
per curiam, 182 F.2d 941 (3rd Cir. 1950).
