Executive Summary: On the day before the effective date of the Regulations and Guidance implementing the Fair Pay and Safe Workplaces Executive Order (collectively the “Rules”), a federal trial court in Texas has temporarily halted implementation of the “blacklisting” requirements and the prohibition of pre-dispute arbitration agreements for Title VII claims and torts based on sexual harassment or assault imposed on certain government contractors and subcontractors by the EO. Pursuant to the Rules, the aforementioned requirements were scheduled to take effect today (October 25, 2016). Now, the requirements will not be implemented until a court rules on the merits of the legal challenges to the EO and the Rules. However, the court refused to enjoin implementation of the government’s paycheck transparency requirements, which require contractors to provide certain information on workers’ paychecks, including whether they are classified as independent contractors. The paycheck transparency requirements will take effect January 1, 2017.

Background

As discussed in our prior Alert, on July 31, 2014, President Obama signed the Fair Pay and Safe Workplaces Executive Order, which requires federal contractors and subcontractors bidding on contracts/subcontracts over $500,000 to disclose any violations that they have incurred under 14 different federal workplace laws (and their state-law equivalents) in the three years preceding their bid. On August 25, 2016, the Rules were published, providing guidance on the implementation of the EO. As noted above, prime contractors were required to comply with the requirements starting today while subcontractors were to comply starting on October 25, 2017.

Subsequently, industry groups sued in federal court, challenging the EO and the Rules on several different grounds. They also sought injunctive relief prohibiting the Rules from taking effect until their challenges are resolved by the federal court. On October 24, 2016, the federal district court for the Eastern District of Texas granted in part the injunctive relief sought. See Associated Builders and Contractors of Southeast Texas v. Rung, Civ. Act. Number 1:16-CV-425 (Oct. 24, 2016).

Federal Court’s Factual Determinations

In its decision enjoining the disclosure requirements, the court took issue with several aspects of the Rules. The court noted that they require disclosure of “violations,” including “non-final administrative merits determinations, regardless of the severity of the alleged violation, or whether a government contract was involved, and without regard to whether a hearing has been held or an enforceable decision issued.” Additionally, the court pointed out that the FAR Rule requires contracting officers (COs) to determine whether these “violations,” which include federal agency complaints and citations that have not been adjudicated, render the bidders “non-responsible” based on a lack of “integrity and business ethics.” Although the federal agencies are to designate agency labor compliance advisors (ALCAs) to assist the COs in making these determinations, the court questioned the qualifications of the COs and the ALCAs and noted that the DOL office that was to provide training to COs and ALCAs was never funded.

Additionally, the court noted that the DOL’s definitions of the terms “serious,” “repeated,” “willful,” and “pervasive” conflict with the criteria of the statutes to which they refer.

Injunctive Relief

Based on its factual determinations, the court held that injunctive relief was appropriate because the industry groups had demonstrated (1) a substantial likelihood of success on the merits of their case; (2) a substantial threat of irreparable injury; (3) that the threatened injury outweighed any damage that the injunctive order might cause the defendants; and (4) that the order will not be adverse to the public interest.

Likelihood of Success on the Merits

The Government Exceeded Its Authority and Its Actions are Preempted by Federal Law

First, the court held that the public disclosure and disqualification requirements imposed by the EO and the Rules are not authorized by the federal Procurement Act, the statute upon which the government relied in taking these actions. The court noted that over the course of decades, neither Congress nor the FAR Counsel or DOL have deemed it necessary or appropriate for government COs to make responsibility determinations based on alleged violations of private sector labor and employment laws. Further, the court stated that for each of these statutes, Congress has set out in detail what agency or court is empowered to find a violation, how such a finding would be determined, and what the penalty or remedy would be. “None of these laws provides for debarment or disqualification of contractors for violations of their provisions; none of them provides for such determinations to be made by unqualified, agency contracting officers (or ALCAs); and certainly none of these laws provides for any such action to occur based on non-final, unadjudicated, ‘administrative merits determinations.’”

The court noted that the EO and Rules explicitly conflict with labor laws that already specify debarment procedures for government contractors who violate requirements specifically directed at government contracting. “It defies reason that Congress gave explicit instructions to suspend or debar government contractors who violate these government-specific labor laws only after a full hearing and final decision, but intended to leave the door open to government agencies to disqualify contractors from individual contract awards without any of these procedural protections.”

Additionally, the court held that the EO and Rules conflict with the laws they purport to invoke by permitting “disqualification based solely upon ‘administrative merits determinations’ that are nothing more than allegations of fault asserted by agency employees and do not constitute final agency findings of any violation at all.” The court noted that thousands of such complaints, cause findings, wage allegations and citations are issued each year, many of which are dismissed or significantly reduced after being contested. The court found no statutory reason to treat these “administrative merits determinations” as “final and binding” while the contractors are still contesting liability or when the allegations are settled without admission of fault.

Violations of Contractors’ First Amendment Rights

The court held that the EO and Rules violate contractors’ First Amendment Rights by forcing them to speak on matters “of considerable controversy adversely affecting their public reputations.” The court held that the government’s disclosure requirements essentially force contractors to “condemn themselves” by stating they have violated one or more labor laws, even when such violations are only alleged. Thus, the disclosure requirements are not “narrowly tailored” to meet the government’s stated interest of disclosing matters demonstrating a lack of integrity and business ethics and therefore cannot withstand First Amendment scrutiny. The court also noted that the government has failed to support the basic premise of the EO – that “the public disclosure of non-adjudicated determinations of labor law violations on private projects correlates in any way to poor performance on government contracts.”

The Disclosure Requirements Likely Violate Contractors’ Due Process Rights

The court held that the disclosure requirements likely violate contractors’ due process rights “by compelling them to report and defend against non-final agency allegations of labor law violations without being entitled to a hearing at which to contest such allegations.”

The Government’s Actions are Arbitrary and Capricious

The court held that the government’s disclosure requirements are arbitrary and capricious, noting that the complexity of the DOL Guidance alone “is sufficient reason to believe that this new system is likely to lead to delays and arbitrary and inconsistent results in the assessment of contractor responsibility, to the detriment of the procurement system.” The court also noted that the government’s estimated cost of implementing the requirements, more than $470,000,000 in the first year alone, is not justified by the benefits since the government was unable to “quantify any benefits derived from the sweeping changes imposed by the Executive Order, FAR Rule, and DOL Guidance.”

The Prohibition on Pre-Dispute Arbitration Agreements Violates Federal Law

The court further found that the EO and Rules violate the Federal Arbitration Act (FAA). The court reiterated U.S. Supreme Court decisions holding that the FAA establishes “a liberal federal policy favoring arbitration agreements” and that it “requires courts to enforce agreements to arbitrate according to their terms.” The court noted that the prohibition on pre-dispute arbitration agreements will be enforced not only on government contracts but also with regard to employees performing private work, with no apparent nexus to the government’s economy and efficiency. The court held that the Executive Branch does not possess the authority to modify a federal statute, such as the FAA, by overriding that statute’s policy requiring enforcement of arbitration agreements.

Injunctive Relief Appropriate

In light of these determinations, the court held that the groups challenging the rule would suffer irreparable harm to their First Amendment rights to be free from compelled speech and their Fifth Amendment due process rights. Since injunctive relief would simply preserve the status quo, the court found no evidence that the government or the public would be harmed by granting the injunction. The court further held that granting injunctive relief would serve the public interest by stopping federal agencies from acting in a manner contrary to the law and by ensuring the delivery of economical and efficient services from government contractors to federal agencies.

Paycheck Transparency Requirement Not Enjoined

The only portion of the Rules to survive the court’s ruling are the paycheck transparency obligations. These provisions require all covered contractors to inform their employees in each paycheck of the number of hours worked, overtime calculations (for non-exempt employees), rates of pay, gross pay, additions or deductions from pay, and to inform employees in writing whether they have been classified as independent contractors. The court held that the plaintiffs failed to show that they would suffer irreparable harm if the requirements are not enjoined; thus it refused to enjoin implementation of this requirement.

Government contractors can – for the moment – breathe a sigh of relief, as the EO and Rules will not go into effect until the preliminary injunction is lifted or reversed. We will continue to monitor this important litigation and report any developments.