The Complex Proposal Will Have High Implementation Costs and a Potential Impact on the Prime/Subcontractor Relationship

HIGHLIGHTS:

  • The proposed amendments to the Federal Acquisition Regulation (FAR) require disclosures of labor law violations – even if they are not final and are subject to dispute.
  • The disclosure obligations contain a three-year look-back period.
  • The proposal requires contracting officers to make pre-award responsibility determinations based on the disclosed information and has raised fears of implicit blacklisting of contractors.

On May 28, 2015, the government proposed to amend the Federal Acquisition Regulation (FAR) to mandate disclosure by government prime and subcontractors of violations of 15 categories of worker protection laws. The Department of Labor (DOL) published a guidance document simultaneously, which the FAR Amendment incorporates (DOL Guidance). Both documents implement Executive Order 13673, “Fair Pay and Safe Workplaces.”

Three Basic Requirements of the Proposed FAR Provisions

The proposed FAR provisions contain three basic requirements:

  1. Contractors (and subcontractors) will have to report whether, within the preceding three-year period, they were found to have violated certain labor laws through an administrative merits determination, an arbitral award or decision, or a civil judgment, and the contracting agency must make a responsibility determination based on the reports.
  2. Contractors must provide “transparent” paychecks to workers and may be required to provide the information in languages other than English.
  3. Contractors with contracts exceeding $1 million may not impose pre-dispute arbitration agreements for claims under Title VII of the Civil Rights Act.

Comments are due on July 27, 2015. Given the proposal’s complexity, its costs of implementation and its potential impact on the prime/subcontractor relationship, the importance of contractor comments cannot be overstated. The government, in fact, has announced its need for industry comments, urging input on several specific aspects of the rulemaking. The highlighted areas include information on the cost of establishing internal systems to track and report labor law violations and the extent to which information reported by contractors should be publicly available.

The first several sections of this alert explain the requirements under the proposed regulations. The final sections of this alert discuss the comment process, and actions companies can take now to be ready for the regulations once finalized.

What Are the Prime Contractor Reporting Requirements?

The proposed FAR amendments require contracting officers to make a specific determination of responsibility based on each offeror’s history of labor law compliance for all prime awards more than $500,000. This determination begins with disclosure by the offeror of any labor law violations within the three years preceding proposal submission. If an offeror discloses a violation or violations, it must then submit specific information concerning the violation. This information, which contractors must update semi-annually, is to include:

  • the labor law violated
  • the case number, inspection number, charge number, docket number, or other unique identification number
  • the date rendered
  • the name of the court, arbitrator(s), agency, board, or commission rendering the determination or decision
  • a copy of the violation determination (unless otherwise publicly available)
  • any additional information the prospective contractor believes is necessary to demonstrate responsibility, such as remedial measures or mitigating circumstances

Violations Will Be Publicly Available in FAPIIS

Importantly, disclosure of basic information about the labor violations will be made publicly available in the Federal Awardee Performance and Integrity Information System (FAPIIS). The government is also working on development of a single website for reporting labor law violations under the new regulations.

What Labor Laws Are Covered?

The regulatory proposal identifies 15 categories of labor laws for which violations must be reported. They are:

  • Fair Labor Standards Act (FLSA)
  • Occupational Safety and Health Act (OSHA)
  • Migrant and Seasonal Worker Protection Act (MSPA)
  • National Labor Relations Act (NLRA)
  • Davis-Bacon Act (DBA)
  • McNamara-O'Hara Service Contract Act (SCA)
  • Executive Order 11246 (Equal Employment Opportunity)
  • Section 503 of the Rehabilitation Act
  • Vietnam Era Veterans’ Readjustment Assistance Act (VEVRAA)
  • Family and Medical Leave Act (FMLA)
  • Title VII of the Civil Rights Act
  • Americans with Disabilities Act (ADA)
  • Age Discrimination in Employment Act (ADEA)
  • Executive Order 13658 (Minimum Wage for Contractors)
  • “Equivalent” state laws as defined by DOL

However, other than OSHA-approved state plans, implementation of the requirement to report state law violations is being deferred pending issuance of additional guidance from DOL.

What Is a Violation?

The proposed regulations define a labor law violation under one of the 15 enumerated laws as one resulting from an administrative merits determination, an arbitral award or decision, or a civil judgment. Even determinations, decisions or judgments that are subject to appeal or further review must be reported by contractors. More specifically, the proposed FAR amendments state:

  • An administrative merits determination is a notice or finding of an enforcement agency following an investigation. It may be final or it may be subject to appeal or further review.
  • An arbitral award or decision is an arbitrator or arbitral panel determination that a labor law violation has occurred, or that enjoined or restrained a violation, including determinations that are not final or are subject to being confirmed, modified, or vacated by a court and including determinations resulting from private or confidential proceedings.
  • A civil judgment is a judgment or order issued by a federal or state in court determining that a labor law violation occurred or enjoining or restraining a violation, including those that are not final or are subject to appeal. Summary judgment decisions and or injunction decisions are included in this category.

The accompanying DOL Guidance further defines these terms. For example, it sets forth a list of specific agency actions falling within the administrative merits determination category, such as a WH-56, “Summary of Unpaid Wages” form or an OSHA citation. The DOL list is intended to be exhaustive. Therefore, administrative actions that do not fall within the listed actions will not constitute administrative merits determinations that must be reported. Nor are employee complaints made to enforcement agencies such as the DOL Wage and Hour Division. State administrative violations will not need to be reported until DOL issues another guidance document providing additional detail as to what will constitute state administrative violations.

What Must the Contracting Officer Do With This Information?

Based on the reported information, contracting officers will be required to make pre-award responsibility determinations and conduct post-award monitoring. Contracting officers are to be assisted in making these determinations by a new category of acquisition officials called agency labor compliance advisors (ALCAs). Once a contracting officer receives the required information concerning reported labor law violations from a contractor and provides it to the ALCA, the ALCA has three business days (unless the contracting officer designates a different time period) to issue written advice and recommendations. The ALCA is to issue one of the following three recommendations:

  1. The contractor can be found to be responsible.
  2. The contractor can be found to be responsible if it implements or improves an existing labor compliance agreement.
  3. The contractor cannot be found to be responsible and the information should be referred to the industry debarring and suspending official.

In making the responsibility determinations, the regulations require the contracting officer and the ALCA to consider: whether the violations are serious, repeated, willful or pervasive; the number of violations; whether the contractor has initiated its own remedial actions; the need for a labor compliance agreement; and any other information the government deems necessary. The DOL Guidance accompanying the FAR proposal spends considerable time amplifying the definitions of serious, repeated, willful and pervasive violations. It even contains tables that provide examples of each violation category. Some of these terms are already defined in statutes such as OSHA, and the DOL Guidance incorporates these definitions. In addition, illustrative benchmarks from the guidance include the following:

  • A serious violation is one affecting 25 percent of the workforce or involving fines and penalties of at least $5,000 or back wages of at least $10,000.
  • A willful violation may occur when a contractor fails to make sufficient efforts to understand labor laws.
  • Repeated violations are evaluated on a company-wide basis so that if one establishment of a multi-establishment company commits a violation, a similar violation by another establishment may be a repeated violation.
  • Pervasive violations may be judged differently for large and small businesses because a low number of violations may justify a pervasive violation finding for smaller companies.

Upon receipt of the ALCA’s advice, the contracting officer is to make a responsibility determination. If the contracting officer deems it appropriate based on the ALCA report, the contracting officer may refer the matter to the agency debarring and suspending official.

For post-award labor law violations, the contracting officer is to follow the same procedure of referral to the ALCA. At that point, the contracting officer has the option to (i) take no action; (ii) refer the matter to DOL for action, such as implementation of a labor compliance agreement; (iii) decide not to exercise remaining options; (iv) terminate; (v) or notify the agency suspending or debarring official.

What Are the Requirements for Subcontractors?

The proposed regulations create an entirely new dynamic between prime and subcontractors. Prime contractors must evaluate labor violation information when determining subcontractor responsibility in connection with subcontracts (other than those for commercially available off-the-shelf items) with an estimated value exceeding $500,000. This evaluation applies to subcontractors at any tier and the FAR clause must be flowed down to noncommercial subcontracts meeting the threshold. Contractors may decide to conduct the evaluations for all qualifying subcontractors at any tier, or devise and manage a program imposing the requirements on higher-tier subcontractors.

Thus, subcontractors must represent whether they have any labor law violations and, if they do, provide the same information about the violations as prime contractors must supply the contracting officer. Prime contractors must then evaluate their subcontractors’ responsibility using the analysis described above. As part of their analysis, prime contractors are to determine whether their subcontractors’ disclosures warrant further action, including requiring a new or enhanced labor compliance agreement, requiring compliance assistance, or discontinuing the subcontract relationship. The proposed regulations state that prime contractors may seek assistance from DOL in making the requisite subcontractor responsibility determination, but neither the proposed regulations nor the DOL Guidance contains much detail about how this consultation is to work.

In terms of timing, prime contractors are to perform the subcontractor evaluation within 30 days of subcontract award for subcontracts entered into within five days of the prime contract execution, and prior to award for all other subcontracts unless urgent circumstances exist, in which case, the determination must be made within 30 days. Subcontractors must update their disclosures semi-annually. They also will be required to notify their higher-tier contractors within five days of a DOL notice that the subcontractor has violated a labor compliance agreement or is refusing to enter into such an agreement within a reasonable time.

What Are the Other Requirements of the Proposed Regulations?

In addition to the labor violation reporting provisions, the FAR proposal contains paycheck transparency requirements and a prohibition on mandatory arbitration for Title VII disputes.

Transparent Paychecks

Contractor and subcontractors with contracts valued at more than $500,000.00 whose workers are subject to the Davis-Bacon Act, Fair Labor Standards Act, Service Contract Act, or equivalent state laws to be identified by DOL, must provide pay statements that identify the hours worked, overtime hours (if applicable), pay, and any additions or deductions for each pay period. Where a “significant portion” of the workforce is not fluent in English, contractors must provide this information in the language or languages with which the workforce is more familiar. Finally, contractors must advise any independent contractors of their status prior to their beginning work.

Prohibition on Mandatory Arbitration

The final piece of the regulatory proposal is the imposition of a ban on the use of pre-dispute arbitration agreements relating to disputes arising under Title VII of the Civil Rights Act.

What Is the Opportunity to Comment?

There can be no doubt that the Fair Pay and Safe Workplace proposal is one of the most sweeping FAR changes in a long while. If finalized, the regulations will impose significant new compliance and reporting requirements on contractors, new duties on contracting officers, and an entirely new dynamic between prime and subcontractors.

The proposal implicitly acknowledges the broad impact of the new requirements by calling out specific areas for which the government seeks comments. These areas are:

  • steps to reduce the regulatory burden on small businesses
  • the degree to which information about disclosed labor law violations should be made public
  • means by which technology may be used to maximize the efficiency of compliance with the rules and reduce the reporting burden
  • alternatives for handling the subcontractor flow-down requirements
  • the need for and cost of establishing new corporate tracking and record-keeping systems in order to comply with the regulations

Industry comments, however, need not be limited to the specified topics. For large and small businesses alike, implementation of a requirement to track and report labor law violations as broadly defined as in the proposal will involve a substantial investment of time, training and new system requirements. Companies with multiple establishments will need to ensure that there is a common understanding throughout their organization as to what must be reported and that reports are timely made and collected. The proposal contains an estimate of more than $106 million in total contractor costs to comply with the requirements in their first year. However, more information from the affected contractor community about the personnel, system, and other compliance costs involved in setting up the policies and procedures needed to meet the new requirements is necessary in order to produce final regulations that reasonably balance the regulatory purpose with the cost of compliance. Thus, the submission of information to assist in this cost/benefit analysis is very important.

The proposed regulations raise other open questions. For example:

  • In the construction industry, there may be significant amounts of OSHA violations that make tracking them an inordinate expense for a large company. Should there be a threshold amount that would trigger a reporting requirement?
  • Similarly, which states have the most stringent labor laws and active enforcement environments? Will contractors located in those states be disproportionally impacted or disadvantaged by the order’s requirements?
  • Would the reporting requirement have an impact on a company’s policies determining when to contest and when to settle a matter?
  • Would the order’s apparent assignment of a policing role to prime contractors have a detrimental effect on subcontractors who are relatively new? Will primes be reluctant to work with smaller, less experienced subcontractors who might present a bigger risk of inadvertent labor law violations?

Information from the contracting community will be critical to formulation of rules that are workable while still achieving the goals of the Fair Pay and Safe Workplace proposal.

What Should Companies Be Doing Now?

The proposal’s three-year look-back means that labor law violations occurring now or in the near future may need to be reported. Contractors should therefore be evaluating their current practices to be ready. Specifically, this evaluation should include:

  • review of past claims and complaints to identify potential gaps or weaknesses in company policies and training efforts.
  • self-audit of common employment practices that have the potential to lead to liability, such as wage payment and employee classification practices
  • analysis of the interface between the company’s human resources, legal and compliance functions to establish a coordinated understanding of what potential proceedings may be covered by the regulation’s mandates and how those proceedings are to be handled, monitored, and if necessary, reported

Contractors should also be considering their third-party relationships. The three-year look-back counsels revisions to subcontract agreements now. These agreements will need to contain requirements for subcontractor reporting of covered labor violations to the prime contractor, representations about subcontractors’ compliance with the executive order’s mandates, clear statements of the parties’ expectations as to how the prime will handle any violations reported by the subcontractor, and indemnification clauses covering damages flowing from either false or incomplete reports.

There are also logistics to consider. Companies with paycheck systems that are not compliant with the paycheck transparency section of the order will need to change the form and substance of whatever documentation accompanies their payment to employees. Similarly, contractors may need to revise their employment agreements relating to covered government contracts to remove references to pre-award arbitration clauses. In that connection, companies will need to decide to delete any pre-award arbitration requirements in all of their employment contracts, or in the alternative, just in the agreements relating to government contracts. This analysis will necessarily include considering the impact of different employment agreement provisions on similarly situated employees and the relative administrative burdens of managing two sets of employment agreements.

Compliance Will Be Complicated

The labor violation reporting mandate is far-reaching. It establishes new relationships between federal procurement and employment laws, between contracting agencies and DOL, and between contractors and subcontractors. Many of its requirements have no precedent. Compliance will be complicated and will involve establishment of new systems and new procedures for interacting with subcontractors and employees. A contractor who begins preparing for these requirements now will not only mitigate the risk of non-compliance but may also secure a competitive advantage on future procurements. The analysis necessary to such preparation may also be useful in terms of providing meaningful input into the rulemakings that will eventually implement the order’s requirements.