Contractors can see both good news and bad news in the Fair Pay and Safe Workplaces final Federal Acquistion Regulation (FAR) rule and final Department of Labor (DoL) guidance published in the Federal Register yesterday.

First, the good news is that the final rule and final guidance represent some serious and positive efforts at considering and addressing key concerns raised in the comments submitted on this controversial requirement, including the prudent adoption of phase-in periods and the decision to address disclosure of subcontractor labor compliance issues by having subcontractors make disclosures directly to the DoL. The bad news is that the rule still presents a formidable and challenging compliance regime for contractors, as well as for contracting officers, and leaves many questions unanswered.

This 90-page final rule amends the FAR to implement Executive Order (EO) 13673, Fair Pay and Safe Workplaces, signed in 2014 and amended by another EO to modify the handling of subcontractor disclosures and to clarify the requirements for public disclosure of documents. EO 13673’s stated purpose is to improve contractor compliance with labor laws and increase efficiency and cost savings in federal contracting. As indicated by the very large number of comments (over 12,000 to the proposed rule), there is concern the rule creates the potential for blacklisting contractors. The DoL’s issuance of 116-pages of final guidance is to assist federal agencies in implementation of the EO in conjunction with the FAR final rule.

What is Required?

The EO requires that prospective and existing contractors on covered contracts (contracts with an estimated value exceeding $500,000 and subcontracts over this value, other than subcontracts for commercially available off-the-shelf (COTS) items), disclose decisions regarding violations of certain labor laws. The EO also requires that contracting officers, in consultation with agency labor compliance advisors (ALCAs), a new position created by the EO, consider the decisions, (including any mitigating factors and remedial measures), as part of the contracting officer’s decision to award or extend a contract. The final rule makes labor compliance a factor in the determination of contractor responsibility, a prerequisite for the award of a federal contract.

The EO also creates new paycheck transparency protections to ensure workers on covered contracts are given the necessary information each pay period to verify the accuracy of what they are paid. Lastly, the EO limits the use of pre-dispute arbitration clauses in employment agreements on covered federal contracts.

Changes from the Proposed FAR Rule

On May 28, 2015, DoD, GSA, and NASA published a proposed rule to implement EO 13673. Simultaneously, DoL issued proposed guidance to provide assistance with the FAR rule. The proposed rule and proposed guidance raised significant concerns and reminded many of the earlier “blacklisting” rule promulgated at the end of the Clinton administration, which was later revoked. The Steptoe advisory on the 2015 proposed rule and proposed guidance is available here.

Based on the extensive and detailed public comments received in response to the proposed rule and additional deliberations, DoD, GSA, and NASA made a number of changes to the proposed rule. Some of the key modifications include changes in the following areas:

  • Phase-in Periods

The final rule provides a phase-in process for the disclosure of labor law decisions that recognizes contractors and subcontractors are not currently required to track and report labor law decisions. Phase-in also provides time that affected parties may need to familiarize themselves with the rule, set up internal protocols, and create or modify internal databases to track labor law decisions in a more readily retrievable manner.

As a result, when the rule takes effect, the disclosure reporting period will be limited to one year and gradually increase to three years by October 25, 2018. Moreover, no disclosures will be required from prospective prime contractors during the first six months that the rule is effective (from October 25, 2016 through April 24, 2017), except from prospective contractors bidding on solicitations issued on or after October 25, 2016 for contracts valued at $50 million or more. Because of the time typically required for contractors to prepare proposals, the government to evaluate the proposals, and the government to select a prospective contractor for major acquisitions of this size, the Federal Register announcement notes that such entities should have adequate time to perform the more limited disclosure representation set forth in the rule.

Subcontractor disclosure is also being phased in, and subcontractors will not be required to begin making disclosures until one year after the rule becomes effective. More specifically, subcontractors will be required to report labor law decisions in accordance with this rule if they are seeking to perform covered work for prospective contractors under federal contracts awarded pursuant to solicitations issued on or after October 25, 2017.

What may be good news is the statement in the Federal Register announcement that DoL and other enforcement agencies are actively working to upgrade their tracking systems so that the need for contractor disclosures of labor law decisions may be reduced over time. The Federal Register notes that DoD, GSA, NASA, and the Office of Management and Budget (OMB) intend to work closely with DoL, as part of the renewal process required under the Paperwork Reduction Act (PRA), to review progress made on system upgrades and evaluate the feasibility of phasing out disclosure requirements set forth in this rule.

  • Subcontractor Disclosures

The Federal Register announcement noted that to minimize burden and risk to prime contractors and create a manageable process for both prime contractors and subcontractors, the final rule requires subcontractors to disclose details regarding their labor law violations (the decisions, mitigating factors and remedial measures), directly to DoL for review and assessment instead of to the prime contractor. This recommendation was presented by several commenters, including the American Bar Association’s Section of Public Contract Law.

The final rule provides for the subcontractor to make a statement to the prime contractor regarding DoL’s response to the subcontractor’s disclosure. The prime contractor will consider the DoL response in evaluating the integrity and business ethics of subcontractors. Under the final rule, subcontractors are required to provide information about their labor law violations to the prime only when the subcontractor is not in agreement with, or has concerns with, DoL’s assessment.

  • Public Disclosure of Information

The final rule mirrors the proposed rule and requires prospective prime contractors to publicly disclose certain basic information about covered violations such as the law violated, the case identification number, the date of the decision finding a violation, and the name of the body that made the decision. The final rule makes clear that the requirement to provide information on the existence of covered violations applies not only to civil judgments and administrative merits determinations, but also arbitral awards, including awards that are not final or still subject to court review. However, the final rule does not compel public disclosure of additional documents the prospective contractor deems necessary to establish its responsibility, such as documents demonstrating mitigating factors, remedial measures, and other steps taken to achieve compliance with labor laws. The rule states this information will not be made public unless the contractor determines it wants this information made public.

  • Other Equivalent State Laws

Consistent with the proposed rule, the final rule limits the scope of initial implementation to decisions concerning violations of the federal labor laws enumerated in the EO and violations of state plans approved by the Occupational Safety and Health Administration (OSHA). Disclosure and consideration of decisions concerning other equivalent state law violations will not go into effect until DoL and the FAR Council seek public comment on additional guidance and rulemaking. The good news is that, as a result, the number of labor law decisions that contractors and subcontractors will need to disclose for the immediate future may be reduced.

  • Disclosing Entity

One question addressed in the final rule is the definition of disclosing entity. Comments differed on this issue with some supporting a broad definition and others advocating a narrow definition. The Federal Register announcement makes clear the scope of representations and disclosures required by the final rule applies to the legal entity whose name and address is entered on the bid/offer and that will be legally responsible for performance of the contract unless a specific FAR provision (e.g., FAR 52.209–5 Certification Regarding Responsibility Matters) requires additional information. The legal entity that is the offeror does not include a parent corporation, a subsidiary corporation, or other affiliates. A corporate division is part of the corporation.

Significant Compliance Efforts will be Required

One reason for the great interest in this final rule and final guidance is the clear requirement for contractors to engage in significant compliance efforts. As noted in the discussion of the phase-in determination, the government understands that affected parties need to familiarize themselves with the rule, set up internal protocols, and create or modify internal databases to track labor law decisions in a readily retrievable manner.

According to the EO, the “vast majority of federal contractors play by the rules,” and the EO is aimed at corporations that do not treat workers fairly or endanger their health and safety. For those corporations trying to play by the rules, the objective as stated in the DoL guidance is to help contractors come into compliance with federal labor laws, not to deny them contracts. As we noted in our 2015 advisory, the implementation of and adjustment to the rules will be a complex, difficult process with the all-important issue of responsibility – a prerequisite for the award of a covered contract – at stake.