Two recent developments have the potential to change the landscape for contractors providing services to the Government.  Government contractors and subcontractors are required to comply with a host of regulations governing their hiring practices and the wages they pay and benefits they provide to certain categories of employees.  A recent Executive Order and court decision, however, have the potential to alter these requirements drastically.

Labor Regulations Applicable to Government Contractors

There are a host of labor regulations applicable to companies providing services to the Government.  For example, the Service Contract Act (“SCA”), 41 U.S.C. chapter 67, is applicable to certain Federal contracts and subcontracts that utilize service employees to furnish services in the United States.  For contracts valued at over $2,500, the SCA requires contractors to pay these employees no less than the wage rates and fringe benefits customary in their locality, as determined by the Secretary of Labor.  Fringe benefits include “medical or hospital care, pensions on retirement or death, compensation for injuries or illness resulting from occupational activity,” as well as unemployment benefits, life insurance, and vacation and holiday pay.

In addition to the SCA, the Federal Acquisition Regulation (“FAR”) includes several clauses that regulate the hiring practices of government contractors, the most important of which is FAR 52.222-26, Equal Opportunity.  This clause prohibits contractors from discriminating based on race, color, religion, sex, or national origin, during both hiring and contract performance, and requires contractors to take affirmative action to limit discrimination in all hiring and advancement decisions by implementing a written Affirmative Action plan.[1]  Contractors are required to submit forms to the Department of Labor and to permit audit access by the Department of Labor’s Office of Federal Contract Compliance Programs.  Government contractors, especially commercial companies and small businesses, often find compliance with the reporting requirements of this clause to be burdensome and costly.

Fair Pay and Safe Workplaces Executive Order

On July 31, 2014, President Obama signed Executive Order 13673, Fair Pay and Safe Workplaces (the “EO”).  The EO creates various new obligations for contractors doing business with the Federal Government.  For government contractors, the most notable provision requires contractors and subcontractors to self-report any findings of violations of certain labor laws, including, for example, the SCA, Federal statutes relating to equal opportunity and affirmative action, and similar state law requirements.[2]  For procurement contracts over $500,000, contractors must represent “to the best of [their] knowledge and belief” whether any administrative merits determination, arbitral award or decision, or civil judgment has been issued finding them noncompliant with these laws.  The representation must be made prior to the award as well as every six months after performance begins.  This representation will be factored into a Contracting Officer’s determination on “whether an offeror is a responsible source that has a satisfactory record of integrity and business ethics,” and may affect the ultimate award decision.[3]

Additionally, prime contractors must include provisions requiring similar disclosures in any subcontract valued over $500,000 (except those for commercially available off-the-shelf items), and must consider the information disclosed in determining whether the subcontractor is a responsible source.  The disclosure of violations committed by either the contractor or subcontractor may result in Government action, including “agreements requiring appropriate remedial measures, compliance assistance, and resolving issues to avoid further violations, as well as remedies such as decisions not to exercise an option on a contract, contract termination, or referral to the agency suspending and debarring official.”

The Government has taken the position that the EO is primarily meant to avoid awarding contracts to contractors who make serious, repeated, willful, and pervasive violations of labor laws, and that “in most cases a single violation of law may not necessarily give rise to a determination of lack of responsibility.”  Nevertheless, contractors should think carefully about when and how to disclose findings of violations, for both themselves and their subcontractors, irrespective of whether the contractor thinks those findings were meritorious.  For commercial companies and small businesses, the EO presents yet another compliance obstacle that increases the cost of doing business with the Federal Government.

The EO includes two other important provisions: (1) it requires, for contracts and subcontracts valued over $1 million, any “decision to arbitrate claims arising under title VII of the Civil Rights Act of 1964 or any tort related to or arising out of sexual assault or harassment may only be made with the voluntary consent of employees or independent contractors after such disputes arise,” which serves as an expansion of the “Franken Amendment,” further limiting contractors’ ability to enforce pre-dispute arbitration agreements relating to certain employee claims; and (2)  the EO calls for the development of processes that enable better communication between the Labor Compliance Advisors, the Department of Labor, and contractors themselves, including regular interagency meetings of Labor Compliance Advisors as well as the creation of a single website for contractors to use for all Federal contract reporting requirements.

D.C. Circuit’s Opinion in Braddock

Although it seems like a basic term, exactly who constitutes a “subcontractor” and under what circumstances labor clauses are applicable to subcontractors has been a hotly contested issue for years.  Many companies providing services to government prime contractors vehemently resist the inclusion of any labor flowdown clauses because, from their perspective, they have entered into a standard commercial contract with the prime contractor and therefore should not be burdened with the Government’s unique and costly terms and conditions.

On March 30, 2013, the U.S. District Court for the District of Columbia finally provided some guidance on this issue in UPMC Braddock v. Harris.  There, the district court took an expansive definition of “subcontractor,” defining the term as any entity that assumes any portion of the contractor’s obligations to the Federal Government.  The Court further held that, although the labor specific clauses (including Equal Employment) were not expressly flowed down in the subcontract, they were to be read into the subcontract as a matter of law.  This decision stood as a radically expansive interpretation of the Christian Doctrine, which, for 50 years, had applied only to prime contractors doing business directly with the Federal Government.

Although this decision was not a good one for government subcontractors, it did provide clear guidance that these labor clauses would be read into subcontracts as a matter of law, regardless of whether they were flowed down by the prime contractor.  Services subcontractors were now on notice that they would be held responsible for complying with the Government’s socio-economic labor terms and conditions, regardless of whether they were included in their actual subcontract.

On November 14, 2014, the landscape changed yet again, as the D.C. Circuit Court of Appeals vacated the district court’s decision.  The court of appeals side-stepped the substantive issues of the case, holding that it was no longer ripe for a decision due to a recently-enacted enforcement moratorium against TRICARE providers (the subcontractors in the district court case).  This news is a double-edged sword for services contractors.

On the positive side, there is no longer a court decision on the books holding that these burdensome labor clauses will be read into subcontracts as a matter of law, thereby eliminating the dangerous precedent of applying the Christian Doctrine at the subcontract level.

The flip side of the coin, however, is that subcontractors are now on notice that the Department of Labor believes that these clauses should apply, regardless of their inclusion in the actual subcontract, and that down the road it may attempt to hold subcontractors accountable for non-compliance, even if the relevant clauses are not flowed down.  Subcontractors, especially commercial companies and small businesses, are back in compliance purgatory, not knowing whether they have to comply, but understanding that the Department of Labor intends to hold them responsible whenever possible.

Path Forward

The EO and court decision have undoubtedly changed the landscape for government contractors, and the applicable labor regulations must be analyzed on a case-by-case basis, especially considering the costs associated with complying with these regulations.

Subcontractors, especially commercial item contractors and small businesses, are back in the dark as to exactly which labor regulations apply.  Complying with all of the socio-economic clauses is costly and burdensome, especially for those companies that do a small amount of business with the Federal Government, yet it remains the most risk-averse course of action, even with the district court’s decision off the books.

In the near future, contractors must develop a plan to track and disclose any findings of labor violations prior to contract award, including those of any subcontractors.  Although the EO is not as harsh as the Mandatory Disclosure Rule, they strike a similar tone, and both have the potential to preclude contractors from receiving Government business.  This risk increases if the FAR Council fails to provide a clear standard of what constitutes “serious, willful, repeated or pervasive violations” in the yet-to-be-drafted implementing regulations, thereby allowing Contracting Officers to make arbitrary and inconsistent determinations.

As always, Government contractors, including subcontractors, must stay vigilant with respect to their compliance obligations, lest they wish to fall victim to the ultimate (not totally unbelievable) parade of horribles: being precluded from a contract award after disclosing a violation of a clause that was not included in the subcontract.

This post first appeared in the Government Contracts Blog.