Proposal makes agency allegations of employment law violations reportable events that could result in denial of federal contracts or termination of existing contracts.

Executive Order 13673 (the Order), signed by US President Barack Obama in July 2014, imposed three new requirements addressing the labor and employment practices of federal contractors and subcontractors: (1) an obligation to report employment law violations, which would be used by contracting officers to determine whether to award a new federal contract or terminate an existing contract; (2) a requirement to provide notices to workers about their Fair Labor Standards Act (FLSA) exemption or independent contractor status; and (3) a requirement that federal contractors agree that claims arising under Title VII or any tort related to or arising out of sexual assault or harassment by their employees and independent contractors will not be arbitrated without the voluntary postdispute consent of an employee or independent contractor, with certain limited exceptions.

E.O. 13673 directed the Federal Acquisition Regulatory Council (FAR Council)—which consists of the Administrator for Federal Procurement Policy, the Secretary of Defense, the Administrator of National Aeronautics and Space, and the Administrator of General Services—to publish implementing regulations through the Federal Acquisition Regulation (FAR) system. The Order also directed the Department of Labor (DOL) to publish guidelines that address transactions deemed to be reportable employment law violations, as well as how contracting officials should use such reported information to determine whether to award a federal contract (or terminate an existing contract). The Order, while effective upon issuance, expressly applies to all solicitations for contracts only as set forth in any final rule issued by the FAR Council.

On May 28, 2015, the FAR Council published a Notice of Proposed Rulemaking implementing E.O 13673.[1] On the same day, the DOL published proposed guidance.[2] The proposed rule and guidelines contain many potentially alarming provisions for employers seeking federal contracts, some of which appear to violate contractors’ due process and Fourth Amendment rights. If adopted, the proposals would impose administrative burdens on contractors, increase the complexity of obtaining and keeping federal contracts, and likely lead to an increase in bid protests and litigation.

The proposals offer employers a 60-day period to submit comments in opposition to these provisions. We strongly encourage employers that have or may seek federal contracts to take advantage of this comment opportunity. If you are interested in sponsoring comments, please contact us in the near future; the period for filing comments only runs through July 27, 2015.

Proposed Implementation of the Employment Violation Reporting Obligations

E.O. 13673 requires employers who are prospective awardees of federal contracts to report certain labor law violations that occurred within the prior three years. Awardees of federal contracts must submit reports of labor law violations every six months during the performance of the contract. The reportable violations include “administrative merits determinations,” “arbitral awards or decisions,” and “civil judgments” involving claims or enforcement actions under many federal employment laws.[3]

The proposed guidelines define “administrative merits determinations” by reference to the specific types of determinations made by a federal enforcement agency, such as the Wage and Hour Division (WHD), Office of Federal Contract Compliance Programs (OFCCP), Occupational Safety and Health Administration (OSHA), Equal Employment Opportunity Commission (EEOC), and National Labor Relations Board (NLRB). Reportable determinations also include, broadly, complaints that a federal enforcement agency files and administrative orders issued through agency adjudication. However, complaints that private parties file with enforcement agencies or in court alleging employment law violations would not trigger a reporting obligation.

Under the proposed guidance, “administrative merits determinations are not limited to notices and findings issued following adversarial or adjudicative proceedings such as a hearing, nor are they limited to notices and findings that are final and unappealable.” Thus, contractors will be required to report mere agency allegations, such as OSHA citations, WHD investigation finding letters, OFCCP show cause notices, EEOC reasonable cause determinations, and NLRB complaints. These disclosures are required even if a contractor is challenging an allegation through formal proceedings. If, at the time of the required reporting, the enforcement agency allegation is withdrawn or reversed in its entirety through additional proceedings in the matter, then there is no reporting obligation.

The DOL will publish additional proposed guidelines that address administrative determinations that state enforcement agencies make under laws that DOL deems to be equivalent to the above-referenced federal laws.

The proposed DOL guidelines define “civil judgments” as any judgment or order entered by any federal or state court in which the court determined that an employer violated any provision of the above-referenced employment laws or enjoined the employer from committing a violation. Civil judgments include orders or judgments that are not final and are appealable, and the employer must report such judgments even if an appeal is pending. Consent judgments are subject to the reporting obligation if they contain a determination that an employment violation occurred or enjoin the employer from violating any provision of the employment laws. However, a private lawsuit that a court dismissed without a judgment would not be a reportable event.

The proposed DOL guidelines define “arbitral awards and decisions” as any award or order by an arbitrator or arbitral panel in which the arbitrator or panel determined that an employer violated any provision of the above-referenced employment laws or enjoined the employer from committing a violation. Arbitral awards include awards and orders that are not final and are appealable, and the employer must report such judgments even if an appeal is pending. Arbitral awards and orders must be reported even if they are subject to a confidentiality agreement.

Under the proposed DOL guidelines, the same alleged violation may trigger several successive reporting obligations. Each transaction must be reported even if the same alleged violation was the basis for a prior report. For example, where an initial agency allegation was reported, the same allegation must later be reported if it is sustained through an administrative order, and must be reported yet again if a federal court affirms it in a review action. However, if the initial reported transaction is reversed or vacated in its entirety through later proceedings, there is no obligation to continue to report the initial transaction in any future contract bid.

The proposed FAR regulations simply incorporate the DOL guidelines by reference and do not modify or expand on the definitions regarding reportable events.

Mechanics of the Contracting Process Under the Proposed FAR Rule

Prior to awarding a government contract, a contracting officer is required to make an affirmative responsibility determination that includes a determination that the apparent successful offeror or bidder has a satisfactory record of integrity and business ethics. The proposed rule requires that the contracting officer consider a prospective contractor’s labor violations in determining whether that contractor has a satisfactory record of integrity and business ethics. Under the proposed FAR rule, all employers bidding on a federal contract would initially provide a representation that there have been or have not been reportable employment law violations. Thereafter, once the contracting officer has initiated a responsibility determination for the prospective contractor, if the employer has indicated covered employment law violations, that employer would be required to enter detailed information describing the violations in the System for Award Management (SAM), including (1) the employment law that was allegedly violated; (2) the relevant matter or case number; (3) the date that the determination, judgment, award, or decision was rendered; and (4) the name of the court, arbitrator(s), or agency that rendered the decision. Further, the contracting officer would be required to solicit from the employer additional information that the prospective contractor views as necessary to establish affirmatively its responsibility, such as mitigating circumstances; remedial measures, including labor compliance agreements; and other steps taken to comply with labor laws.

The contracting officer would review the data provided, and, in consultation with agency Labor Contract Advisors, would determine whether the employer is a responsible source eligible to receive the federal contract. The proposals contemplate that most entities would not be deemed nonresponsible, but instead would be required to agree to a “labor compliance agreement” as a condition of award of the federal contract. The proposals provide little discussion or framework for labor compliance agreements, apparently vesting broad authority in enforcement agencies, the DOL, agency Labor Contract Advisors, and contracting officers to develop, negotiate, and monitor such agreements. Employers should pay particular attention to these proposals because they would place powers in the hands of federal regulators to extract extra-legal “remedial actions” by leveraging an award or continuation of federal contracts. The outlook for those prospective offerors found nonresponsible is equally grim; the likelihood of successfully challenging contracting officer responsibility determinations in the procurement process is very low given the high level of deference accorded such determinations by both the Government Accountability Office (GAO) and the Court of Federal Claims (COFC). Moreover, because the proposed regulation’s definition of “administrative merits determinations” effectively includes notices or findings that amount to little more than alleged violations, it is unclear whether GAO or the COFC could readily find a determination of nonresponsibility to be without a rational basis, even if that decision was predicated on alleged violations that, after contract award, may not be proven.

Post-Award Implications of Labor Violations

Employers awarded contracts would be required to enter current information regarding labor violations in SAM on a semi-annual basis. If, based on this information, the Labor Contract Advisor determines that further consideration or action is warranted, he or she will notify the contracting officer and provide advice and recommendation regarding appropriate contracting officer action. Such action may include referral to the DOL for a new or enhanced labor compliance agreement, a determination not to exercise a contract option, termination of the contract, and notification of the agency suspension and debarring official.

Proposed Implementation of the Requirement That Contracting Officials Consider Reported Violations When Making Contract Awards

E.O. 13673 directs that contracting officers evaluate whether reported violations constitute “serious, willful, repeated or pervasive violations” that could affect the responsibility determination. The Order directed the DOL to issue guidelines that define these terms and draw on existing statutory standards to the extent possible.

The proposed DOL guidelines provide a set of complex standards that would require contracting officers and Labor Contract Advisors to evaluate a broad array of factors, which can only be accomplished through significant additional reporting from contractors: “Each contractor’s disclosed violations . . . will be assessed on a case-by-case basis in light of the totality of the circumstances, including the severity of the violation or violations, the size of the contractor, and any mitigating factors.” However, several categories of violations “raise particular concerns”: (1) “pervasive” violations as defined by the DOL guidance; (2) violations that meet two of the three other violation categories defined by the DOL guidance (i.e., serious, repeated, or willful); (3) violations reflected in final orders (as opposed to agency allegations); and (4) violations of “particular gravity,” including violations related to the death of an employee, those that involve termination of employment in retaliation for protected conduct, those that affect working conditions of all or nearly all of the workforce, and those that involve back pay, fines, or damages greater than $100,000.

Labor Contract Advisors and contracting officers are advised to consider the following mitigating factors: (1) whether a violation has been remediated, including whether a contractor has agreed to a labor compliance agreement; (2) whether there was only one violation; (3) the number of violations relative to the size of the contractor; (4) existing safety and health programs and grievance procedures; (5) whether a violation was attributable to a recent change in law or regulations; (6) whether a violation occurred despite a contractor’s good faith efforts to ascertain its legal obligations and follow the law; and (7) whether there has been a significant period of compliance after the violation.

The proposed DOL guidance contains lengthy, multifactor definitions of the terms “serious,” “willful,” “repeated,” and “pervasive”:

  • A violation is “serious” if it (1) was designated as serious under the OSH Act, (2) affected 25% or more of the workforce at the worksite, (3) involved an assessment of fines of $5,000 or more or back pay of $10,000 or more, (4) involved certain child labor protections or resulted in death or serious bodily injury, (5) constituted a pattern or practice of systemic discrimination, (6) involved retaliation for protected conducted, (7) interfered with an agency investigation, or (8) constituted a breach of a material term of a settlement agreement.
  • A violation is “willful” based on the standards for punitive or liquidated damages under each particular employment law. In general, an employer must have known that its actions constituted a violation of the employment laws or must have acted in reckless indifference to whether the conduct was prohibited.
  • A violation is “repeated” when it is “substantially similar” to another violation committed by the contractor in any of the operations across the contractor’s enterprise. The prior violation must be reflected in a civil judgment, arbitral award or decision, or adjudicated or uncontested agency merits determination that occurred within the prior three years.
  • Violations are “pervasive” if they involve a pattern of willful or serious violations, continuing violations, numerous violations in relation to the size of the contractor, or relate to the actions or inactions of high-level officials of the contractor.

The DOL provided a lengthy appendix to the proposed guidelines that summarizes the complex definitions of these terms and provides illustrative examples under most of the covered employment laws.

The above summary offers a very basic overview of the complex standards and definitions. There are many nuances that will provide both the basis for contractor arguments that reported violations do not satisfy the standards and considerable uncertainty about whether Labor Contract Advisors or contracting officers will find a contractor to be a responsible party. The DOL’s regulatory commentary suggests that an ultimate determination will be infrequent and the point of the exercise is to provide Labor Contract Advisors and enforcement agencies with leverage to negotiate labor contract agreements with contractors as a condition of receiving or keeping federal contracts.

Under these proposals, federal contractors and subcontractors with large workforces—which likely would have a number of reportable violations under the expansive DOL definitions—would have no choice but to develop sophisticated submissions that address the reasons why the violations should not disqualify them under the DOL guidelines. It is unlikely that contracting officers will be able to conduct the complex assessments called for under the proposed guidelines. Although the Labor Contract Advisors are available to provide assistance, it is doubtful that there will be enough of them in each agency, given the volume of federal transactions. Contractors should expect delays and backlogs if the proposals are adopted.

Subcontractor Reporting

The proposed rule would require prime contractors and higher-tier subcontractors (when determining subcontractor responsibility) to require and evaluate subcontractor labor violation information, would require subcontractors to update this information, and would require prime contractors to consider taking action based on these updates. The proposals, if adopted in their current form, could be especially problematic with regard to subcontractor reporting and prime contractors’ consideration of employment law violations reported by their subcontractors. Under the proposals, prime contractors and higher-tier subcontractors would face substantial burdens in determining which entities constitute covered subcontractors, coordinating the submission of bi-annual reports from covered subcontractors, and evaluating whether reported violations meet the complex standards outlined in the DOL guidance for whether violations are “serious, repeated, willful and pervasive.” Recognizing these challenges, the proposed FAR rule solicits comments on whether subcontractors should be required to report directly to the DOL rather than to the prime contractor. Under this alternative approach, the DOL would provide a recommendation to a contractor about whether the subcontractor is a responsible source.

Paycheck Notices—Wage Statement and Independent Contractor Notice

The proposed DOL guidance and FAR regulations also implement E.O. 13673’s requirement that contractors provide workers who are performing work under the covered contract with information about how their pay is calculated and their status as employees or independent contractors. Under the Order, contractors will be required to provide workers with a wage statement each pay period that includes information concerning each individual’s hours worked, overtime hours, pay, and any additions to or deductions from pay. The wage statement must be provided to every worker subject to the FLSA, the DBA, the SCA, or equivalent state laws, regardless of a contractor’s classification of a worker as an employee or independent contractor.

Under the proposals, the hours worked and overtime hours contained in the wage statement must be broken down to correspond to the period for which overtime is calculated and paid, which will almost always be weekly. This means that if the pay period is biweekly and the worker is entitled to overtime pay for hours worked that exceed 40 in a week, then the wage statement must provide a weekly breakdown that shows the hours worked and any overtime hours for the first week, as well as the hours worked and any overtime hours for the second week. The wage statement provided to workers who are exempt from the FLSA’s overtime compensation requirements does not need to include a record of hours worked if a contractor informs individuals of their exempt status. Written notice to a worker is required, and oral notice will not be sufficient.

Under the proposed guidance, additions to pay may include bonuses, awards, and shift differentials. Deductions include those required by law (such as withholding for taxes), voluntary deductions by a worker (i.e., contributions to health insurance premiums or retirement accounts), and all other deductions or reductions from gross pay, regardless of the reason.

The proposals provide that these wage statement requirements shall be deemed to be fulfilled where a contractor is complying with state or local requirements that are substantially similar to those required by the Order. The DOL’s guidance, when finalized, will include a list of state and local jurisdictions determined to have wage statement requirements substantially similar to the Order’s wage statement requirement.

In addition to the wage statement, the Order requires contractors to provide workers whom they treat as independent contractors with a document informing the individual of his or her independent contractor status. The notice must be provided to each individual worker before the worker performs any work under the contract, and a new notice must be provided to an independent contractor each time he or she is engaged to perform work under a separate covered contract, regardless of whether the worker performs the same type of work.

Arbitration Provisions

E.O. 13673 requires that federal contractors agree that, with certain limited exceptions, claims arising under Title VII or any tort related to or arising out of sexual assault or harassment by their employees and independent contractors will not be arbitrated without the voluntary postdispute consent of an employee or independent contractor. The proposed FAR implementing rule simply parrots the Order’s text and provides little additional detail regarding implementation. The DOL guidance does not address this provision at all. It remains to be seen whether this requirement will be construed as applying to all Title VII claims or only those “related to or arising out of sexual assault or harassment,” but we note that the regulations implementing a similar provision with similar language in the Franken Amendment adopted the more expansive reading. Importantly, this provision does not invalidate preexisting arbitration agreements unless an employer has discretion to modify the agreement, but it will apply to any renegotiated or replacement agreement. It also does not apply to employees covered by a collective bargaining agreement.

This requirement will likely invite litigation by trade associations as to whether there is statutory authorization for the new requirements and whether the Order conflicts with federal law. For example, the requirement that federal contractors agree that Title VII claims will not be arbitrated without the voluntary postdispute consent of employees or independent contractors conflicts with the Federal Arbitration Act (FAA), which reflects a “national policy favoring arbitration,” and section 118 of the Civil Rights Act of 1991, which expressly provides that “the use of alternative means of dispute resolution, including . . . arbitration, is encouraged to resolve disputes” under Title VII. The US Supreme Court has long recognized that Title VII claims are arbitrable and recently held in CompuCredit Corp. v. Greenwood that the FAA requires that arbitration agreements be enforced according to their terms, “even when the claims . . . are federal statutory claims, unless the FAA’s mandate has been overridden by a contrary congressionalcommand.”[4]

Which Contracts Does the Executive Order Apply To?

The new reporting obligations will apply to federal procurement contracts of $500,000 or more and to subcontracts at the same threshold, unless the subcontract is for “commercially available off-the-shelf items”—a term defined in the FAR system.[5] The requirement that contractors agree that Title VII claims and tort claims related to or arising out of sexual assault or harassment would not be arbitrated without the voluntary postdispute consent of employees or independent contractors applies to federal contracts and subcontracts of $1 million or more, unless the acquisition is for “commercial items”[6] or “commercially available off-the-shelf items.” This requirement apparently applies whether or not an employee or independent contractor is personally involved in the performance of a government contract.

When Will the New Requirements Take Effect?

The new requirements will apply to solicitations for contracts issued after the final FAR rule implementing the Order is published. According to a fact sheet provided by the White House, the final rule may be expected in 2016.[7]

What Should Employers Do Now?

Employers should consider sponsoring comments in opposition to many of the provisions of the proposed DOL guidelines and FAR rule. Employers should also conduct a privileged risk assessment to evaluate the potential effect of the Order and proposed implementing standards on their employment practices and federal contracts. Further, employers should review and evaluate existing and contemplated arbitration agreements to determine the potential impact of the new order and may want to consider the pros and cons of amending arbitration agreements to eliminate any right to unilaterally modify them before final implementing regulations are issued. There may be actions that employers can take before a final rule is issued to avoid some negative aspects of the Order. The risk assessment may also provide information that employers can use to inform comments to the FAR Council on the proposed implementing regulations.