On August 24, 2016, the FAR Council released a final rule implementing the 2015 Fair Pay and Safe Workplaces Executive Order. The Department of Labor issued guidance on the final rule the same day. These regulations place new obligations on contractors that work with federal government agencies and on subcontractors that work on federal projects.

First, they require most contractors and some subcontractors to report violations of 15 different labor and employment laws in their bids and proposals to contracting agencies and during contract performance. Second, they require most contractors and some subcontractors to provide certain payment documentation to employees and a certain notice to independent contractors. Third, they limit arbitration (as opposed to litigation) of civil claims involving employment discrimination, sexual assault, or sexual harassment.

Disclosure of Labor and Employment Law Violations

The final rule will ultimately require contractors bidding or proposing on federal contracts valued at more than $500,000 to disclose in their offers any administrative merits determination, arbitral award or decision, or civil judgment rendered against the contractor within the preceding three-year period for violations of any of 15 enumerated federal and state labor and employment laws. The rule will also require potential subcontractors (at any tier) on subcontracts valued at more than $500,000 to disclose the same information to the Department of Labor for the department to render responsibility findings to be considered by the prime contractor. Contractors and subcontractors with contracts of more than $500,000 will have to disclose violations every six months during performance, and they must include in their subcontracts of more than $500,000 provisions that flow down these requirements. Information about violations disclosed by contractors will be made publicly available through the Federal Awardee Performance and Integrity Information System (FAPIIS).

The labor and employment laws covered by the rule are:

  • The Fair Labor Standards Act, 29 U.S.C. chapter 8;
  • The Occupational Safety and Health Act;
  • The Migrant and Seasonal Agricultural Worker Protection Act;
  • The National Labor Relations Act;
  • The Davis-Bacon Act, 40 U.S.C. chapter 31, subchapter IV;
  • The Service Contract Act, 41 U.S.C. chapter 67;
  • Executive Order 11246 (Equal Employment Opportunity);
  • Section 503 of the Rehabilitation Act;
  • The Vietnam Era Veterans' Readjustment Assistance Acts;
  • The Family and Medical Leave Act; Title VII of the Civil Rights Act;
  • The Americans with Disabilities Act;
  • The Age Discrimination in Employment Act;
  • Executive Order 13658 (Establishing a Minimum Wage for Contractors); and
  • Equivalent State laws

The only "equivalent state laws" currently covered by the final rule are OSHA-approved state plans. The rule defers to the Department of Labor and FAR Council for further rulemaking to identify other "equivalent state law" violations that will require disclosure in the future.

The most significant change that the final rule made to the proposed regulations that were issued last May is the phased implementation of the disclosure requirements:

  • The disclosure requirements take effect on October 25, 2016.
  •  Disclosures will not be required for violations occurring before October 25, 2015. 
  • For the first six months that the rule is effective, disclosure requirements will apply only to solicitations valued at $50 million or more. Disclosure requirements will apply to solicitations valued at $500,000 or more beginning on April 25, 2017.
  • Subcontractors will not be required to begin making disclosures until October 25, 2017--one year after the effective date of the regulations.
  • The look-back period for which violations must be disclosed will initially be one year and will gradually increase to three years by October 25, 2018.

Some have called these regulations the "blacklisting" rules. Contracting officers will evaluate any reported violations both prior to and after contract awards to determine whether contractors are responsible and have satisfactory records of integrity and business ethics to be awarded or to continue performance of a contract with the federal government. Prior to a contract award, this analysis would allow contracting officers to require contractors to enter into or to enhance a labor compliance agreement with the Department of Labor in order to be eligible for award. Contracting officers also could make referrals to agency suspending and debarring officials based on the compliance history submitted by an offeror during the bid or proposal stage of a solicitation. After a contract award and during performance, the ongoing semi-annual analysis could lead contracting officers to refer contractors and subcontractors to the Department of Labor for action (which may include a new or enhanced labor compliance agreement), to decline to exercise contract options, to terminate contracts, or to refer contractors and subcontractors to agency suspending and debarring officials.

The requirement that contractors and subcontractors must disclose administrative merits determinations is concerning. As defined in the rule, an administrative merits determination includes the following notices or findings, whether or not they are subject to appeal or further review:

  • a Summary of Unpaid Wages issued by the Department of Labor's Wage and Hour Division;
  • a letter issued by the Department of Labor's Wage and Hour Division indicating that an investigation disclosed certain violations of the Fair Labor Standards Act or a violation of the Family and Medical Leave Act, the Service Contract Act, the Davis-Bacon Act, or Executive Order 13658 (Establishing a Minimum Wage for Contractors);
  • a citation, notice of imminent danger, or notice of failure to abate from the Occupational Safety and Health Administration, or any state equivalent;
  • a show-cause notice issued by the Office of Federal Contract Compliance Programs;
  • a reasonable-cause determination issued by or a civil action filed on behalf of the Equal Employment Opportunity Commission;
  • a complaint issued by any Regional Director of the NLRB;
  • any other complaint filed by or on behalf of a federal agency with a federal or state court, an administrative judge, or an administrative law judge alleging that the contractor or subcontractor violated any provision of the applicable labor and employment laws; and
  • any order or finding from any administrative judge, the Department of Labor Administrative Review Board, the Occupational Safety and Health Review Commission (or state equivalent), or the National Labor Relations Board that the contractor or subcontractor violated any provision of the applicable labor and employment laws.

This definition requires contractors and subcontractors to disclose administrative merits determinations that can be issued following nothing more than an investigation by the relevant government agency. Administrative merits determinations are not limited to notices and findings issued following adversarial or adjudicative proceedings such as a hearing on the merits, nor are they limited to notices and findings that are final and not appealable. The administrative merits determinations that must be reported include those that contractors or subcontractors are challenging or can still challenge or are otherwise subject to further appeal or review.

The regulations create the new role of Agency Labor Compliance Advisor for each federal agency. ALCAs are to provide advice and guidance to agencies, contracting officers, contractors, and the labor community as subject-matter experts concerning the application of labor laws (statutes, executive orders, and regulations) to federal government acquisitions and contracts. They are responsible for communicating with the Department of Labor, other ACLAs, other agencies, and other parties concerning such matters. The regulations require contracting officers to request written advice and recommendations from ACLAs concerning contractors' records of integrity and business ethics and the responsive actions that should be taken. ACLAs will make one of the following recommendations to contracting officers concerning a contractor's record of compliance with labor and employment laws:

a) Supports a finding of a satisfactory record of integrity and business ethics;

b) Supports a finding of a satisfactory record of integrity and business ethics, but the prospective contractor needs to commit, after award, to negotiating a labor compliance agreement or another acceptable remedial action;

c) Could support a finding of a satisfactory record of integrity and business ethics only if the prospective contractor commits, prior to award, to negotiating a labor compliance agreement or another acceptable remedial action;

d) Could support a finding of a satisfactory record of integrity and business ethics only if the prospective contractor enters, prior to award, into a labor compliance agreement; or

e) Does not support a finding by the contracting officer of a satisfactory record of integrity and business ethics, and the agency suspending and debarring official should be notified in accordance with agency procedures.

Another particularly burdensome aspect of the rule is that prime contractors must determine if their proposed subcontractors have a "satisfactory record of integrity and business ethics." In effect, the rule requires the prime contractor to serve as a government regulator. The implications of this requirement can be severe to the contractor. For example, if a contractor uses a subcontractor's price in its proposal and later determines from the subcontractor's disclosures that it is not responsible and would likely be rejected by the government, then the contractor has no recourse to recover the cost of replacing the planned subcontractor. Also, because the disclosures must be updated, violations by a subcontractor on other projects could lead to a determination that a subcontractor is no longer responsible to perform on any project and to a termination of the subcontract.

The final rule provides some relief for contractors by requiring subcontractors to disclose covered violations directly to the Department of Labor for review and assessment. DOL will advise the subcontractor--within three days of the disclosures--if DOL considers the violations to be serious, willful, repeated, and/or pervasive. DOL may also advise whether a labor compliance agreement is warranted. The contractor may rely upon the subcontractor's representation about the assessment made by DOL. A contractor may proceed with a subcontractor, despite a negative assessment by DOL, provided the contractor reviews labor law violations that DOL considers to be serious, repeated, willful, and/or pervasive and the contractor notifies the contracting officer in writing of the basis for the contractor's decision. The basis for using such a subcontractor may include limited availability of alternative subcontractors or the prevention of delays during contract performance.

Payment Documentation to Employees and Notice to Independent Contractors

The final rule requires covered federal contractors and some of their subcontractors to provide certain payment documentation to employees and a certain notice to independent contractors. Contractors and subcontractors at any tier must include subcontract provisions that flow down these requirements into subcontracts of more than $500,000. These paycheck transparency requirements become effective on January 1, 2017.

Contractors and subcontractors with a federal contract or subcontract of more than $500,000 must provide employees with a wage statement for each pay period if the employees are covered by the Fair Labor Standards Act, the Davis-Bacon Act, the Service Contract Act, or equivalent state laws identified by the Department of Labor. The wage statement must include hours worked, overtime hours, pay, and any additions or deductions made to pay. The wage statement must be issued every pay period and must contain the total number of hours worked in the pay period and the number of those hours that were overtime hours. 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 (typically weekly). The wage statement provided to employees exempt from the overtime compensation requirements of the Fair Labor Standards Act need not include a record of hours worked if a contractor informs the individuals of their overtime-exempt status. These wage-statement requirements will be deemed fulfilled if a contractor or subcontractor is complying with state or local requirements that the U.S. Secretary of Labor has determined are substantially similar to those required by the regulations.

Contractors and subcontractors with a federal contract or subcontract of more than $500,000 who are treating any individual performing work under the contract or subcontract as an independent contractor and not as an employee must provide a document to the individual that informs the individual of this independent-contractor status. Contractors must provide the document to the individual either prior to the work beginning or at the time the contractor and the individual form a contract.

Where a significant portion of a workforce is not fluent in English, contractors and subcontractors must provide the wage statement and the independent-contractor notification in English and in the language(s) with which the workforce is more familiar. The regulations do not define "significant portion."

Limiting Arbitration of Employment Discrimination and Sexual Harassment Claims

The final rule limits arbitration of civil claims involving employment discrimination, sexual assault, or sexual harassment. With limited exceptions, contractors and subcontractors with a federal contract or subcontract of more than $1,000,000 must agree that the decision to arbitrate employment discrimination claims (arising under title VII of the Civil Rights Act of 1964) or tort claims arising out of or related to sexual assault or sexual harassment can be made only with the voluntary consent of employees or independent contractors after the disputes arise. Federal contractors and subcontractors at any tier must include in their subcontracts of more than $1,000,000 provisions that flow down these requirements. These regulations become effective on October 25, 2016.

The limitation does not apply to employees covered by a collective bargaining agreement negotiated between a contractor and a labor organization representing the employees. The limitation also does not apply to employees or independent contractors who entered into a valid contract to arbitrate prior to the contractor bidding or proposing for a contract containing the arbitration-limiting clause required by these regulations, unless, however, the contractor is permitted to change the terms of the contract with the employee or independent contractor or the contract with the employee or independent contractor is renegotiated or replaced.

Concluding Comments and Concerns

While the final rule and Department of Labor guidance establish requirements for disclosure of labor and employment law violations and create a process for review and evaluation, a determination concerning the significance of these violations is ultimately subjective. Given the time, resources, and corresponding costs associated with preparing proposals for large federal contracts, some contractors might be incentivized to enter into labor compliance agreements or other administrative agreements with the government--even though the contractors feel that such agreements are otherwise unjustified--simply to mitigate the possibilities of disqualification for an award and the waste of substantial bidding resources.

Federal contractors and subcontractors should not allow the phase-in of these regulations to stop them from preparing now for their implementation. This includes not only compiling information on prior violations dating back to October 25, 2015, but also creating a system for collecting, updating, evaluating, and disclosing information on future violations and ongoing proceedings.

Beginning September 12, 2016, contractors can contact Department of Labor to request an assessment of their record of compliance independent of a particular contract. Contracting officers and ALCAs may use the department's assessments for subsequent contracts, unless new violations have occurred and must be disclosed. While a pre-assessment might expedite future offers, contractors and subcontractors should consider the possible negative ramifications, including referral to suspending and debarring officials.