On August 29, 2011, the Department of Labor (DOL) published a final rule,1 implementing Executive Order 13495, Nondisplacement of Qualified Workers Under Service Contracts, which was the first major procurement policy initiative of President Obama's Administration, issued only ten days after he took office.2 The final rule adopts the Executive Order's policy that service contracts must include a clause requiring successor contractors and their subcontractors to offer the incumbent contractor's employees a right of first refusal of employment in positions for which they are qualified. The final rule, which includes limited changes from the proposed rule issued on March 19, 2010,3 also imposes other compliance and reporting burdens on contractors. 

The following addresses several of the key questions that contractors may have concerning the final rule. 

When do the new DOL requirements take effect?

Although the Executive Order and DOL final rule each became effective immediately, the standard contract clauses and the resulting contractual obligations will not apply to federal contracts and subcontracts until the rules are incorporated into the Federal Acquisition Regulation (FAR). To date, the FAR Council has not initiated a rulemaking action to implement the Executive Order and DOL's final rule, and it has not indicated when it will do so. The process of incorporating the new requirements in the FAR, however, should be swift, as the Executive Order and the final rule appear to give the FAR Council little discretion to deviate from contract language dictated by the DOL's rule. Once implemented, the requirements will have a significant impact on companies that perform service contracts and subcontracts for the federal government.

Which contracts and subcontracts will be subject to the requirement that the successor contractor extend an employment offer to displaced employees?

The final rule applies to contracts and subcontracts at all tiers for services covered by the McNamara-O'Hara Service Contract Act of 1965 (the SCA).4 It requires "successor contractors" to provide good faith offers of employment to predecessor contract employees whose employment will be terminated as a result of the award of the successor contract and/or the expiration of the predecessor contract.5 Successor contractors are those contractors that provide the same or similar services as the predecessor in the same location. While the applicability of the final rule is broad, it does include several important exemptions.

First, service contracts and subcontracts under the simplified acquisition threshold ($150,000 in most cases) are excluded from the requirements. Note, however, that if a contractor that holds a prime contract valued above the simplified acquisition threshold and subject to the requirements discontinues a subcontract valued below the simplified acquisition threshold, the prime contractor must offer rights of first refusal to the subcontractor's displaced employees. 

Second, certain contracts and subcontracts awarded for services provided by persons who are blind or have severe disabilities, including those awarded under the Randolph-Sheppard Act and the Javits-Wagner-O'Day Act, also are excluded.

Third, an agency's Head of the Contracting Activity (HCA) may exempt a contract, subcontract, or purchase order or any class of contracts, subcontracts, or purchase orders from the nondisplacement requirements with a written determination, issued no later than the date of the solicitation, that application of the nondisplacement requirement would either (1) not serve the purposes of the Executive Order; or (2) impair the ability of the federal government to procure services on an economical and efficient basis. The final rule identifies certain factors that an agency can rely upon in determining whether to issue an exemption (e.g., where use of this particular carryover workforce would greatly disrupt delivery of services and emergency situations) and certain factors that an agency cannot rely upon (e.g., the job performance of the predecessor contractor and the seniority of the workforce). Further, if an agency exercises its exemption authority, it must notify the DOL and the contractor must notify affected workers and their collective bargaining representatives within five days of the solicitation date. Failure to provide the required notice renders the exemption inoperative and requires inclusion of the nondisplacement requirements in the resulting contract. The final rule does not address how such notice defects will be addressed in situations in which the problem is first identified after the contract is executed. 

Which employees are covered by the nondisplacement requirement and entitled to an employment offer?

Successor contractors and subcontractors are generally required to extend the right of first refusal to SCA-covered employees of the predecessor contractor whose employment will be terminated because of the award of the successor contract and/or the expiration of the earlier contract. The rule requires successor contractors to presume that all predecessor employees will be terminated, absent the ability to demonstrate a reasonable belief to the contrary. 

The requirements do not extend to employees serving in a bona fide executive, administrative, or professional capacity, as those terms are defined in the SCA regulations. Determining which employees are covered by the SCA and which are exempt can be difficult (particularly since non-incumbent offerors may not know much about the incumbent staffing). In general, an "executive" employee has primarily management duties, including the authority to direct the work of at least two other employees and to hire and fire employees (or at least to influence the hiring and firing of other employees). An "administrative" employee performs office or non-manual work directly related to the management or business operations of the employer, or its customers and exercises discretion and judgment with respect to "matters of significance." A "professional" employee either (1) has knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course study; or (2) performs work that requires invention, imagination, originality, or talent in a recognized field or artistic or creative endeavor.6 Additionally, to qualify as an executive, administrative, or professional employee, an individual must earn a minimum salary dictated by the DOL's SCA regulations (generally $455 per week under the current rules).

The obligation to offer employment also does not extend to service employees who were hired by the predecessor contractor (or subcontractor) to perform work on both federal and non-federal contracts as part of a single job. This exception does not apply if the predecessor employees were deployed in a manner that was designed to avoid the purposes of the Executive Order, but the rule does not provide any firm guidelines to use in assessing whether actions were intended to avoid the nondisplacement requirements. The rules only state that a change in the way that the predecessor deployed employees near the end of the contract could suggest an effort to avoid the purposes of the requirements.

Are successor contractors required to hire all displaced employees of the predecessor contractor? Are contractors required to hire displaced employees if it means displacing their own pre-existing employees? 

Under the final rule, a successor contractor retains discretion to determine the number of positions required to staff its contract. The contractor may decide to use less service employees than the predecessor contractor used. Further, the successor contractor may staff the contract with contractor or subcontractor employees who have worked for the contractor or a subcontractor for three months immediately preceding the start of the contract and who otherwise would be laid off or discharged if not assigned to the new contract. The successor contractor, therefore, must calculate the number of vacancies by determining the total number of service employees required for the contract and, when applicable, reducing that number by the number of the successor contractor's current service employees who have been working for the successor for three months and who would be laid off or discharged unless staffed on the contract. Once the successor contractor calculates the number of vacancies, it must provide a right of first refusal to displaced predecessor employees until those vacancies are filled. The successor contractor has discretion in determining which displaced workers receive offers if there are not enough vacancies to hire all qualified, displaced workers. However, if some displaced workers are not offered positions, the successor contractor must offer the right of first refusal to those displaced workers for any vacancies that occur during the first 90 days of contract performance. After 90 days, the contractor is no longer required to offer the right of first refusal to displaced employees.

What form must the offer of employment take? Is the successor contractor required to offer the same position that the displaced employee held under the predecessor contract?

The final rule requires successor contractors to extend a good faith offer with a bona fide, express right of first refusal to predecessor employees who would be terminated as a result of the contract award and/or expiration of the earlier contract. Contractors may offer the position orally or in writing and must give the displaced employee a deadline by which to accept the offer, which must be at least ten days from the offer date. Contractors must make reasonable efforts to make the offer in a language understood by the displaced employee.

Successor contractors are not required to offer "the same or similar position" to a displaced worker. The contractors have some flexibility to offer the displaced employee a different position than he or she held under the predecessor contract. The contractor, however, is required to "scrutinize each employee's qualifications in order to offer positions to the greatest number of predecessor contractor employees possible." Further, the successor contractor is not required to offer the same terms and conditions (including wages and benefits) that the displaced employee received under the earlier contract. The contractor, however, cannot alter the terms and conditions based on a desire that the employee refuse the offer. 

Additionally, where a successor contractor subsequently terminates a predecessor employee, the facts and circumstances surrounding the initial employment offer may be examined during a compliance action to determine if the successor's offer was bona fide. Although the rule does not provide examples, it seems to suggest that a situation in which a contractor terminated a predecessor employee soon after hiring could raise concerns about whether the offer was bona fide.

Are successor contractors required to hire displaced employees regardless of their suitability to perform the necessary work?

A successor contractor is not required to offer a position to a displaced employee that the contractor reasonably believes did not perform suitably on the predecessor contract. Such a belief, however, must be based on an individual examination of that particular employee's performance that is supported by written credible information from a knowledgeable source. The successor contractor may not attribute general poor performance by the predecessor contractor to the individual displaced worker, and instead may rely only upon information related specifically to the individual performance of the particular worker. Further, successor contractors are generally prohibited from imposing their own screening processes on the predecessor employees as a prerequisite to extending an employment offer. Such processes, including drug tests, background checks, and security clearance checks, are allowed only when provided for by the contracting agency, incorporated into the government contract, and consistent with the Executive Order. 

What obligations does the final rule impose upon predecessor contractors?

Predecessors must provide a certified list of all service employees working on the contract to the contracting officer not less than 30 days before completing performance. (To ease the reporting burden, the new regulations allow a contractor to use the certified list currently used during contract closeout under the SCA if that list also provides all of the information required under the new rule.) If staffing changes occur during the final 30 days of performance, predecessor contractors must provide, not less than 10 days before completing performance, a revised certified list of all service employees working on the contract within the last month of performance. Additionally, predecessor contractors must provide written notice to all service employees of their possible right to an offer of employment from the successor contractor. If a significant portion of the predecessor's employees are not fluent in English, the predecessor must provide the notice in a language the employees understand.

How can the successor contractor identify displaced employees and fulfill its obligations to offer employment if the predecessor does not identify them?

Contracting officers must provide the predecessor's certified list of employees to successor contractors. (The rules do not establish a deadline by which the contracting officer must do so.) In some cases, however, the predecessor contractor may not provide that list to the government. If for some reason the predecessor contractor does not meet its obligations, the successor contractor is still responsible for ensuring that displaced workers receive an offer of employment. The successor contractor must rely on any available credible evidence to determine if a worker is entitled to a job offer (e.g., government verification or an employee producing a paystub).

What reporting and recordkeeping obligations apply?

The final rule imposes broad recordkeeping obligations on contractors. Contractors must retain all written offers of employment extended to displaced workers. If the employment offer was verbal, the contractor must create a contemporaneous written record of that offer. If a contractor claims an exemption or exclusion from the nondisplacement requirement, the contractor also must retain any records that support the exemption or exclusion. Successor contractors also must retain any employment lists of predecessor contractors provided by the contracting officer. Contractors must keep these records for three years from creation. 

Who is responsible for enforcement of the nondisplacement requirements? 

Contracting officers are responsible for investigating complaints of noncompliance with the nondisplacement rules and for reporting violations of the rules to the DOL's Wage and Hour Division (the Division), which possesses expanded responsibilities and broad enforcement powers under the final rule. Employees or their representatives may file complaints regarding violations of the nondisplacement regulations with the Wage and Hour Division within 120 days of the start of performance on the successor contract. The Division may initiate an investigation at any time, either as a result of a complaint or by the Division's own initiative. The Division has the power to inspect the records of covered contractors, question employees of covered contractors, and require the production of any evidence deemed necessary to determine whether a violation has occurred. Contractors have a duty to cooperate with any review or investigation conducted under the final rule. 

What standards or presumptions apply in the event of a dispute concerning a contractor's compliance with the nondisplacement requirements?

The final rule provides certain presumptions that a contractor must overcome in an enforcement review. The following highlights several of the most important presumptions. 

First, a successor contractor must presume that all of the predecessor contractor's displaced employees were service employees covered under the new regulations. A successor contractor must overcome this presumption through credible evidence gathered from knowledgeable sources, sufficient to give the successor a reasonable belief that the displaced employee was not a covered service employee. 

Second, displaced employees are presumed to have performed satisfactorily on the predecessor contractor. The successor contractors can only rebut this presumption through an individualized assessment of that employee's performance (which potentially could involve an assessment that all individuals performed poorly on the earlier contract). 

Third, displaced employees are presumed not to have worked on one or more non-federal contracts. The successor contractor must overcome this presumption through credible evidence supplied by a knowledgeable source, sufficient to provide the successor contractor a reasonable belief that the worker worked on non-federal contracts. A successor contractor may not use the general business practices of the predecessor to imply that its employees all worked on non-federal contracts. 

What potential penalties and sanctions could be imposed upon a contractor for failure to comply with the new requirements?

In the event that the DOL's Wage and Hour Division determines that a violation occurred, the DOL has the power to order remedies and impose sanctions against the offending contractor. The Division may order a contractor to hire the affected employee for a position in which the employee is qualified. The DOL also can order withholding of contract funds sufficient to pay back wages and other relief to affected employees. If a contractor has failed to provide the certified employee list to the contracting officer, the contracting officer, on his or her own initiative or upon request by the DOL, may suspend payment to the contractor until the list is provided. Most significantly, the DOL may debar a contractor and its responsible officers (and any firm in which the contractor has a "substantial interest") for up to three years if it finds that the contractor has failed to comply with an order of the DOL or has committed a "willful or aggravated" violation of the nondisplacement regulations.

What redress does a contractor have available to challenge an enforcement action?

When making enforcement determinations, the Administrator of the DOL's Wage and Hour Division must provide due process to contractors, including notice of the determination and the contractor's right to appeal the decision. Contractors must appeal final determinations of the Administrator within 20 days of the determination. Affected employees also may appeal determinations that no violation occurred. The Office of Administrative Law Judges is responsible for conducting hearings pursuant to appeals of determinations regarding the nondisplacement regulations if there are any disputed facts. Hearings must be conducted within 60 days of the aggrieved party's request for a hearing. Should a party disagree with the ruling of the Administrative Law Judge or if there are no disputed facts before the Administrator, it may appeal to the Administrative Review Board within 20 days of the decision (either of the Administrator or the Administrative Law Judge). The Administrative Review Board may only consider the administrative record as developed below and may not consider new evidence. The Board must render a decision within 90 days of receiving the petition for review.

Conclusion: looking forward

We suggest that companies that provide services covered by the SCA begin planning for when the new DOL rules are incorporated within the FAR. The new rules will impose significant requirements relating to how contractors and subcontractors staff their covered contracts and subcontracts. These rules may impact, among other things, contractor/subcontractor proposal strategies, proposed labor pricing, staffing plans, transition plans, record-keeping processes, subcontract administration, and compliance-related internal controls and procedures. Given the stiff penalties for noncompliance and the expectation that the rule will be implemented in the FAR soon, service contractors should give serious consideration to the internal controls, procedures, and training that will be necessary within the organization to ensure compliance.