On January 30, 2009, President Obama signed three Executive Orders reflecting a dramatic change in labor policy affecting federal contractors. The new Executive Orders require the posting of a notice on federal labor law rights, disallow certain labor-related costs as legitimate expenses under federal contracts, and require federal contractors that perform services previously performed by another contractor to offer employment to the predecessor’s employees. These Executive Orders, which have not yet been assigned identifying numbers, are discussed below.

Posting NLRA Notice

Unlike most other federal laws granting rights and protections to employees, the National Labor Relations Act (NLRA), which governs the right to form and join labor organizations and to engage in collective bargaining, does not contain any general requirement that employers post a notice informing employees of those rights. Taking the position that a work force knowledgeable about NLRA rights will serve the goal of maintaining industrial peace, one of President Obama’s new Executive Orders requires federal contractors and subcontractors to post notices informing employees of their rights under federal labor laws, including the NLRA.

The Executive Order directs the Secretary of Labor to prescribe the size, form, and content of the required notice and to develop rules and regulations relating to the posting requirement. The Executive Order specifies that the notice must be posted in workplaces where employees engage in activities relating to the performance of the federal contract or subcontract. If a contractor or subcontractor posts notices to employees electronically, the new notice regarding rights under federal labor laws must be posted electronically as well. The posting requirement will apply to federal contracts resulting from solicitations issued on or after the effective date of the Secretary of Labor’s regulations implementing the new Executive Order and to subcontracts under such contracts. A failure to comply with the posting requirement may result in cancellation of the federal contract or subcontract and debarment from future federal contracts.

In addition to imposing a duty to post a notice describing rights under federal labor laws, the Executive Order revokes Executive Order 13201, signed by President George W. Bush on February 17, 2001. That Executive Order required federal contractors to post a notice informing employees that they could not be required to become members of a union and that nonmembers who are required under a collective bargaining agreement to pay an “agency fee” to a union could object to the use of their agency fees for purposes unrelated to collective bargaining, contract administration, and grievance adjustments.

Nondisplacement of Service Workers

When the federal government replaces one contractor providing services to the government with another contractor, the successor contractor does not always hire the predecessor’s employees, thus resulting in job losses for experienced service workers. Asserting that governmental interests in economy and efficiency are served when a successor service contractor hires the predecessor’s employees, another of President Obama’s Executive Orders requires successor service contractors and their subcontractors to offer a right of first refusal for jobs under the new contract or subcontract to nonmanagement, nonsupervisory employees of the predecessor who had performed services under the predecessor contract and who would otherwise lose their jobs as a result of the change in contractors. This new obligation applies to contracts that are covered by the Service Contract Act of 1965 and that result from solicitations issued on or after the effective date of the Federal Acquisition Regulatory Council’s regulations implementing the new Executive Order. It also applies to subcontracts under such contracts.

Under the new Executive Order, the successor contractor must make express offers of employment to the qualified nonmanagement, nonsupervisory employees of the predecessor who will not continue to be employed by the predecessor and must give those workers a stated period of at least ten days in which to accept the offers. The predecessor contractor must provide a list of its employees working under its contract to the federal contracting officer, who will transmit the list to the successor contractor. The successor contractor is not required to offer employment to any of the predecessor’s employees who are reasonably believed to have performed unsuitably on the job. The successor contractor may not offer new employment under the contract to any other workers until it has fulfilled its obligations with respect to the predecessor’s employees. The successor contractor may, however, employ under the contract any of its own employees who have been employed by the successor for at least three months immediately preceding the commencement of the successor contract and who would otherwise face layoff or discharge. The Executive Order specifies that a successor service contractor may elect to employ fewer workers than the predecessor contractor, but it does not describe how offers are to be made to the predecessor’s work force in this situation. All of these provisions apply equally to subcontractors of a successor contractor.

The failure of a successor service contractor or subcontractor to comply with the requirements of the Executive Order may result in sanctions, including an order to employ the predecessor’s employees and to pay lost wages. Willful violations of the Executive Order may result in debarment for up to three years.

“Persuader Activity” Costs

The third Executive Order provides that costs incurred by a federal contractor for “persuader activities” – that is, activities undertaken to persuade employees to exercise or not exercise their NLRA rights to organize and bargain collectively or to influence the manner of exercising those rights – shall not be allowable costs under a federal contract. Such disallowed costs include the costs of preparing and distributing persuader-activity materials, hiring legal counsel or consultants to advise on or conduct persuader activities, holding persuader-activity meetings with employees (including the costs of employee wages while attending those meetings), and planning or conducting persuader activities by managers, supervisors, or union representatives during working hours. Costs incurred in maintaining satisfactory relations between a contractor and its employees are allowable, however, and these costs may include the costs of labor-management committees and employee publications that are not issued to persuade employees with respect to the exercise of their rights to organize and bargain collectively.

The Executive Order directs the Federal Acquisition Regulatory Council to adopt regulations implementing the Executive Order. The Executive Order will apply to federal contracts resulting from solicitations issued on or after the effective date of those regulations.

Practical Implications

The three Executive Orders discussed above are decidedly labor-friendly and mark a significant change in labor policy affecting federal contractors. The requirement that employers post a notice summarizing NLRA rights will likely encourage increased union-organizing activity and other protected concerted activities among contractors’ employees, while the prohibition against federal disbursements for persuader-activity costs will diminish contractors’ resources for educating employees about the realities of union representation. In addition, contractors that provide services to the federal government will be substantially limited in their ability to select their own work forces when they succeed another service provider. Employers submitting bids for federal contracts should carefully consider these new obligations and limitations and the costs that may attach to them.