Last fall, the Federal Acquisition Regulation (FAR) Council and Department of Defense (DoD) published proposed rules to implement requirements in President Obama’s Executive Order 13627 and the National Defense Authorization Act (NDAA) of FY 2013 intended to combat human trafficking in the Government’s supply chain.1 These implementing rules, which have drawn extensive comments from a broad array of stakeholders,2 likely will take effect in 2014, and for the reasons discussed below, the interim or final rules, whichever form they take next, are likely to align closely with the proposal rules. Now, therefore, is a good time to take stock of the proposals and to assess what the regulations are likely to entail once they take effect. This update highlights the salient aspects of the proposed rules and the requirements that are likely to be of most interest to contractors, especially those with extensive overseas supply chains supporting the U.S. Government.

  1.  While the proposed FAR and DoD rules are not effective yet, the regulations are not likely to change substantially from their proposed form.

The NDAA mandated changes to the FAR and DoD FAR  Supplement (DFARS) human trafficking policies within 180 days. The rulemaking, with the proposed rules issued more than 365 days after the passage of the NDAA, is already late. Although such a delay is not unusual, interim or final rules should be expected soon.

Further, because the FAR and DFARS rules are proposed rules, they are not effective, and the FAR Council and DoD are likely to revise their respective rules, at least modestly, before they take effect. Yet despite the possibility of changes to these rules, many of the proposed requirements are dictated by the underlying Executive Order and statute, and thus contractors should expect that the rules, once effective, will track closely with the proposed rules.

Given the timing and the likelihood that the effective rules will align with the proposed rules, contractors have an opportunity to take steps now to prepare to comply with the more burdensome regime in the hopes of managing some of the inherent compliance risks discussed below.

  1. Aspects of the proposed FAR rule would apply to all contractors and subcontractors, and the most onerous aspects of the rule could affect most contractors that acquire supplies or perform services overseas.

The proposed FAR rule would impose most of its new requirements through changes to the pre-existing FAR clause, 52.222-50, Combatting Trafficking in Persons. The FAR prescribes this clause for all solicitations and contracts, without exceptions for commercial-item or commercially-available off-the-shelf (COTS) item contracts and subcontracts.3 As a result, many aspects of the proposed rule, including the broader scope of prohibited conduct and the new notification and cooperation requirements, will effectively apply to all contractors and subcontractors, including those that provide strictly COTS items to the Government.

One important aspect of the proposed rule is the requirement that certain contractors and subcontractors  adopt a compliance plan targeted at human trafficking risks. That requirement, which is implemented through a new subparagraph of FAR 52.222-50, applies only to the portions, if any, of a contract or subcontract that involve acquiring non-COTS supplies or performing services valued in excess of $500,000 outside the United States.4 But while performance outside the United States is a critical trigger for the compliance-plan requirement, the FAR Council has not attempted to explain what it means for a contract or portion of a   contract to be “performed outside the United States” for purposes of the applicability of this requirement. Neither the rule nor the accompanying commentary indicates whether contractors should apply a test similar to that used to identify the origin of services under the Trade Agreements Act or if some other test is contemplated.

Further, once the rule is incorporated into new and existing contracts, any contractor subject to the revised clause could face repercussions, as discussed below, for failing to adequately address prohibited conduct in its supply chain (e.g., not taking appropriate remedial action against offending employees or subcontractors). Consequently, even though the compliance-plan requirement and the associated certification (both of which  are discussed below) may not apply to all contracts, the regulations likely would force all contractors and subcontractors with overseas supply chains to take affirmative steps to prevent and detect human trafficking in their supply chains.

  1. The proposed FAR rule would extend the reach of the regulations by expanding the scope of conduct that is considered human trafficking.

The proposed FAR rule would expand the scope of prohibited conduct currently described in FAR 22.1702, 22.1703, and 52.222-50. The existing regulations cover only conduct that is traditionally considered “severe forms” of human trafficking, commercial sex acts, and forced labor. The proposed rule would expand the regulations to encompass six additional forms of conduct:

  • denying access to employee identification documents;
  • misleading or fraudulent recruiting practices (e.g., failing to disclose “basic information” or making material misrepresentations during recruitment regarding key terms of employment such as wages, fringe benefits, location of work, and living conditions);
  • charging recruitment fees;
  • failing to provide return transportation for employees;
  • providing sub-standard housing (i.e., housing that fails host country standards); and
  • not providing employment documents in the employee’s native language before the employee departs from his or her country of origin.

Although the rule would classify these practices as human trafficking, the rule could be applied to encompass conduct that is not necessarily tied to trafficking or enslavement.

Misleading recruitment practices, in some cases, may be an indicator of potential human trafficking and may suggest nefarious purposes, but in other cases, they may be unintentional and aberrational. For instance, an employer that provides inaccurate wage estimates or housing that is not fully compliant with a foreign  country’s local housing code is not necessarily engaged in human trafficking (as that term is defined by the Department of State5), but they would be engaging in prohibited conduct under the rule and thus exposed to risk that the Government would seek to impose the remedies available under the rule. As a result, contractors will need to appropriately calibrate their compliance controls to address the full scope of prohibited conduct. Among other things, contractors will be forced to closely manage employment practices related to overseas positions — from recruitment to hiring to separation — and be prepared to remedy and explain instances of non-compliance (e.g., one employee does not receive return transportation even though it was offered and the employer intended to provide it).

  1. The proposed FAR rule would require that contractors adopt a compliance plan to combat human trafficking for any work valued at more than $500,000 that is to be performed outside the United States.

As noted above, the proposed FAR rule would amend FAR 52.222-50 to require that contractors develop a distinct compliance program to address human trafficking for any contracts or subcontracts, or portions thereof, that involve acquiring non-COTS supplies or performing services valued in excess of $500,000 outside the United States.6 This requirement would force contractors with at least modestly-sized federally-funded work overseas to implement detailed compliance plans for preventing and detecting human trafficking (as defined broadly by the rule). While the rule would mandate that a contractor’s compliance plan must be “appropriate to the size and complexity of the contract and to the nature and scope of the activities to be performed,” it provides little guidance for a contractor to apply in determining what is “appropriate” to its specific circumstances. The rule merely indicates that contractors should consider the number of non-U.S. citizens to be employed and the risk that supplies or services will be susceptible to trafficking, without specifying how to perform the contemplated risk assessment.7

The proposed rule does state that a contractor’s plan must, at a minimum, include the following elements:

  1. an awareness program to inform contractor employees of the zero-tolerance policy, prohibited activities (i.e., the full scope of prohibited conduct noted above), and remedial actions that will be taken in response to violations
  2. a process for employees to report activity inconsistent with the zero-tolerance policy without fear of retaliation
  3. a recruitment and wage plan that only permits the use of recruitment companies that follow certain guidelines, prohibits charging recruitment fees to employees, and ensures that wages meet applicable host-country legal requirements (or explains the variance)
  4. a housing plan (if housing is provided by the contractor or subcontractor) that ensures housing meets host-country housing and safety standards or explains the variance
  5. procedures to prevent agents and subcontractors at any tier and at any dollar amount from engaging in prohibited conduct
  6. procedures to monitor, detect, and terminate agents, subcontractors, or subcontract employees that engage in prohibited conduct8

It is unclear, however, when these minimum requirements will be sufficient to satisfy the Government and  when more may be expected or required. There are inherent risks in such uncertainty. When instances of prohibited conduct are discovered in a contractor’s supply chain, the Government may be inclined to conclude, with the benefit of hindsight, that the contractor’s approach was insufficient. This could be precarious for contractors, particularly in light of the certification requirement discussed below.

Contractors also must post the “relevant contents” of the compliance plan at their workplace no later than the start of contract performance. If the contractor maintains a website, it also must post the plan there. The   timing of these obligations means that the contractor would effectively be forced to develop its compliance plan prior to initiating performance under the contract.9 In fact, the contractor is required to provide a copy of the compliance plan to the contracting officer upon request, and prospective contractors probably should expect that many contracting officers may require them to provide a copy of the plan prior to award or with their proposal.

  1. The proposed FAR rule would require that contractors subject to the compliance plan requirement certify that they maintain a plan and have disclosed any trafficking violations.

When the compliance plan requirement applies, that is, when the Government expects the contractor to  acquire non-COTS supplies or perform services valued in excess of $500,000 outside the United States, the contracting officer is directed to include a new certification, FAR 52.222-XX, Certification Regarding Trafficking in Persons Compliance Plan, in the solicitation. The certification states that the contractor or prospective contractor has not only implemented a compliance plan to prevent prohibited activities, but also certifies, to the best of its knowledge and belief, after conducting due diligence, that (1) no individual or entity in its supply chain has engaged in prohibited activities, or (2) if the contractor has found abuses, the contractor or subcontractor took appropriate remedial and referral action. When this requirement applies, prospective contractors are required to submit the certification prior to award, and contractors are required to update the certification annually following award.10

The certification requirement is one of the more troubling aspects of the proposed FAR rule. It could be interpreted — and contractors should expect that the Government will apply it — as requiring that the contractor essentially promise that no unreported prohibited conduct has occurred or is occurring in its supply chain. This is the case even though, as discussed above, the rule defines prohibited conduct broadly and provides only minimal guidance to contractors as to the measures that the Government expects them to take to minimize the risks in this area.

The certification may provide the Government and qui tam relators with a new lever to threaten contractors and companies in their supply chain with potential False Claims Act liability. For similar certifications tied to compliance obligations, the Government often will hold contractors to a very high standard in terms of the information that the contractor should have known regarding matters covered in its certifications. When instances of prohibited conduct are detected, especially when the Government learns of them from sources other than the contractor, the Government can be expected, in many cases, to jump to the conclusion that the contractor’s due diligence was inadequate. In this way, once the new compliance obligations and accompanying certification take effect, instances of prohibited conduct or alleged prohibited conduct anywhere in a contractor’s supply chain could expose the contractor to allegations of fraud.

  1. The proposed FAR rule would require that contractors notify the Government of “credible information” of any trafficking violations and fully cooperate with any government investigation.

The proposed FAR rule would require that contractors notify both the cognizant contracting officer and the agency inspector general (IG) of:

  1. any “credible information” that it receives from any source that alleges a contractor employee, subcontractor, subcontractor employee, or their agent has engaged in conduct that violates the Government’s zero-tolerance policy; and
  2. any action taken against a contractor employee, subcontractor, subcontractor employee, or their agent for prohibited conduct or other non-compliances pursuant to the clause.11

As proposed, the rule uses the phrase “credible information,” as opposed to the phrase “credible evidence,” with which many practitioners in this area are now familiar through the FAR’s existing “mandatory disclosure” provisions in FAR subpart 3.10 and the associated clause, FAR 52.203-13.12 The rule does not define “credible information” and the accompanying commentary does not explain how this standard compares to the “credible evidence” standard. For instance, it is unclear whether the credible information standard, like the credible evidence standard, also contemplates allowing the contractor a reasonable amount of time to conduct an internal investigation, at least on a preliminary basis, to determine if there is sufficient information or evidence to trigger a disclosure obligation.

Additionally, the proposed FAR rule would introduce a “full cooperation” subparagraph (g) in FAR 52.222-50, requiring the contractor to provide reasonable access to facilities and staff (both inside and outside the United States) to allow agencies to conduct audits and investigations to ascertain whether the contractor is in compliance with the anti-trafficking requirements.13 Contractors would be required to both protect and interview all employees who are suspected victims of, or witnesses to, prohibited activities before they return to their country of origin. Contractors would be prohibited from hindering or preventing those employees from fully cooperating with federal authorities.14

  1. The proposed FAR rule would introduce mitigating and aggravating factors for the contracting officer to consider when determining the appropriate remedy in the event of non-compliance with the rules.

Under the proposed FAR rule, the remedies available to the Government in the event of contractor non- compliance remain largely the same as those currently available under FAR 52.222-50.15 These remedies include:

  • removal of contractor employees from the place of performance;
  • directing the contractor to remove a subcontractor;
  • suspension of contract payments;
  • reducing the award fee for the non-compliant period;
  • termination for default;
  • suspension or debarment; and
  • declining to exercise available options (a remedy added by the proposed rule).16

The proposed rule would provide both mitigating and aggravating factors for the Government to consider in the event of a contractual non-compliance.17 If the contractor was acting in accordance with its compliance- and-awareness program when the prohibited conduct or contractual non-compliance occurred, the Government should treat the contractor’s actions as a mitigating factor. This would be the case even if the contractor has chosen to implement a plan where not strictly required. On the other hand, if the contractor does not enforce or follow its compliance plan after the contracting officer directs it to do so, the Government can consider that an aggravating factor in deciding how to respond to the non-compliance. Similarly, it is an aggravating factor to not abate an alleged violation after receiving direction from the contracting officer.

This aspect of the proposed rule is notable because the potential for contractors to avail themselves of the mitigating factors may be illusory. The Government can impose remedies under the rule only when a  contractor fails to comply with a contractual requirement. (Proposed FAR 22.1704 indicates that the Government can impose remedies based on instances of prohibited conduct, but the clause — which presumably would control — would dictate that the remedies are only available when the contractor fails to comply with subparagraphs (c), (d), (g), (h), or (i) of the clause.) Most or all of the contractual requirements presumably will be incorporated in some fashion into a contractor’s compliance plan, and thus, it is unclear if a contractor could ever be in a position to show that it was “acting in accordance with its program” when a non- compliance occurred.

  1.  The proposed FAR rule’s flow-down requirements are extensive and could apply to a company’s entire overseas supply chain.

The proposed FAR rule would require that the contractor flow down all obligations in FAR 52.222-50, as revised, to subcontractors and “agents.” For subcontracts that involve acquiring non-COTS supplies or performing services valued in excess of $500,000 outside the United States, the subcontractor also would be required to implement and follow a compliance plan focused on combatting human trafficking.18 Such subcontractors also would be required to provide a certification to the prime contractor in advance of award and annually thereafter.

The rule appears to include an ambiguity concerning the definition of “agent.” FAR Parts 2 and 22 do not currently define “agent,” and neither the proposed clause nor the revisions to FAR Part 22 would add a definition of that term. While the scope of “agents” contemplated by the rule is unclear, the flow-down requirement could be interpreted to encompass suppliers and vendors that would not be considered “subcontractors” under the FAR Part 44 definition.19 Thus, unless revised, the scope of the flow-down obligations under the clause could be expansive.

  1. DoD contractors would be subject to heightened requirements under the proposed DFARS rule.

DoD determined that the proposed Government-wide FAR provisions would not go far enough in addressing human trafficking in DoD’s supply chain. To bolster its efforts in this area, DoD proposed a series of “enhanced protections” that it would impose on DoD contractors.

  1. Revised hotline poster requirement

DoD proposed to change the title of DFARS clause 252.203-7004 from “Display of Fraud Hotline Posters” to “Display of Hotline Posters.”20 Under the revised, retitled clause, contractors would be required to post new hotline posters (the substance of which would cover human trafficking and whistleblower protections) prominently within common work areas of business segments performing work under DoD contracts. Contractors that maintain a website also would be required to post electronic versions of the notice there. If a “substantial portion” of the contractor’s workforce does not speak English, the contractor must also display the posters in the language or languages spoken by a substantial portion of its workforce. These requirements would apply to performance in the United States and abroad, but contracts valued less than $5 million and contracts for commercial items and COTS items would be excluded.

  1. Contractor representation regarding efforts to combat human trafficking

In addition to the proposed FAR certification discussed above, DoD has proposed a separate representation that would apply to DoD contracts in excess of the simplified acquisition threshold (which is generally $150,000 but may be higher for special programs, like those supporting a contingency operation or facilitating defense against or recovery from nuclear, biological, chemical, or radiological attack).21 The provision would require the prospective DoD contractor to represent, by submitting its offer, that:

  1. it will not engage in any trafficking in persons or related activities in contract performance;
  2. it has hiring and subcontracting policies to protect the rights of employees (and subcontractor employees), and will comply with those policies in contract performance; and
  3. it has notified employees and subcontractors of the responsibility to report human trafficking violations and of employee whistleblower protections for reporting such conduct.

The DoD representation would apply to contracts for commercial items and COTS items.

  1. Contractor employee "Bill of Rights"

The proposed DoD rule also would amend DFARS clause 252.225-7040, Contractor Personnel Authorized to Accompany U.S. Armed Forces Deployed Outside the United States, to integrate a contractor employee “Bill of Rights.” This amendment is intended to ensure contractor employees accompanying U.S. Armed Forces overseas are aware of their right to:

  • hold their own identity or immigration documents (e.g., passport or driver’s license);
  • receive agreed-upon wages on time;
  • take lunch and work breaks;
  • elect to terminate employment at any time;
  • identify grievances without fear of reprisal;
  • receive a copy of their employment contract in a language they understand;
  • receive wages that are not below the legal in-country minimum wage;
  • receive notice of their rights, wages, and prohibited activities prior to signing an employment contract; and
  • if housing is provided, live in housing that meets the host-country housing and safety standards.

The rule would require that contractors enforce these employee rights and post a notice of the Bill of Rights in employee workspaces. Similar to the hotline posters discussed above, the posters must be available in English and any foreign language spoken by a “significant portion” of the workforce.

Conclusion

We anticipate that the FAR Council and DoD will issue interim or final rules soon. For the reasons discussed above, the effective rules are unlikely to deviate significantly from the proposed versions. The proposed rules would effectively force many government contractors to develop robust compliance programs to monitor, detect, and address not only instances of human trafficking but also a broad range of employment practices that could be deemed misleading or inappropriate. The delay in the rulemakings should give contractors a “head start” in preparing to comply with the more burdensome regime. We will continue to monitor the rulemakings and provide updates on further developments.