Last week, Judge Marcia Crone of the United States District Court for the Eastern District of Texas stopped the implementation of controversial provisions of Executive Order 13673, Fair Pay and Safe Workplaces, the associated FAR rule and Department of Labor Guidance (“the rules”). The Executive Order, which was first issued in 2014, requires contracting officers to consider in responsibility determinations a prospective contractor’s “serious, repeated, willful, and pervasive” violations of 14 labor laws as reflected by administrative merits determinations, arbitral awards or decisions, or civil judgments. In addition to concluding that the Executive Order likely exceeded the President’s authority, Judge Crone found the implementing rules and guidance problematic. As implemented, the rules would have required contractors to publicly disclose all labor law violations, including notices, findings, or documents issued to them by enforcement agencies or court judgments or orders, regardless of finality, appealability, or reviewability. Moreover, these disclosures were not limited to a contractor’s activities on government contracts. Judge Crone concluded that the plaintiffs were likely to succeed on the merits and enjoined the Office of Federal Procurement Policy and the members of the FAR Council from “implementing any portion of the FAR Rule or DOL Guidance relating to the new reporting and disclosure requirements regarding labor law violations.” As we previously reported, the new FAR rule and DOL Guidance were issued on August 25, 2015 and set to become effective on October 25, 2016, with a six month phase-in period.

The lawsuit was brought on October 7, 2016 by the Associated Builders and Contractors of Southeast Texas, Associated Builders and Contractors, Inc., and National Association of Security Companies. This was not surprising as many commentators thought the rules would have a significant impact on companies engaged in construction work. For example, the most cited OSHA violation is fall protection in construction work. In 2014, according to OSHA’s website, 20.5% of worker fatalities in private industry were in construction. Under the rules, a labor law violation that causes the death or serious injury of one or more workers is automatically classified as “serious,” and would impact the contracting officer’s responsibility determination. In moving for a preliminary injunction and temporary restraining order, the plaintiffs argued that the rules significantly exceeded the President’s, FAR Council’s, and DOL’s authority and were otherwise preempted by the very same labor laws. Moreover, the plaintiffs argued, the rules were arbitrary and capricious and were not entitled to any deference because they forced massive and unnecessary costs on contractors, government agencies, and taxpayers without any rational benefits.

The plaintiffs also sought an injunction against the pay transparency provisions of the rules, as well as against the limitation on certain arbitration agreements. The pay transparency provisions require employers to include certain information in their employee paychecks each period, including the number of hours worked, overtime calculations for nonexempt employees, rates of pay, gross pay and additions or deductions from pay, and whether they have been classified as independent contractors. The arbitration provisions prohibit contractors with contracts for noncommercial items over $1 million from entering pre-dispute arbitration agreements with employees or independent contractors on any matter arising under Title VII of the Civil Rights Act, as well as regarding any tort related to or arising out of allegations of sexual assault or harassment. The plaintiffs argued that these provisions were unlawful and arbitrary. Furthermore, the limitation on certain arbitration agreements violated the Federal Arbitration Act’s clear policy favoring the enforcement of arbitration agreements.

The court concluded that all of the plaintiffs’ arguments, with the exception of those relating to the paycheck transparency provisions, were likely to succeed on the merits. Unlike the other provisions of the rules which were set to take effect on October 25, 2015, the paycheck transparency provisions are effective on January 1, 2017 and only apply to individuals performing work under a government contract or subcontract. Judge Crone found, among other things, that the rest of the rules conflicted with the stated labor laws because a contractor could potentially be disqualified from a contract for violations that, under the labor law at issue, would not result in the contractor’s suspension or debarment. In addition, the inclusion of nonfinal, appealable decisions in the required disclosures subjected contractors to potential bad conduct by agency officials and violated due process. The government’s explanation for the benefits of the rules to the government and the public or of the burdens it imposed on contractors was, according to the court, inadequate. Importantly, the court concluded that “despite the efforts of agency employees and invitations to interested parties to provide data, the government was unable to quantify any benefits derived from the sweeping changes imposed by the Executive Order, FAR rule, and DOL Guidance.”

Where do we go from here? For now, contractors can breathe a sigh of relief that the associated FAR clauses will not be included in any new solicitations or contracts. But given the Obama administration’s commitment to strengthening compliance with labor laws and the amount of government time that has already been expended in implementing the Executive Order, the FAR rule, and the DOL Guidance, many expect that the reprieve will be short-lived and that the administration will likely litigate this case vigorously. Certain aspects of the court’s opinion also raise doubts as to whether the plaintiffs can succeed on the merits on all their claims. For example, the court’s opinion did not meaningfully address the fact that the disclosures required by the rules only apply to companies seeking to compete for a government contract and violations are not the basis, in and of themselves, for disqualifying a contractor. Moreover, the information that contractors must disclose under the rules is, in most situations, already available to the government. There is no question that the results of the upcoming presidential election will also impact whether these rules become part of the reality of government contracting.