By James Kevin Wholey, originally published in Buffalo Business Firstq on 3/22/16.

New Risks, Costs for Federal Government Contractors

In the past 18 months, the Obama Administration — acting by executive order and bypassing Congress — has greatly expanded the role of the Department of Labor (DOL) in awarding and administering federal contracts and, in consequence, its power over companies seeking to do business with the federal government.

Perhaps none are so sweeping as the proposed rule and guidance regarding “Fair Pay and Safe Workplaces.” The president issued Executive Order 13673 on July 31, 2014. The FARS Council (the Department of Defense, NASA and the General Services Administration) and the Labor Department on May 27, 2015, simultaneously issued a notice of proposed rulemaking (80 Fed. Reg. 30,548 May 28, 2015)) titled “Fair Pay and Safe Workplaces” and the proposed guidance in implementing the Executive Order (80 Fed. Reg. 30,574 May 28, 2016) (“Guidance”).

Taken together, the compliance and reporting requirements of the proposed rule and guidance raise not only the risks and costs of doing business with the federal government, but also troubling questions of contractor due process — and of Constitutional authority.

The proposed rule and guidance essentially impose three sets of new regulatory obligations upon contractors and would-be contractors:

  • Required Qualifying Disclosures For Eligibility to Bid or Re-Bid
  • Pay Transparency/Independent Contractor Notice
  • Limits on Pre-Dispute Arbitration Agreements

The first requires disclosure of certain alleged labor and employment law violations in order to bid for and maintain a contract; the second obligates specific disclosures regarding pay-related information and status; the last prohibits contractors from using pre-dispute arbitration agreements for specified employment disputes.

Although the latter two give rise to their own issues of vagueness and enforceability, this column will focus primarily on the first area (qualifying disclosures), as issues raised there go to the heart of eligibility of a company to do business with the government.

Section 2 of the Executive Order requires companies seek federal contracts worth $500,000 or more to, in the bid process, disclose any “administrative merits decision, arbitrary award or decision, or civil judgment” against it within the preceding three years of any of an array of federal labor and employment laws (including various civil rights laws, Fair Labor Standards Act, Service Contract Act, Family Medical Leave Act, Davis-Bacon Act, Executive Order 13658 (contract minimum wage) or “equivalent state laws”).

  • “Administrative Merits determination” is defined as a preliminary finding or recommendation by “any labor enforcement agency” including the DOL, OSHA, EEOC, OFCC and the NRLB, “even if subject to further review.” The disclosure requirement therefore includes mere “reasonable cause” letters or complaints filed by an agency.
  • “Arbitral Award or Decision” means any initial determination by the NLRB or other arbitrator that a labor or employment law has been violated; it thus encompasses awards that are not final and are subject to being confirmed, modified or vacated by a court.
  • “Civil Judgment” means any state or federal court determination, or enjoining, of a violation of labor law. Notably, any private settlements of such allegations are excepted.

Certain regulatory inconsistencies are overlooked here — one example being that the EEOC is obligated by law to engage in good-faith conciliation after making a “reasonable cause” finding. But under the proposed guidance, that finding is already discloseable as an “administrative merits determination.”

Importantly, reporting obligations continue post-award. Contractors are required to update these disclosures every six months during performance — not just at renewal, as has been the case for other representations under FARS.

This obligation is included in an enhanced “flow-down” provision (to be phased in), whereby prime contractors must not only communicate the requirements to their subcontractors but must oversee their subs’ post-award performance of their monitoring and reporting obligations — making “primes” the guarantors of the labor law compliance and reporting of their subcontractors.

According to the guidance, contracting agencies will use this information to determine if any violations are “serious,” “repeated,” “willful” and “pervasive,” as those terms are extensively but vaguely defined in the guidance. These findings would then be used to determine the contractors’ ongoing eligibility for current and further contracts as a “responsible” bidder.

The problems with this rule and guidance are numerous. The overarching issue that emerges is one of simple due process. Non-final determinations (mere allegations, in some instances) could end up “blacklisting” a bidder or contractor.

Non-final labor law accusations are no indicator of a company’s integrity and business ethics and should not be the basis for barring that company from government work; such an approach could cost contractors jobs and revenue based on allegations that ultimately turned out to be meritless, with the harm done irreparable by the time of actual resolution.

Moreover, it leaves companies open to the extortionate threat of practical debarment as leverage in labor disputes, whether meritorious or not. Concerns about such leverage might have a distorting effect on how companies pursue their rights in litigating with labor agencies on unrelated matters.

Finally, the interim reporting and “flow-down” provisions with their new responsibilities for oversight of and disclosure from subcontractors opens up a new horizon of prospective liability for government contractors. Could an incomplete or mistaken report — or one from a company’s subcontractor — give rise to possible actions under the False Claims Act or other federal statutes? The issue needs examination.

There are Constitutional questions, as well. Arguably this order and proposed guidance empower the Department of Labor to reinterpret and enforce separately passed laws under which Congress established and continues to oversee more than 14 different agencies. While the question of whether the DOL has such statutory authority or can acquire it by Executive Order is beyond the scope of this article, clearly the rule is open to such challenge.

In all, the rule (if finalized) seems likely to generate a fair amount of litigation, Constitutional and otherwise. Congress has already expressed repeated concerns, with letters signed by eight members of Congress (July 15, 2015) and four senators (Aug. 6, 2015), each pointing out that the rule trespassed on authorities already legislated by Congress (these letters may have helped cause an extension of the comment period). More concretely, in the December budget agreement, Congress pointedly declined to include funding for the new labor office and compliance officers requested to enforce the rule.

Nevertheless, Congress did not — as it might have — seek specifically to repeal the authorizing order nor prohibit promulgating the rule, which will be published in final form in April. Until and unless it does so, the prudent course is to treat the rule as imminent law. All current and would-be federal contractors should carefully review the proposed rule and guidance and be prepared to comply.