Contractors Face Uncertainty Amid New Labor Law-Related Requirements

On July 31, 2014, President Barack Obama issued yet another executive order addressed to roughly 24,000 federal government contractors.1 The order, entitled “Fair Pay and Workplace Safety,” imposes significant new regulatory requirements and administrative burdens on contractors and bidders for contracts valued in excess of $500,000. It will be implemented in stages starting in 2016.2

The order’s stated purpose is to “create incentives for better compliance and a process for helping contractors come into compliance with basic workplace protection laws,” as well as to “increase efficiency in federal contracting.”3 Its requirements, however, are more stick than carrot. The provisions discussed here are some of the most concerning. Specifically, the order mandates disclosure of employment law violations and establishes a new watchdog position, Labor LCAs, who will review the disclosures and take actions against contractors, including rejection of a bid and debarment, based on the disclosures.4 As discussed below, these provisions will complicate the contracting process and increase the costs of doing business with the government.

Self-Reporting of Violations

The order’s self-reporting provisions require bidders and contractors with contracts for goods and services, including construction, valued in excess of $500,000 to disclose violations of various employment laws. It also requires contractors to solicit information from covered subcontractors about their labor law violations and report those as well. The disclosure requirements are aimed at rewarding “contractors who invest in their workers’ safety and maintain a fair and equitable workplace” and eliminating competition from other contractors and bidders who “offer low-ball bids—based on savings from skirting the law—and then ultimately deliver poorer performance to taxpayers.”5 Businesses that wish to do business with the government will have to make disclosures during the bidding process, and as discussed below, their disclosures may prevent them from being awarded a contract and cause them to be referred to the Department of Labor for additional oversight. Once awarded a contract, contractors must update disclosures for themselves and covered subcontractors every six months. Serious labor law violations may lead to termination of a contract or even debarment.

Self-Reporting During the Bidding Process. The disclosure obligations during the bidding process are quite broad. Bidders must self-report any “administrative merits determination, arbitral award or decision, or civil judgment” entered against them in the previous three years for violations of any of 14 federal labor laws and analogous state laws.6 These laws include:

  • Wage and hour law violations under the Fair Labor Standards Act, the Davis Bacon Act, the Service Contract Act, and Executive Order 13658 (establishing a minimum wage for contractors);
  • Workplace safety violations under the Occupational Safety and Health Act of 1970;
  • Violations of the National Labor Relations Act (which protects, among other things, employees’ right to form a union);
  • Violations of non-discrimination laws including §503 of the Rehabilitation Act of 1973, the Americans with Disabilities Act, the Vietnam Era Veterans’ Readjustment Assistance Act, Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967, Executive Orders 11246 (Equal Employment Opportunity);
  • Violations of the Family and Medical Leave Act;
  • Violations of the Migrant and Seasonal Agricultural Worker Protection Act; and
  • Equivalent state laws, as defined in guidance to be issued by the Department of Labor.

Bidders will also be required to represent that, to the best of their knowledge, they have disclosed all labor law violations, if any, and to describe any steps taken to correct those violations or improve compliance.

Self-reporting During the Life of a Contract. After being awarded a contract, the company must update its self-report every six months. In addition, at the time of signing a contract, the company must represent that it will require the same disclosures of labor law violations from subcontractors to which it awards, or plans to award, contracts valued at over $500,000—except those for commercially available off-the-shelf items. Contractors also must require their covered subcontractors to update their disclosures every six months during the life of the subcontract.

Oversight Schemes and Consequences of Reporting

The order directs each contracting agency to designate a senior official as its Labor LCA (LCA). The LCA’s key role will be to assist contracting officers and agency officials in assessing whether a company’s self-reported violations are of a “serious, repeated, willful, or pervasive nature” and, if the violations are “serious, repeated, willful or pervasive,” taking action against the company. LCAs may recommend any of a host of actions ranging in severity from rejecting a bid or terminating a contract and debarring a contractor, as well as recommending that a contractor be required to enter into an “agreement” designed to remedy violations and prevent future violations.7 When evaluating a company’s disclosures and what actions, if any, to take against the company, the LCA and the contracting agency also may consider information sent by the Department of Labor about completed and pending investigations of the company. The most impactful consequences will be reserved for businesses whose histories of violations are judged to reflect a “lack of integrity or business ethics.”8

In addition to recommending various actions against bidders and contractors and their subcontractors, LCAs will be empowered, among other things, to consult with agency officials and the Department of Labor, as necessary, in the development of regulations, policies, and guidance addressing labor law compliance by contractors and subcontractors and strengthening agency management of contractor compliance. LCAs also will publicly9 provide a yearly summary of agency actions taken to promote greater labor law compliance, including reporting about actions taken with respect to contractors and subcontractors who have been deemed to have “serious, repeated, willful and pervasive” violations of labor laws.

Contractor Review and Action Against Subcontractors. Surprisingly, government officials are not the only ones required to act against violators of labor laws. A contractor must not only solicit and report violations of subcontractors, but it also must evaluate its subcontractors’ disclosures before awarding them a subcontract and avoid doing business with subcontractors with a history of violations. But, when a subcontract would be effective within five days of the execution of the prime contract, the contractor will have 30 days to review the subcontractor’s disclosures and, presumably, terminate the subcontract if appropriate. As they receive subcontractors’ required disclosure updates every six months, contractors must continue to evaluate subcontractors’ compliance with labor laws throughout the life of the subcontract and take any necessary actions.

Undefined Review Standards. Notwithstanding the importance of the assessments by contractors and contracting officers of the egregiousness and prevalence of reported violations, the order does not define what constitutes “serious,” “repeated,” “willful,” or “pervasive” violations. Rather, the order tasks the Secretary of Labor with developing guidance that defines those terms by incorporating existing statutory standards or, if none exist, new standards that take into account the number of employees affected by the violations, the degree of risk posed or actual harm done by the violation to the health, safety, or well-being of a worker, the amount of damages incurred or fines or penalties assessed with regard to the violation, the number of violations, the size of the business and other considerations as the secretary finds appropriate.

The responsibility of developing the regulations to be used in determining whether violations reflect a lack of integrity or business ethics falls on the Federal Acquisition Regulatory (FAR) Council. Following the order’s limited guidance, the regulations will provide that a single violation will not, in most instances, support a finding of lack of responsibility. The regulations also are supposed to ensure that any “remedial measures or mitigating factors” taken by contractors and subcontractors in response to violations are appropriately considered.10

Practical and Legal Implications

The order’s reporting and compliance enforcement requirements raise many practical and legal concerns for contractors and subcontractors. These include:

  • What is the scope of the disclosures? Must contractors and subcontractors report violations found against affiliated entities and subsidiaries that are not directly involved with fulfillment of the contract?
  • If the regulations set a broad scope of disclosure, how will a contractor ensure that all violations of all of its covered affiliated entities and subsidiaries are reported? Will contractors be subject to the False Claims Act and qui tam litigation if disclosures are incomplete?
  • How will the terms “serious,” “repeated,” “willful” and “pervasive” ultimately be defined?
  • Under what circumstances will disclosures lead to audits or investigations and the potential imposition of remedial measures or other obligations? Will the “agreements” recommended by LCAs be non-negotiable mandates? Will companies that lose bids based on their disclosures nevertheless be required to enter into such “agreements”?
  • How will contractors coordinate collection of information about violations from subcontractors and ensure that disclosures are timely and complete? Will critical subcontractors terminate relationships to avoid reporting obligations and hinder the contractor’s ability to fulfill a contract?

Given the potential serious and far-reaching ramifications of the mandatory disclosures, contractors may need to reconsider their risk management and litigation strategies. President Obama has made no secret of the fact that the order is designed to encourage settlement of employment claims and lawsuits—settlements need not be disclosed.11 But that goal competes with two other stated goals of the order: reducing contracting costs and increasing contracting efficiency.

Publicly available disclosures obtained through Freedom of Information Act12 requests or the public annual reports by LCAs could be used by plaintiffs’ attorneys to target companies with a history of certain types of violations for lawsuits. They also might seek to introduce disclosures into evidence in support of new claims. Plaintiffs’ attorneys may also simply target government contractors for suit, seeking to capitalize on the additional settlement leverage they may perceive they gain from the order. To avoid the risk of an adverse judgment and the potentially serious consequences that could follow after reporting a judgment, contractors and subcontractors might feel pressure to settle all but the most frivolous of claims. Additional litigation and settlement increases the cost of doing business with the government and may ultimately increase the costs that companies must charge to fulfil a contract.

Mandatory public disclosures may affect not only the costs but also the effectiveness and quality of the federal contracting process. A company that loses a bid might try to use the winning bidder’s disclosures to support a bid protest, seizing on what is sure to be the inherent subjectivity of contracting officers’ relative assessments of competitors’ “integrity” and “business ethics” based on the “nature” of reported violations and remedial actions taken. Sour would-be contractors trying to get a second bite of the apple could, thus, unnecessarily delay the final approval of validly awarded contracts.

Ultimately, the prospect of increased litigation and compliance costs and tremendous administrative burdens may drive away many responsible businesses that could or do provide high-quality services and goods to the government. To avoid this, the rules and guidance that regulators eventually decide to promulgate must be clear and specific enough to allow contracting officers across federal agencies to impose corrective actions that are uniformly proportionate to the severity and pervasiveness of reported violations. This is especially critical regarding the extent to which subcontractors’ wrongdoings will impact their prime contractors’ ability to do business with the government. In the end, ensuring that the costs of the order do not outstrip its intended benefits is in the government’s hands—unless, of course, it contracts out the work.