Government contractors will soon be required to disclose any previous violations of labor and employment laws when submitting a bid, effectively imposing significant new compliance and recordkeeping obligations.
The Labor Department issued its 106-page proposed guidance in May, intended to help clarify the scope of the controversial Fair Pay and Safe Workplaces Executive Order, signed by President Barack Obama in July 2014. Additionally, a 131-page proposed regulation issued by the Defense Department, General Services Administration, and NASA integrates the requirements of the executive order and the Labor Department guidance into existing procurement regulations.
Both the proposed guidance and the regulation require would-be government contractors whose estimated value of supplies or services exceeds $500,000 to disclose whether they’ve had any labor law violations in the last three years before they can be considered for a contract. Violations broadly encompass administrative rulings, civil judgments, or arbitration awards or decisions rendered against the contractor for violations of any of 14 specified federal statutes and “equivalent state laws,” addressing wage and hour, safety and health, collective bargaining, family and medical leave, and civil rights protections.
“The Executive Order and the proposed regulation, once finalized, will for the first time make labor and employment law compliance a key part of the federal government’s determination of whether or not a contractor will be a successful bidder on a federal contract,” says Kenneth Gage, an employment law partner at the firm Paul Hastings. “Now that labor and employment law compliance will be a major part of the contracting process, it makes it all the more important that employers get it right.”
Absent from the proposed guidance is clarification of which state laws are “equivalent” to the 14 federal labor laws set forth in the executive order. In a footnote, the Labor Department said it will issue a “second proposed guidance” addressing that question at a future date.
“Now that labor and employment law compliance will be a major part of the contracting process, it makes it all the more important that employers get it right.”
Kenneth Gage, Partner, Paul Hastings
The proposed guidance will remain open for comment until July 26. The proposed rules will remain open for comment until July 27.
The guidance lays out what reporting requirements would be imposed on contractors. For each reportable violation, the contractor must provide:
The specific labor law that was violated;
The case number, docket number, or other unique identification number;
The date of the determination, judgment, award, or decision; and
The name of the court, arbitrator(s), agency, board, or commission that rendered it.
Even after winning a contract, companies must update their disclosures to the contracting government agency every six months during the performance of the contract.
These new reporting requirements will mean big headaches particularly for large federal contractors, with dozens or even hundreds of locations around the country, who must now figure out how to track and report all their offenses. “The practical challenge for contractors now, especially for large contractors, is that you have to catalogue all this,” Gage says.
Companies may want to have a centralized database where they can gather incidents of labor or employment law violations so that at any given time, compliance officers “could literally run a report and get a statement of the violations that would be provided to the contracting agency,” says Connie Bertram, a partner in the labor practice at the law firm Proskauer.
Before contractors reach that point, they’ll first need to understand how the company currently handles complaints and alleged violations of labor and employment laws: Who are the points of contact in the company who make the decisions about how to respond to those complaints? “You don’t want a situation where each individual department is making its own decision,” Bertram says.
That’s where the compliance or legal department can help centralize the process, by identifying all the stakeholders within the company (HR, legal, health & safety, business unit chiefs) who may know about violations, and then forming a team to share and gather this information. From there, come up with an internal reporting system to track potential violations and make sure it’s updated continuously.
Under the proposed rules, contractors further would be required to obtain data about their sub-contractors within the preceding three-year period. “That brings up a whole host of other issues,” says Steve McBrady, a partner in the government contracts group of law firm Crowell & Moring. For example, it’s not unusual for one company to have a sub-contractor that is its competitor on the next contract up for bid. That raises concerns about confidentiality.
Another routine arrangement: small companies that operate as prime contractors, which in turn use much larger companies as their sub-contractors. “Is it reasonable to expect that a small business prime contractor will be able to analyze and collect the labor law compliance information from its large sub-contractor?” McBrady asks.
Contractors must receive updates from their sub-contractors every six months. The good news, such that it is: The reporting provision applies only to sub-contracts valued at more than $500,000, and it exempts sub-contracts for commercially available off-the-shelf items.
For sub-contractors, the disclosure requirements potentially provide an opportunity “to differentiate themselves when they are proposing and bidding themselves to be selected as a sub-contractor by a prime,” Bertram says. If they can give the contractor a pre-prepared report, showing that they’re in compliance with the executive order, or demonstrate steps they’ve taken to address previous violations, “I think they’d get a leg up on their competitors,” she says.
Although companies will have the opportunity to disclose steps they take to correct violations or improve compliance with labor laws, contracting officers at government agencies will have considerable discretion to assess the labor law violations disclosed. That part has the contracting industry in an uproar.
Geoff Burr, vice president of government affairs for national trade association Associated Builders and Contractors, issued a statement saying the rule “creates a murky federal acquisition system that is absurdly cumbersome and allows contracts to be awarded in a subjective nature.”
The 14 federal labor laws and Executive Orders identified in the Fair Pay and Safe Workplaces Executive Order 13673 are:
Fair Labor Standards Act;
Occupational Safety and Health Act of 1970;
Migrant and Seasonal Agricultural Worker Protection Act;
National Labor Relations Act;
Americans with Disabilities Act of 1990;
Family and Medical Leave Act;
Title VII of the Civil Rights Act of 1964;
Age Discrimination in Employment Act of 1967;
McNamara-O’Hara Service Contract Act;
Section 503 of the Rehabilitation Act of 1973;
Vietnam Era Veterans’ Readjustment Assistance Act of 1972 and the Veterans’ Readjustment Assistance Act of 1974;
Executive Order 11246 (Equal Employment Opportunity); and
Executive order 13658 (Establishing a Minimum Wage for Contractors).
Source: Executive Order.
Specifically, the proposed guidance requires contracting officers, together with newly established “labor compliance advisers,” to evaluate whether a company has a “satisfactory record of integrity and business ethics” that should be entitled to do business with the federal government.
According to the guidance, “each contractor’s disclosed violations of labor laws will be assessed on a case-by-case basis in light of the totality of the circumstances, including the severity of the violation or violations, the size of the contractor, and any mitigating factors.”
Burr said the “blacklisting” proposal “will unnecessarily complicate the federal acquisition process by adding undue subjectivity and may result in some of the best federal contractors being blacklisted from winning future contracts. Additionally, the Administration’s latest assault on federal contractors will result in more bid protests and more frequent and costly labor and employment disputes.”
The National Association of Manufacturers expressed similar concerns. “The issue with the President’s order and the proposed regulations is the fact that it injects a political appointee into the contracting process who can use even the allegation of wrongdoing to deny a company a contract,” Joe Trauger, vice president of human resources policy for NAM, said in a statement. “This is fundamentally unfair and eviscerates any notion of due process.”
One thing is clear: The proposed guidance and regulations create the need for companies to better manage the decision-making process when deciding how to resolve a labor or employment dispute. At a high level, the disclosure requirements “put a lot more pressure on prospective contractors and current contractors to resolve these alleged labor and employment violations before the point that they become an administrative merits determination, a civil judgment, or an arbitral award,” Gage says. It creates a “significant incentive” to settle, rather than litigate, a claim, he says.
Regardless of what ends up in the final regulations, Bertram says, “one thing is clear: We’re going to have a three-year look-back period.” That means contractors must start thinking now about factoring those disclosure obligations into their risk assessments, she says, “Because violations that are found today are going to be reportable when the regulations are finalized.”