Despite the government’s attempt at verbal finessing, important new rules for companies that do business with federal agencies are already referred to with the ominous shorthand of “contractor blacklisting.”

On Aug. 24, the Department of Labor and the Federal Acquisition Regulatory Council announced final regulations and guidance implementing a 2014 executive order by President Barack Obama. The Fair Pay and Safe Workplaces Directive set the stage for requiring that prospective federal contractors disclose labor law, civil rights, and wage violations. It also requires guidance for contracting agencies on how to factor in labor violations when awarding federal contracts and sub-contracts valued at more than $500,000.

Pervasive, prolonged, willful, or serious violations can be used to block a company’s bid.

“Contractors that illegally cut corners at the expense of their workers should not benefit from taxpayer-funded federal contracts,” U.S. Secretary of Labor Thomas Perez said in a statement. “At the same time, employers who meet their legal responsibilities should not have to compete with those who do not.”

Government contractors are already required to disclose findings of fault and liability made in administrative or civil proceedings. Current disclosures, however, do not “give a full picture of the contractor’s labor compliance track record and leave agencies vulnerable to making awards to contractors that cheat their workers, competitors, and the taxpayers,” the Labor Department said.

Prospective contractors will be required to disclose violations of 14 laws during the previous three years, including those addressing wage and hour, safety and health, collective bargaining, family and medical leave, and civil rights protections.

Specifically, the 14 laws referred to are:

The Fair Labor Standards Act

The Occupational Safety and Health Act

The Migrant and Seasonal Agricultural Worker Protection Act

The National Labor Relations Act

The Americans with Disabilities Act

The Family and Medical Leave Act

Title VII of the Civil Rights Act

The Age Discrimination in Employment Act

The Davis-Bacon Act

The McNamara-O’Hara Service Contract Act

Section 503 of the Rehabilitation Act

The Vietnam Era Veterans’ Readjustment Assistance Act of 1972 and The Veterans’ Readjustment Assistance Act of 1974

Executive Order 11246 (Equal Employment Opportunity)

Executive Order 13658 (Establishing a Minimum Wage for Contractors)

The rule also limits the use of pre-dispute arbitration clauses in employment agreements on covered federal contracts.

Most federal contractors will only have to attest that they comply with laws providing basic workplace protections, the Labor Department says. Designated Agency Labor Compliance Advisors (ALCAs) will be made available to assist contractors who report violations and coordinate with the relevant enforcement agency experts to help them come into compliance.

“Let’s dust off our alternative dispute resolution caps and really develop procedures for identifying and resolving complaints before they become external complaints and charges.”
Connie Bertram, Co-Head, Government Contractor Compliance and Relations Group, Proskauer Rose

The final regulations are effective on Oct. 25, 2016, and will be implemented in phases. Among the important dates:

Oct. 25, 2016: The final rule takes effect. Mandatory disclosure and assessment of labor law compliance begins for all prime contractors under consideration for contracts with a total value greater than or equal to $50 million. The reporting disclosure period is initially limited to one year and will gradually increase to three years by Oct. 25, 2018.

Jan. 1, 2017: The “paycheck transparency” clause takes effect, requiring contractors to provide wage statements and notice of any independent contractor relationship to their covered workers.

April 25, 2017: The total contract value threshold for prime contracts requiring disclosure and assessment of labor law compliance is reduced to $500,000.

Oct. 25, 2017: Mandatory assessment begins for all sub-contractors under consideration for sub-contracts with a total value greater than or equal to $500,000.

During the week of Sept. 12, 2016, pre-assessment begins, through which current or prospective contractors may contact the Labor Department for a voluntary review and assessment of their labor compliance history. The Department will assess whether any of the contractor’s violations are “serious, repeated, willful, or pervasive” and whether a labor compliance agreement is warranted. The intent is to assist contractors with the development of a labor compliance agreement and taking steps to mitigate issues before a specific acquisition. Participation will be considered as a mitigating factor in future acquisitions.

Modifications made to the final rule—many of which were made in response to industry comments on the proposal—include: a phase-in of the implementation for lower-value contracts and for sub-contractors; delaying the application of a three-year look-back period for reporting; and holding sub-contractors (rather than their prime contractors) responsible for directly reporting labor law violations. A requirement to report most state labor law infractions will be addressed with a separate federal rulemaking process.

“While having sub-contractors go directly to the Labor Department to report their violations “isn’t ideal,” that system is vastly preferential to what was proposed, which would have been for sub-contractors to report their violations directly to prime contractors and “prime contractors then having to put themselves in the shoes of both contracting officers and labor compliance advisers,” says Leslie Stout-Tabackman, principal with law firm Jackson Lewis. “That was clearly unworkable.”


The following is from the Department of Labor's guidance and its review of comment letters.
Jenner & Block LLP commented that it was unfair to require disclosure of violations that have been settled, thus rendering them “potentially sanctionable event[s].” According to the comment, doing so would cause “the Federal government to violate its own contractual obligations” when there is a non-admission provision in the settlement agreement.
The Department declines to amend the Guidance's treatment of settled violations. The Order requires the disclosure of violations, and the fact that a violation was subsequently settled does not negate the fact that the enforcement agency, after a thorough investigation, found a violation to have occurred.
In some settlements, the enforcement agency may agree as part of the settlement to vacate a prior administrative merits determination. In such a case, the settlement would have the same effect as a court decision reversing or vacating the original violation. As the Guidance notes, in such a circumstance, the contractor does not need to disclose the original Labor Law decision.
Unless an enforcement agency has agreed to vacate or rescind the underlying violation entirely, however, the contractor must still disclose the related Labor Law decisions when required by the Order, notwithstanding any settlement agreement. A non-admission provision, for example, does not generally involve an enforcement agency's agreement to withdraw any finding of a violation. Thus, a non-admission provision does not affect the existence of any prior Labor Law decision, and therefore does not change the Order's requirement that a contractor must disclose any Labor Law decision that preceded the settlement. Similarly, an enforcement agency will not include, and an ALCA will not consider, language in a settlement agreement purporting to determine or affect whether a violation or related Labor Law decision must be disclosed under the Order.
Although settlement agreements will not affect a contractor's disclosure requirements under the Order, a settlement agreement may be an important factor in the ALCA's overall assessment of the contractor's compliance record.
The Order requires ALCAs to consider steps taken to correct the violation or improve compliance, and the Guidance accordingly provides that the remediation of a Labor Law violation through a settlement agreement is an important mitigating factor that can weigh in favor of a satisfactory record of Labor Law compliance.
Source: Department of Labor

A lack of clarity in the proposed rule and guidance with respect to who a contractor was with respect to reporting obligations is also addressed. The final rule makes clear that the legal entity itself is only required to report its violations. “The legal entity is that which is listed on the bid or the offer on the contract, not that entity’s parent, subsidiaries, or sister companies,” Stout-Tabackman says. “However, you may have a trade name of a division, but it is not its own legal entity. If you are the division of a corporation, you would be required to make disclosures of the corporation itself.”

A lingering concern for Stout-Tabackman is whether the Labor Department is up to the task of handling its new responsibilities—handling all the data, making determinations, and figuring out what counts as “willful, pervasive, repeated, and serious.”

“There may be a lack of personnel, a lack of resources, and in some cases a lack of expertise that could make this unfair and unjust to contractors,” she says.

Despite accommodations and concessions in the final rule, critics are jeering and legal challenges are being plotted.

“The accommodations provided in the final rule and guidance fail to mitigate the fundamentally flawed rationale for the Executive Order,” says David Berteau, president and CEO of the Professional Services Council, a trade group representing the government technology and professional services industry. “As the government itself recognizes, there has been no overwhelming problem with contractor labor law violations. At best, the new rule and guidelines are a sheer duplication of the responsibility of the Labor Department and other agencies. At worst, it’s a huge, new, costly burden of collecting information. That burden would rest on the contractors, on the thousands or tens of thousands of sub-contractors, and on contracting officers across the government.”

National Association of Manufacturers President and CEO Jay Timmons says the new rule may block businesses from working with the federal government whether or not they have violated workplace laws.

“This regulation is akin to a bizarre ‘guilty until proven innocent’ policy that significantly burdens manufacturers who will have to expend countless hours and resources to ensure they do not run afoul of a fundamentally unfair regulation,” he said in a statement.

Manufacturers already average more than $19,500 in compliance costs per employee per year, and that number nearly doubles to $34,671 for small manufacturers with fewer than 50 employees, Timmons claimed, adding, “for manufacturers being crushed by the weight and costs of regulations, this administration has gone too far.”

“These regulations will bury federal contractors and sub-contractors under mountains of paperwork and then prevent some from getting work for a labor violation they didn’t commit,” says Senate Labor Committee Chairman Lamar Alexander (R-Tenn.)

In Congress, both the House and Senate have passed versions of the National Defense Authorization Act that includes language to exclude defense contracts from the administration’s executive order unless the companies involved have been debarred or otherwise suspended Department of Defense contractors from the rule. Defense contractors account for the majority of all federal contractors.

The two chambers, however, face the daunting prospect of resolving differences in the two bills and either securing presidential sign-off or gathering the votes needed for a veto override.

Alexander said that effort is intended to ensure “that the men and women working to ensure our national security are not bogged down in needless red tape.”

In the mid-1990s, the Government Accountability Office (then known as the General Accounting Office) issued two reports finding that federal contracts worth more than $60 billion had been awarded to companies that had violated the National Labor Relations Act and the Occupational Safety and Health Act.

A decade later, the GAO found a similar pattern and that nearly two-thirds of the 50 largest wage-and-hour violations and almost 40 percent of the 50 largest workplace health-and-safety penalties issued between Fiscal Years 2005 and 2009 were made against companies that went on to receive new government contracts.

“It is easy to see this becoming a situation where the Labor Department becomes a gatekeeper to contracts across the federal government, regardless of the agency you want to do your work for,” says James Murphy, a management-side labor and employment lawyer for law firm Ogletree Deakins. “Whether you get any federal contracts or not depends upon whether you pass muster with the DoL … non-adjudicated administrative merit decisions are really the core of the entire framework.”

A prevailing point of contention is that companies may be forced to report citations in the midst of an agency appeal or court challenge.

“They are counting on the value of government contracts and the uncertainty contractors are going to face if they have a black mark against their name,” Murphy says. “The administration is hoping it is this uncertainty contractors will not be able to live with, and the only way to eliminate it will be through settling claims brought by plaintiffs, unions, and government enforcement agencies. If a contract is worth $5 million and you can settle an OSHA citation for $35,000, are you going to trial over it? Or, are you just going to pay it and hope because if you pay it before the citation, nothing shows up?”

We will likely see savvy plaintiffs’ attorneys “knowing they will be able to extract a greater settlement from a government contractor because they will be interested in avoiding a violation,” says Connie Bertram, co-head of the government contractor compliance and relations group at law firm Proskauer Rose. Perceived violations of the False Claims Act will have them “chomping at the bit.”

Typical risk management focuses on litigation, the potential range of verdicts or penalties, the likelihood of an adverse ruling, the costs of resolution, and other potential consequences, such as media exposure. Factoring in the likelihood of a reportable violation as the consequence of a proceeding will likely push many contractors to settle more cases early on.

How should government contractors respond to the new regulatory landscape?

While the matter of state analogues will be dealt with at a later date, Bertram suggests that contractors prepare now. “We don’t know if they are going to have a phase-in for the state analogues and you might need to do some cleanup based on clarifications to that part of the regulations,” she says. “Contractors should go into developing their systems and trying to capture both the state and federal violations, but only reporting the federal ones for now.”

The first step in developing a compliance plan, in her view, is to identify the individuals, units, and departments that will be responsible for preparing disclosures and overseeing updates. That process may be a complicated one.

“Because there are 14 different statutes, and then you have the state analogues, at any given time at any given company there are probably six or seven different departments that might be touching those kinds of violations,” Bertram says. “OSHA violations are typically handled very differently than labor violations that are handled very differently from employment and retaliation-based complaints.”

A goal is to identify potential violations before they become violations, and even before they become complaints or charges. “Perform an audit of all of the systems and processes that are relevant to the 14 statutes so you can identify, at the earliest possible point, potential problem areas and potential claimants,” she says. “Let’s dust off our alternative dispute resolution caps and really develop procedures for identifying and resolving complaints before they become external complaints and charges.”

Hotlines, mediation programs, open-door policies, and an ombudsman are all measures that should be robust. “All these different procedures for making people happy so they will not sue you are really going to pay off for employers,” she says.

Bertram also advocates an improved capability to track and document dispute resolution to ensure that already resolved situations are not taken off the reporting list.

“I’m concerned that because these lists are going to be generated and submitted by the contracting office or the proposals office of a government contractor that they are going to provide bad information,” she says. “They get an inquiry, dig deeper to develop mitigating materials, and then have the in-house counsels office say it isn’t even a violation any longer. By then, you have the labor adviser already looking at it.”

Preparation, however, may not eliminate uncertainty. “Unfortunately, you don’t know what you are going to get when you take your violations to the Labor Department,” says Jackson Lewis’ Stout-Tabackman. “You walk in that door and you lose control over what the outcome might be.”