Executive Order Creates New Disclosure Obligations for Government Contractors: Once Implemented, the Order Will Fundamentally Alter the Relationships Between Prime and Subcontractors

by Holland & Knight LLP
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HIGHLIGHTS:

  • Contractors must report civil and administrative decisions involving violations of federal and state labor and health and safety laws.
  • Prime contractors will be required to collect the same information from subcontractors and act on the information.
  • Contracting officers must consider violations of labor and health and safety laws when awarding contracts, exercising options, terminating contracts, and making suspension and debarment referrals.

The July 31, 2014, executive order, "Fair Pay and Safe Workplaces," introduces a broad federal contractor reporting scheme that alters the relationship between prime and subcontractors, creates an obligation for contracting officers to enforce worker protection laws, and inserts the Department of Labor (DOL) in the procurement process. This alert summarizes these new obligations.

While the executive order states that it is "effective immediately," it requires the Federal Acquisition Regulatory (FAR) Council, in consultation with the Department of Labor, and the Office of Management and Budget, to amend the FAR to implement a large number of its provisions. These FAR amendments presumably will include the development of the solicitation and contract provisions necessary to make the rule applicable to contractors. That said, there is nothing that would appear to prohibit agencies from developing interim solicitation and contract provisions.

Key Feature: Pre-Award Self-Disclosure Requirement

The executive order's key feature is the establishment of a new pre-award self-disclosure requirement that is to be updated every six months following the award of a contract. All contracts with an estimated value exceeding $500,000 are covered, including those for construction and commercial items. Small businesses also must comply with the reporting obligations. Reported violations are to be included in the government-wide Federal Awardee Performance and Integrity Information System (FAPIIS), along with "data on the resolution of any issues related to such information."

Companies will have to report whether, within the preceding three-year period, they have been subject to "any administrative merits determination, arbitral award or decision, or civil judgment" involving the violation of 15 categories of labor and health and safety laws. The laws are:

  • The Fair Labor Standards Act
  • The Occupational and Safety Act
  • The Migrant and Seasonal Worker Protection Act
  • The National Labor Relations Act
  • The Davis-Bacon Act
  • The Services Contract Act
  • Executive Order 11246 (Equal Employment Opportunity)
  • Section 503 of the Rehabilitation Act
  • The Vietnam Era Veterans' Readjustment Assistance Act
  • The Family and Medical Leave Act
  • Title VII of the Civil Rights Act
  • The Americans with Disabilities Act
  • The Age Discrimination in Employment Act
  • Executive Order 13658 (Minimum Wage for Contractors)
  • "Equivalent" State Laws (which are to be defined in guidance issued by DOL)

Pre-Award

The contracting officer must consider this information in an offeror's responsibility determination. If an offeror discloses a violation, the contracting officer must provide the offeror with the opportunity to disclose any steps it has taken to correct the violation or improve compliance. Contracting officers are required to disclose information obtained through this self-disclosure process to the agency's suspending and debarring official (SDO) "as appropriate."

Post-Award

Contractors have a continuing obligation to update the information described above every six months. Contracting officers are required to consider whether the information disclosed merits further action, such as "agreements requiring appropriate remedial measures, compliance assistance, and resolving issues to avoid further violations, as well as remedies such as decisions not to exercise an option on a contract, contract termination, or referral to an agency suspending and debarring official."

The executive order mandates the creation of a new position within each agency called the labor compliance advisor. Contracting officers must consult with the agency's labor compliance advisor when making the decision whether to pursue an action against an offeror or contractor. Labor compliance advisors are independently authorized to send information they deem relevant to the agency SDO.

Subcontractor Provisions

The executive order's subcontractor provisions are extremely interesting although not entirely clear. Offerors must represent that they have required each subcontractor with an expected subcontract value exceeding $500,000 – excepting subcontracts for "commercially available off-the-shelf items" – to disclose the same set of violations identified above and to update the information every six months. Prime contractors will be required to evaluate the information submitted by subcontractors before awarding a subcontract. After award, contractors must consider whether they are to take action with respect to their subcontractors. The suggested actions may include "appropriate remedial measures, compliance assistance, and resolving issues to avoid further violations." The contracting officer, the labor compliance advisor and the Department of Labor are all tasked with being available to consult with contractors to assist in evaluating subcontractor information and determining what action, if any, to take against the subcontractor. Here is where it gets interesting: Section 2(a)(vii) authorizes the contracting officer to refer information concerning subcontractor violations to the SDO, but it does not include an express requirement for prime contractors to disclose violations reported by their subcontractors to the government. This omission places prime contractors in a difficult position: if a prime contractor learns of a serious violation by a subcontractor, must it disclose that to the government? What happens if it does? What liability does it have if it does not?

The order creates the potential for further confusion by tasking both the FAR Council and DOL with developing guidelines to assist contracting officers – and prime contractors – with identifying which labor law violations are "serious, repeated, willful, or pervasive." It mandates three components for inclusion in the FAR amendments. The new FAR provisions must:

  • provide that, in most cases, a single violation should not necessarily give rise to a nonresponsibility determination
  • ensure that contracting agencies consider mitigating factors and remedial actions
  • build in the assurance that contracting officers and labor compliance advisors send information to the SDO, "as appropriate"

DOL Guidance Required

For its part, DOL must also issue guidance to assist contracting agencies in determining whether contractor violations of the labor laws were "serious, repeated, willful or pervasive." This guidance is to incorporate any existing statutory standards, and if none exist, create them. The executive order contains further instructions for DOL in connection with its development of these standards: the order directs that the standard for determining whether a violation is "serious" must examine the number of employees affected, the degree of risk to worker safety, health or well-being resulting from the violation, and the amount of damages or penalties involved. In deciding whether "repeated "violations have occurred, the DOL guidance will direct agencies to ask whether the contractor has had one or more additional violations of the same or substantially similar requirements within the preceding three-year period. The guidance's criteria for willfulness will look at whether the contractor "knew of, showed reckless disregard for, or acted with plain indifference to "the labor laws." The pervasive standard will be judged by analyzing the number of violations in relationship to the size of the contractor. The executive order does not impose a timeline on either the FAR Council or DOL for publication of the regulations and guidance.

There are two other requirements created by the executive order. Federal government contractors and subcontractors will need to provide "transparent" paychecks to workers covered by the Fair Labor Standards Act, Davis Bacon Act, Service Contract Act and equivalent state laws. The paychecks are to include information as to hours worked, overtime, pay, and any additions or deductions. Finally, the executive order prohibits contractors and subcontractors with contracts for noncommercial items over $1 million from imposing pre-dispute arbitration agreements for claims under Title VII of the Civil Rights Act or for sexual harassment or assault. This appears to extend government-wide the provisions of the Franken Amendment, which in 2010 established a similar prohibition for DOD contracts. (Fiscal Year 2010 Defense Appropriations Act, P.L. 111-118, Section 8116).

The July 31 executive order contains many new obligations not just for contractors, but for contracting officers and DOL. Once implemented, it will fundamentally alter relationships between prime and subcontractors. It will require contractors and subcontractors to examine their current systems for identifying, responding to, and recording labor law violations. In preparation for these changes, contractors will benefit from evaluating their current compliance programs to determine existing areas of vulnerability and next steps for preventative action. Key elements of these programs include:

  • clear employee policies and related employee training in areas such as harassment prevention and workplace safety
  • additional management training to promote early, informal conflict resolution in the workplace
  • reporting procedures and HR/management protocols for addressing employee complaints, wage payment errors and requests for medical leave or disability accommodation
  • effective recordkeeping systems and periodic self-audits to identify and resolve compliance oversights
  • uniform procedures for determining whether a violation must be reported and for raising violations to the appropriate management level

In addition, reviewing prior violations of the relevant labor and health and safety laws, and any corrective action taken, will further highlight for contractors those areas where compliance efforts may be inadequate.

An in-depth analysis of the executive order's implications on contractor compliance programs and on the procurement process itself will follow.

To ensure compliance with Treasury Regulations (31 CFR Part 10, §10.35), we inform you that any tax advice contained in this correspondence was not intended or written by us to be used, and cannot be used by you or anyone else, for the purpose of avoiding penalties imposed by the Internal Revenue Code.

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