Executive Order May Block Contractors with Labor Violations from Receiving Federal Contracts

by Cooley LLP
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On July 31, 2014, President Obama signed the Fair Pay and Safe Workplaces Executive Order (“Executive Order”) that requires contractors to (1) disclose recent violations of various workplace laws before being awarded federal contracts; (2) provide wage notifications to employees and notify independent contractors of their non-employee status; and (3) barring contractors from requiring employees to sign pre-dispute arbitration agreements. This is slated to take effect for new contractors in 2016.

Background on Executive Order

According to a Fact Sheet released with the Executive Order, the purpose of this executive action is to “crack down” on federal contractors by ensuring that companies with a history of employee rights violations do not receive federal contracts. The White House indicated that the “goal of the process created by the Executive Order is to help more contractors come into compliance with workplace protections, not to deny contracts to contractors.” The Obama Administration also believes that the Executive Order will “promote efficiency in federal contracting” by removing “companies with workplace violations” that are “more likely to encounter performance problems.”

The Executive Order comes on the heels of a series of presidential actions geared towards implementing the Obama Administration’s “Year of Action” agenda in light of the stalemate in Congress. As recent as two weeks ago, President Obama signed an executive order making it illegal for federal contractors to discriminate on the basis of sexual orientation or gender identity.

Covered Contracts

The Executive Order will apply to all federal contracts for goods and services, including construction contracts, where the estimated value of the contract exceeds $500,000. It also requires prime contractors to flow down this requirement to all subcontracts that are not for commercially available off-the-shelf items where the estimated value of the subcontract is over $500,000.

Requirements of Executive Order

Disclosure of Labor Law Violations

As part of the solicitation process for covered contracts, contractors will be required to disclose whether they have any violations of certain federal and state discrimination, wage and hour, leave, and safety laws in the three years prior to bidding on the solicitation. Specifically, the Executive Order requires contractors to disclose violations of the following labor laws:

  • The Fair Labor Standards Act (“FLSA”);
  • The Occupational Safety and Health Act;
  • The National Labor Relations Act;
  • The Davis-Bacon Act;
  • The Service Contract Act;
  • Executive Order 11246;
  • 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;
  • Americans with Disabilities Act;
  • The Age Discrimination in Employment Act;
  • Executive Order 13658 (establishing minimum wages for contractors); and
  • Equivalent state laws, as defined by the Department of Labor guidance.

Violations of these laws includes “any administrative merits determination, arbitral award or decision, or civil judgment” rendered against the contractor in the three years prior to the solicitation.

As part of this disclosure, contractors will have an opportunity to disclose to the contracting officer any “steps taken to correct the violations” or “improve compliance” with these laws, including any agreements the contractor has entered with a federal or state enforcement agency. If the contractor is awarded a contract covered by the Executive Order, the contractor must provide updated disclosures to the contracting officer every six months for the duration of the contract.

Notification of Wages

Contractors will now be required to provide all individuals performing work on the contract a notification “concerning the individual’s hours worked, overtime hours, pay, and any additions made to or deductions made from pay.” This notification must be provided to employees in each pay period. Contractors will not have to include hours worked in the notification for employees who are exempt from the overtime requirements under FLSA or similar state laws if the contractor has previously informed the employee that they are exempt from overtime.

Independent Contractor Notification

The Executive Order requires contractors to provide written notification to individuals they are treating as independent contractors who perform work on contracts covered by the Executive Order. No details have been provided on what information must be included in this disclosure.

No Mandatory Arbitration Agreements

Contractors being awarded contracts with an estimated value of $1 million will no longer be able to require employees or independent contractors to enter pre-dispute arbitration agreements requiring them to arbitrate claims under Title VII of the Civil Rights Act or any tort related to or arising out of sexual assault or sexual harassment claims. This does not apply if:

  • The employee voluntarily consents to the arbitration agreement after a dispute has arisen between the employee and the contractor;
  • The contract is for commercial items or commercially off-the-shelf items;
  • The arbitration agreement was entered prior to the contractor bidding on a contract covered by the Executive Order.

Flow Downs to Subcontractors

Prime contracts must flow down:

  • The requirements to disclose labor law violations for any subcontract of $500,000 or more (except for contracts for commercially available off-the-shelf items)
  • The requirement to provide employees with wage notifications and independent contractors notification of their status in all subcontracts of $500,000 or more (except for contracts for commercially available off-the-shelf items); and
  • The requirement prohibiting certain pre-dispute arbitration agreements for subcontracts with an estimated value exceeding $1 million.

In addition, prime contractors must represent to the contracting officer that:

  • The prime contractor will require each subcontractor to disclose labor law violations to it and update this information every six months; and
  • Before awarding the subcontract, the prime contractor will consider the disclosures submitted to it by the subcontractor to determine whether the subcontractor is “a responsible source that has a satisfactory record of integrity and business ethics”.

If violations of labor laws are brought to the attention of the prime contractor, the prime contractor must consider whether “action is necessary”, including whether to award the subcontract or taking remedial measures if the subcontract is already awarded.

Determination of Violations

Before awarding contracts of $500,000 or more, contracting officers are required to consider these disclosures to determine whether the contractor “is a responsible source that has a satisfactory record of integrity and business ethics.” The Executive Order has instructed the FAR Council, in consultation with the Department of Labor and other agencies, to issue regulations that provide guidance on what labor law violations “demonstrate a lack of integrity or business ethics” because they are “serious, repeated, willful, or pervasive violations.”

Although contractors will have to wait until the final regulations are issued to understand what types of labor law violations the government may block them from receiving contracts, the Executive Order provides the following guidance:

  • A “single violation of law may not necessarily give rise to a determination of lack of responsibility”, but it will depend on the “nature” of the violation.
  • To the extent existing standards under those labor laws do not provide guidance on the types of violations that are considered “serious, repeated, willful, or pervasive violations”, the government will use the following standards:
    • Violations are “serious” based on, among other considerations: (1) the number of employees affected; (2) the degree of risk posed or actual harm done by the violation to the well-being of the worker; (3) the amount of damages incurred or fines or penalties assessed for the violation;
    • Violations are “repeated” if the contractor has “had one or more additional violations of the same or a substantially similar requirement in the past three years”;
    • Violations are “willful” if the contractor “knew of, showed reckless disregard for, or acted with plain indifference” to whether it was in compliance with these labor laws; and
    • Violations will be considered “pervasive” by comparing the “number of violations” of these labor laws in relation to the size of the contractor.

Contracting officers must give consideration to “any remedial measures or mitigating factors”, such as any corrective actions taken by the contractor. The Executive Order also instructs contracting officers to send information to the “agency suspending or debarring official” as appropriate for serious violations.

Website

The federal government will be developing a website for contractors to report information required by the Executive Order as well as other federal contractor reporting requirements.

Effective Date

The Executive Order will be implemented on all covered contracts in stages on a “prioritized basis” starting in 2016.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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