Increased Hiring Requirements for Federal Contractors: Mirroring European Laws?

by Pillsbury Global Sourcing Practice
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[author: Brooke L. Daniels]

The U.S. Department of Defense, General Services Administration and the National Aeronautics and Space Administration (NASA) have issued a proposal to amend the Federal Acquisition Regulation (FAR) implementing Executive Order 13495 , which will require government contractors that take over service work from other companies to offer jobs to certain categories of the predecessor's employees.

The presidential order is intended to aid procurement efficiency and mitigate transition risk by preserving the service continuity of the predecessor's employees, if the contract is awarded for the same or similar work in the same location. There are many similarities with the long standing protections offered to citizens of the European Union, whose jobs are protected in certain circumstances by the Acquired Rights Directive (ARD). Under the ARD, an employee's job is safeguarded by requiring a successor contractor to hire the employee from its predecessor on substantially the same terms and conditions (e.g., salary, benefits, years of services) as the employee enjoyed with its predecessor. Notably, the ARD applies to private sector outsourcing transactions, not just to government contracts as is the case under the proposed FAR regulations.

For any company that has sought to outsource its IT or BPO functions on a global basis, the implications of the ARD are impossible to ignore. It requires suppliers to conduct substantial due diligence on the customer's HR policies and personnel before signing an outsourcing deal, and to make offers to its predecessor's employees as opposed to using its own employees to perform the services. As a result, the supplier must factor the cost of hiring the new personnel into its solution, and in turn, pass that cost back as a charge to the customer. Although the consequences vary from country to country, ARD non-compliance violations can result in hefty fines for both customers and suppliers as well as potential criminal liability for certain breaches of consultation requirements in countries such as France.

Although the proposed FAR rule may have the same flavor as the ARD, it is unlikely to prove to be nearly as restrictive as the ARD. There are significant exceptions to the rule, including:

  1. it does not apply to services contracts valued at less than $150,000;
  2. a successor contractor may elect to employ fewer employees under its contract in order to provide the most efficient performance;
  3. managerial positions are exempted from the rule; and
  4. an agency may waive the application of the rule if it would impair the Federal Government's ability to procure services on an efficient and economic basis.

The ARD has its own set of carve outs, but those carve outs are not nearly as generous as the exemptions provided above. In a recent article in Law360, Dietrich Knauth suggests about 15,000 service contracts will be subject to the proposed rule annually. It will be interesting to see how often agencies will seek to rely on exception (4) to preserve the economic efficiency of their service contracts. Is this the start of a trend toward increased job protection by the United States? Will we see more of these types of regulations, and it is possible that such regulations could bleed into the private sector? If the laws of the European Union can be used as guidance, then the answers to such questions will have a major impact on the savings and solutions that suppliers are able to offer customers in second generation outsourcing arrangements.

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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