On December 14, the Department of Labor issued its final rule implementing Executive Order 14055, entitled “Nondisplacement of Qualified Workers Under Service Contracts.” The executive order and rule seek to enhance efficiency by encouraging and streamlining the use of carryover workforces when the performance of a federal service contract shifts from one entity to another. The rule has broad applicability to federal service contracts under the Service Contract Act, subject to some minor exclusions.
The final rule is effective February 12, 2024 and will apply to solicitations issued on or after the effective date of the final regulations issued by the Federal Acquisition Regulatory Council.
In general, the rule requires all federal contractors with federal contracts and subcontracts subject to the Service Contract Act that exceed the Simplified Acquisition Threshold (currently $250,000) to offer a right of first refusal to employees of the incumbent contractor when the performance of a contract shifts from one contractor to another. In other words, a successor contractor must offer employment to certain qualified employees of the predecessor who are working on the contract (“Predecessor Employees”) before it can post job openings or hire other employees to fill positions on that contract. The right of first refusal is granted to all Predecessor Employees, and successor contractors cannot make, or refuse to make, job offers based on the wage rate, seniority, or fringe benefits of the Predecessor Employees except in very narrow circumstances. Successor contractors must also make offers to all Predecessor Employees unless the workforce is reduced for efficiency purposes. However, the successor contractor cannot seek out additional non-Predecessor Employees until 90 days after the start of the new contract or until it offers positions to all Predecessor Employees.
The rule establishes stringent procedures for obtaining exceptions to these requirements. In only narrow circumstances (war, natural disaster, prohibitive cost increase, frustration of the open and fair competition, etc.) will a contracting agency allow an exception. Failure to abide by this rule can result in sanctions, including debarment from federal contracts for up to three years.
DETAILED SUMMARY
On November 18, 2021, President Biden issued Executive Order 14055, entitled “Nondisplacement of Qualified Workers Under Service Contracts.” The President issued the executive order with the objective of providing certain protections for employees who perform work pursuant to federal service contracts. On December 14, 2023, the Department of Labor published its final rule that implements EO 14055.
Purpose of EO 14055 (Section 9.1 of the final rule)
The final rule states that the purpose of EO 14055 is three-fold:
- to ensure that the government’s interests in economic efficiency are served “when the successor contractor or subcontractor hires the predecessor’s employees.”
- to require federal service contracts and subcontracts to include a clause “that requires the contractor or its subcontractors to offer a right of first refusal of employment to service employees employed under the predecessor contract and its subcontractors whose employment would be terminated as a result of the award of the successor contract.”
- to not create or change any rights under the Contract Disputes Act, 41 U.S.C. 7101 et seq., or any private right of action.
Important Definitions (Section 9.2)
The DOL defines a “contract” or “service contract” subject to the final rule “to mean any contract, contract-like instrument, or subcontract entered into by the Federal Government or its contractors that is covered by the [Service Contract Act (“SCA”)] and its implementing regulations.” The DOL rejected comments pushing back on the breadth of this definition and stated that it merely intends to capture “all agreements of a contractual nature” that qualify as contracts under the SCA.
The DOL also defines “contractor” to mean “any individual or other legal entity that is awarded a Federal Government service contract or subcontract under a Federal Government service contract.” The DOL further defines employee to be “an individual engaged in the performance of an SCA-covered contract,” including independent contractors. However, the definition of employee does not include individuals employed “in a bona fide executive, administrative, or professional capacity,” as defined in 29 CFR 541.
The DOL defines “same or similar work” as work that is “either identical to or has primary characteristics that are alike in substance to work performed on another service contract.” The DOL explained that this definition requires contracts to “at a minimum, share the characteristics essential to the work performed under the predecessor contract.” (Emphasis added). The DOL notes that it is not “same or similar work” if the shared characteristics are only “incidental to performance of the contract.” This requires analysis by the contracting agency to determine the scope and similarity of the predecessor and successor contracts.
Applicability and Exclusions (Section 9.3)
The final rule includes in its scope any contract or solicitation for a contract that (1) provides services covered by the SCA and (2) is equal to or exceeds the simplified acquisition threshold as defined in 41 USC 134. There are some exclusions.
First, where a prime contract does not meet the simplified acquisition threshold, then all subcontracts under the prime contract will also be excluded.
Second, the final rule does not apply to employees “hired to work under a Federal service contract and one or more nonfederal service contracts as part of a single job, provided that the employees were not deployed in a manner designated to avoid the purposes of Executive Order 14055.”
Third, there are a number of ways that the contracting agency may waive application of the final rule in whole or in part. The senior procurement executive must produce a written determination that includes specific facts and reasoning to support the determination, and that at least one of three enumerated circumstances exist:
(1) Adherence to 29 C.F.R. Part 9 for the specific contract would not achieve the Government’s interest in economy and efficiency;
(2) Adherence to 29 C.F.R. Part 9 would substantially reduce the number of bidders such that it would frustrate full and open competition and where Part 9 cannot be reasonably tailored to the agency’s needs for the contract; or
(3) Adherence to 29 C.F.R. Part 9 would conflict with other federal law.
If the agency pursues a written determination under subpart (1) above, then it must include a written analysis that takes into account numerous factors, including but not limited to:
(1) The use of a carryover workforce would greatly increase disruption of the delivery of services;
(2) The existence of emergency situations such as natural disaster or war; and
(3) Where the senior procurement executive reasonably believes that the predecessor employee’s past performance was a collective failure.
The agency may not consider certain factors such as the general assumption that carryover workforces cause disruption, the job performance of the predecessor (unless there is a collective failure), the seniority of the workforce, and the reconfiguration of the contract. The agency also may not consider wage rates and fringe benefits except:
(1) In emergency situations such as natural disaster or war;
(2) Where the carryover workforce collectively “would not constitute an experienced and trained workforce” that would require extensive training to function; and
(3) Circumstances similar to the above where cost of a carryover workforce would become prohibitive.
Any exceptions granted by the agency must be published on its website.
Obligations of Contracting Agencies (Section 9.11)
The basic obligation is that all contracts covered by 29 C.F.R. Part 9 and not subject to the above exceptions must include a contract provision granting predecessor employees the right of first refusal to employment under the successor contract. This includes a requirement that the contracting officer ensure the predecessor employer provides written notice to its employees (and their union, if applicable) of their rights under Part 9 prior to the execution of the contract.
29 C.F.R. Part 9 also requires the contracting agency to take reasonable steps to ensure location continuity—where reasonable. This means that:
when an agency prepares a solicitation for a service contract that succeeds a contract for performance of the same or similar work, the agency must consider whether performance of the work in the same locality or localities in which the contract is currently being performed is reasonably necessary to ensure economical and efficient provision of services.
Where location continuity is reasonable and ensures economic efficiency, the contract must include a provision that guarantees location continuity. If the contracting agency determines it is possible for the service to be performed in another location, the agency must address a number of factors:
(1) Whether relocation would result in service disruption;
(2) Whether relocation would increase physical/informational security risks;
(3) Whether the predecessor workforce demonstrated such prior successful performance that location continuity would result in as much retention of that workforce as possible; and
(4) Other statutory or regulatory requirements governing location.
If the agency performs this analysis, it must complete the analysis before issuance of the solicitation. The agency must also ensure that the predecessor employees receive written notice that the agency is conducting location analysis, and provide the employees (and their union, if applicable) with the opportunity to provide additional information.
A further obligation of the agency is to provide the predecessor contractor’s list of employees to the successor contractor “no later than 21 calendar days prior to the start of performance on the successor’s contract” or on request (subject to the Privacy Act). Critically, the employment list includes level of seniority/work anniversary.
The contracting agency must also respond to complaints to the Wage and Hour Division.
Finally, where the DOL or contracting agency discovers an erroneous determination that 29 C.F.R. Part 9 did not apply or a contract failed to include a right of first refusal, then the agency must incorporate the clause using any and all authority at its disposal. The incorporated clause may be retroactive “where circumstances warrant.” This analysis depends on the administrative and economic burden of imposing the clause retroactively.
Obligations of Contractors (Section 9.12)
Contractors have several obligations under the new 29 C.F.R. Part 9. First, the contractor may not fill employment openings prior to giving qualified Predecessor Employees, whose employment will be terminated as a result of award of the successor contract or the expiration of the contract under which the employees were hired, the opportunity to exercise their right of first refusal. The contractors must make a “bona fide” offer of employment to each qualified Predecessor Employee before posting a job opening for positions on the contract.
Second, the contractor must offer right of first refusal to employees who appear on the list of employees described above and have worked on the contract during the last month of performance. However, the contractor must also offer right of first refusal to employees who do not appear on the list, but provide evidence of employment during the last month of performance such as paystubs.
Third, the contractor has an affirmative duty to ensure the right of first refusal provision required by 29 C.F.R. Part 9 is in the contract. It may not rely on the contracting agency, or the contracting agency’s failure to include the clause.
Fourth, the contractor’s bona fide offers must include certain information/requirements, including:
(1) No employment screening process outside of those provided by the contracting agency;
(2) A time limit for employee response of not less than 10 business days;
(3) An offer of employment in writing presented in person or by certified mail, email, commercial courier, or personal service;
(4) The job position offered may be in a dissimilar position so long as the employee is qualified;
(5) The job position offered may include different terms and conditions so long as they are not created for the purpose of dissuading acceptance of the job offer
In addition, the DOL warns that termination of an employee where circumstances indicate the termination was for the purpose of defeating the purpose of 29 C.F.R. Part 9 will be “closely examined.” The DOL also warns contractors that post-award incorporation of the right of first refusal can be retroactive.
29 C.F.R. Part 9 does provide exceptions to the contractor’s obligations:
Contractor Obligations Regarding Staffing Levels
The final rule also imposes certain obligations regarding the successor contractor’s staffing levels. The successor contractor may determine the number of employees necessary to perform the contract efficiently and only needs to provide employment offers to the number of eligible employees necessary to perform the contract. However, if there is a reduction in staffing, the successor contractor must continue to offer employment to predecessor employees for the first 90 calendar days of its performance of the contract (or until all predecessor employees receive offers). The final rule contains the following examples:
A contractor with 18 employment openings and a list of 20 employees from the predecessor contract must continue to offer employment to individuals on the list until 18 of the employees accept the contractor’s employment offer or until the remaining employees have rejected the offer. If an employee quits or is terminated from the successor contract within 90 calendar days of the first date of contract performance, the contractor must first offer that employment opening to any remaining eligible employees of the predecessor contract.
A successor contractor originally offers 20 jobs to predecessor contract employees on a contract that had 30 positions under the predecessor contractor. The first 20 predecessor contract employees the successor contractor approaches accept the employment offer. Within a month of commencing work on the contract, the successor determines that it must hire seven additional employees to perform the contract requirements. The first three predecessor contract employees to whom the successor offers employment decline the offer; however, the next four predecessor contract employees accept the offers. In accordance with the provisions of this section, the successor contractor offers employment on the contract to the three remaining predecessor contract employees who all accept; however, two employees on the contract quit 5 weeks later. The successor contractor has no further obligation under this part to make a second employment offer to the persons who previously declined an offer of employment on the contract.
A successor contractor reduces staff on a successor contract by two positions from the predecessor contract’s staffing pattern. Each predecessor contract employee the successor approaches accepts the employment offer; therefore, employment offers are not made to two predecessor contract employees. The successor contractor terminates an employee five months later. The successor contractor has no obligation to offer employment to the two remaining employees from the predecessor contract because more than 90 calendar days have passed since the successor contractor’s first date of performance on the contract.
In addition, when there is a reduction, the successor contractor must demonstrate that it scrutinized each employee’s qualifications “in order to offer the greatest possible number of predecessor contract employees’ positions equivalent to those they held under the predecessor contract.”
Contractor Obligations Regarding End of Contract Performance
Predecessor contractors must perform certain obligations prior to the end of contract performance:
Subcontractor Obligations (Part 9.13)
Subcontractors must also include the right of first refusal provision in its contract with the prime as well as lower tiered contracts. Violation of this provision will result in joint and several liability with the prime contractor. Further, if a prime discontinues services with a subcontractor during the course of performance of the contract, the prime contractor must offer employment to the subcontractor’s employees per the 29 C.F.R. Part 9 obligations detailed above.
Enforcement (Part 9.21)
Complaints by employees regarding violations of 29 C.F.R. Part 9 will be filed with the Wage and Hour Division. Complaints must be filed within 120 days from the date of the successor contractor’s beginning of performance. Such complaints will be confidential. The WHD will investigate the claims it receives by conducting interviews with the contractors and confidential interviews with the employees, and inspecting relevant documents. The WHD has broad discretion in its investigation.
Administration/Appeals (Part 9.22)
The WHD will provide a written determination to resolve its investigation. The WHD will provide notice of the written determination to the involved parties and the contracting officer. In the notice, the division will state whether there are any relevant facts in dispute. Further, the WHD will state that an interested party has 20 calendar days to appeal to the Chief Administrative Law Judge of the Office of the Administrative Law Judges. If no appeals are received, the determination will become a final order of the Labor Secretary. Of note, the WHD’s decision not to seek debarment is not appealable.
In the circumstance where the WHD concludes no relevant facts are in dispute, the division will provide notice to state as such. The interested party then has 20 calendar days to appeal to the Administrative Review Board.
Sanctions (Part 9.23)
The final rule delineates a number of sanctions, including an order to hire the affected employee along with payment of lost compensation and interest. The federal government can also withhold payment to the contractor for the purpose of distributing amounts necessary to pay unpaid wages to the affected employees. Failure of predecessor contractors to provide the required lists of employees described above may result in the contracting agency withholding payment. Finally, continued or willful violations of 29 C.F.R. Part 9 may result in debarment for up to three years.
