On August 25, 2016, the Federal Acquisition Regulatory Council and the U.S. Department of Labor published the Final Rule and its associated Guidance implementing President Barack Obama's "Fair Pay and Safe Workplaces" Executive Order (E.O. 13673). The Final Rule imposes significant new labor requirements and restrictions on government contractors that will increase compliance burdens.

The Final Rule is composed of the following three discrete parts which are discussed in detail below, along with steps to safeguard your business.

1. The first part requires contractors to disclose prior labor law violations as part of their offer in response to a solicitation, and also requires contracting officers to evaluate those disclosures to determine whether the contractor is sufficiently responsible to perform the government contract.
2. The second part relates to "Paycheck Transparency" and requires contractors to maintain wage records according to applicable federal and state law, and also requires contractors to provide employees with a pay statement each pay period, identifying the individual's hours worked, overtime hours, pay and any additions made to or deductions made from pay.
3. Finally, the Final Rule also limits federal contractors' use of "pre-dispute" employee arbitration clauses, including a prohibition of these clauses with regard to employees who are not working on a government contract.

1. Disclosure of Labor Law Violations and Contracting Officers' Responsibility Determinations

The most burdensome and controversial part of E.O. 13673 relates to the required disclosure of prior labor law violations when submitting an offer for a government contract. The Final Rule requires contractors to disclose administrative merits determinations, which include notices or findings of labor law violations issued by an enforcement agency before they are adjudicated on the merits. For example, an EEOC reasonable cause determination, which confirms only that the agency has found reasonable cause to believe that a charge is true, is considered a reportable violation. NLRB complaints, agency complaints filed with courts or administrative agencies, and Office of Federal Contract Compliance show cause notices also are considered reportable violations. Despite several industry comments raising objections to the inclusion of these "violations" and the potential due process issues that may result, the Final Rule still requires their disclosure. Beyond administrative merit determinations, the Final Rule also requires contractors to disclose arbitration decisions and civil judgments that show labor law violations. The disclosures must be submitted at sam.gov and will be publicly available in the FAPIIS.gov performance and integrity database.

Contracting officers are required to review contractors' disclosures when making responsibility determinations to decide whether government contractors are responsible to perform the relevant contract under FAR Part 9. The Final Rule requires contracting officers to consider the labor law violations when determining whether a prospective contractor is responsible and has a satisfactory record of integrity and business ethics. The Final Rule also creates a new bureaucracy of Agency Labor Compliance Advisors (ALCAs) who will assist contracting officers with evaluating the submitted disclosures. The ALCAs must review the disclosures and make a recommendation to the contracting officer about whether the contractor's labor law compliance:

1. shows a satisfactory record of integrity and business ethics;
2. shows a satisfactory record of integrity and business ethics, but still requires a labor compliance agreement with the agency or another acceptable remedial action to address labor law violations;
3. could support a showing of a satisfactory record of integrity and business ethics, but only if the prospective contractor commits, prior to award, to negotiating a labor compliance agreement or taking some other acceptable remedial action;
4. could support a showing of a satisfactory record of integrity and business ethics, but only if the contractor actually enters into a labor compliance agreement prior to award; or
5. does not support a finding by the contracting officer of a satisfactory record of integrity and business ethics and shows that the agency's suspending or debarring official also should be notified. FAR 22.2004-2(a)(3) (Oct. 2016).

A labor compliance agreement is an agreement entered into between a contractor or subcontractor and an enforcement agency to address appropriate remedial measures to increase the contractor's compliance with labor laws. When making a recommendation, the ALCA must determine whether any of the labor law violations are serious, repeated, willful and/or pervasive, and shall also consider any mitigating factors presented by the contractor.

Beginning on October 25, 2017, contractors must require subcontractors with whom they have contracts exceeding a value of $500,000, other than for commercially available off-the-shelf items, to also report labor law violations directly to the ALCA. The ALCA will then review the information and make a recommendation about the subcontractor's responsibility for the prime contractor's review. The prime contractor is then required to make its own determination about its subcontractor's responsibility. Subcontracts and teaming agreements should be updated to include this new requirement.

The Final Rule's labor law violation disclosure requirements are initially limited to prime contract solicitations issued on or after October 25, 2016, that are expected to exceed $50 million. However, on April 25, 2017, solicitations in excess of $500,000 will also be subject to these disclosure requirements. After the award of the contract, the prime contractor must then also consistently update (at least every six months) its list of labor law violations in sam.gov. The disclosure requirements then apply to subcontractors beginning on October 25, 2017.

2. Paycheck Transparency

The Final Rule also imposes several wage statement and notice requirements related to employee pay, which become effective on January 1, 2017. The Final Rule requires contractors to issue wage statements to their employees each pay period that must contain:

1. the total number of hours worked in the pay period;
2. an identification of overtime hours;
3. the rate of pay (i.e., hourly rate);
4. the gross pay; and
5. an itemization of any additions made to or deductions taken from gross pay. FAR 52.222-60(b) (Oct. 2016).

However, the contractor is not required to include the number of hours worked in the wage statement issued to employees who are exempt from the overtime compensation requirements of the Fair Labor Standards Act so long as the contractor provides written notice to the employee documenting his or her overtime exempt status. Similarly, if the contractor determines certain individuals are independent contractors instead of employees, it must notify those independent contractors of their status in writing. The contractor must deliver all required notices and wage statements in English and in the languages with which a significant portion of the workforce is fluent if a significant portion is not fluent in English.

3. Prohibition of Pre-Dispute Employee Arbitration Clauses

Starting on October 25, 2016, contractors making offers for contracts valued in excess of $1,000,000 (excluding commercial items) will be prohibited from requiring employees or independent contractors to arbitrate claims pursuant to pre-dispute arbitration agreements when those claims arise under Title VII of the Civil Rights Act of 1964 or any tort related to or arising out of sexual assault or harassment. Except for narrow exceptions related to existing arbitration agreements or collective bargaining agreements, arbitration of Title VII claims and tort claims related to or arising out of sexual assault or harassment may only be arbitrated if the claimant agrees to that arbitration after knowing that a dispute exists. Significantly, the government's Guidance confirms that the clause applies to all employees and independent contractors, including those who do not work on government contracts. The only exceptions to the pre-dispute arbitration prohibition arise when employees are covered by a negotiated collective bargaining agreement that includes an arbitration clause, or have already entered into an existing valid arbitration agreement that does not permit the contractor to change its terms and has not been renegotiated or replaced.

Important Preparation for October 2016

Government contractors should immediately begin preparation for implementation of the Final Rule, which will first apply on October 25, 2016.

First, contractors should begin collecting information about any labor law violations that occurred during the past year so they are prepared to report them when competing for contracts over $50 million on October 25, 2016, and for contracts over $500,000 starting on April 25, 2017. Contractors should task a department with collecting this information on an ongoing basis so violations are collected and analyzed before the disclosure deadline is imposed. Early identification and analysis are important because contractors are allowed to provide mitigating evidence to the government when submitting violations to show that the issue was a misunderstanding, was properly resolved or to provide other extenuating circumstances. Therefore, when collecting information about violations, contractors would be wise to also collect and prepare mitigating information so they can explain and defend against any adverse recommendations by the ALCA.

Similarly, contractors' payroll systems should be evaluated to ensure compliance with federal and state wage laws and to prepare for issuing the required wage statements on and after January 1, 2017, as required by the Paycheck Transparency provisions of the Final Rule. Contractors should also note that the wage statements can be provided electronically only if the worker can access it through a computer, device or system that is provided or made available by the contractor.

Finally, contractors who are planning to compete for noncommercial item contracts in excess of $1,000,000 should also closely review their arbitration agreements to ensure that they will not violate the arbitration prohibitions that will be imposed on October 25, 2016.