Rules of the Road Change for Government Contractors

by BakerHostetler

On July 31, 2014, with a stroke of his pen, President Obama promulgated new rules targeting government contractors who commit “serious,” “repeated,” “willful” and “pervasive” violations of laws regulating the workplace. The executive order also will change government contractor payroll practices and will limit the use of predispute mandatory arbitration agreements. Even before the new rules become effective, which is expected sometime in 2016, healthcare employers that are (or that hope to be) government contractors or subcontractors may find themselves with heightened sensitivity to employment and labor claims which, under the executive order, may limit their eligibility to be awarded government contracts. Academic medical centers and university research facilities may be particularly vulnerable, given the use of government contracts not only for research and related healthcare delivery, but also for facilities construction and overhead expenses.

The heart of the executive order is a three-part scheme mandating disclosure, remediation and possible sanctions for government contractors (and subcontractors) that provide goods and services valued at $500,000 or more and that have been found as a result of legal or administrative proceedings to have violated any of the following federal laws or executive orders or their state equivalents:

  • Laws regarding employee pay, such as the Fair Labor Standards Act, the Davis-Bacon Act, the Service Contract Act and Executive Order 13658, which sets minimum wages for government contractors;
  • Civil rights laws, including Title VII of the Civil Rights Act of 1964, the Family and Medical Leave Act, the Americans with Disabilities Act, the Age Discrimination in Employment Act, Section 503 of the Rehabilitation Act and Executive Order 11246;
  • Laws protecting employee working conditions, such as the Occupational Safety and Health Act and the Migrant and Seasonal Agricultural Worker Protection Act; and
  • Laws protecting employee rights to act collectively, including the National Labor Relations Act.

Disclosure is the obligation of government contractors themselves (and, one would assume, entities applying to be government contractors). The initial reporting period is the prior three years (from what date is unclear). Disclosures must be updated every six months.

Contracting agencies are charged with monitoring government contractor compliance with the enumerated statutes and executive orders. In this task, they will be aided by the Department of Labor, which will help collect information with government agencies charged with enforcement of the enumerated laws (such as the National Labor Relations Board and the Equal Employment Opportunity Commission), advise whether a government contractor has taken adequate steps to remedy a past violation and make recommendations to “strengthen agency management of contractor compliance with labor laws.”

In addition, the Secretary of Labor is directed to develop guidance, “in consultation with” the agencies responsible for enforcement of the various labor and employment laws, so that contracting agencies may determine whether adverse findings against a government contractor (or subcontractor or applicant), whether in a legal or administrative proceeding or arbitration, were issued for “serious, repeated, willful, or pervasive” violations of the laws. The Secretary of Labor also is directed to develop standards for determining whether a violation is “serious,” “repeated,” “willful” or “pervasive,” if no definition exists.

Contractors subject to the disclosure and enforcement rules also will be required to adopt new payroll disclosure practices, so that employee pay stubs will document the employee’s hours worked, overtime hours, pay and any additions or deductions from pay. (Contracting agencies also may adopt a similar requirement for subcontractors.)

The executive order also prohibits the use of mandatory, predispute arbitration agreements with employees or independent contractors of government contractors that supply goods and services (other than off-the-shelf commercially available items) valued at $1 million or more. Existing arbitration agreements may be enforced, but only until the government contract is renegotiated or replaced or if the government contractor or subcontractor is “permitted to change the terms of the contract with the employee or independent contractor.”

The executive order is expected to take effect sometime in 2016, after the Federal Acquisition Regulatory Council, which is responsible for government procurement policy, issues a final rule with respect to each element of the executive order. This means that enforcement likely will begin during the last year of President Obama’s term. If a Republican gains the White House in 2016, it will be anyone’s guess whether the executive order will remain in place.

That said, the practical effect on government contractors (or subcontractors) or entities that anticipate applying for government contracts or subcontracts will be immediate. Government contractors and subcontractors will need to develop mechanisms to collect the information to be reported when the executive order goes into effect. In addition, employers may be reluctant to face trial, arbitration or administrative hearings if a loss may mean potential debarment or mandated “remedial measures” beyond the remedy, usually monetary damages or reinstatement, ordered by a court, arbitrator or administrative body. The potential impact on government contracts should be considered when making cost/benefit analyses of labor and employment claims.

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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