On December 14, 2023, the Department of Labor’s (DOL) Wage and Hour Division (WHD) published its long-awaited Final Rule, “Nondisplacement of Qualified Workers Under Service Contracts.” The rule defines service contractors’ latest obligations to offer certain incumbent employees a right of first refusal and implements the Biden Administration’s Executive Order (EO) 14055, which PilieroMazza previously wrote about here. While previous iterations of the Service Contract Act’s (SCA) nondisplacement obligations may have been implemented, the Final Rule includes a number of heightened obligations and responsibilities for government service contractors, as well as severe penalties for non-compliance. Solicitations issued on or after February 12, 2024, are subject to the Final Rule. This client alert highlights important aspects of the Final Rule. Also, please visit this link to register for our webinar on January 17, 2024, which delves into critical implications for prime and subcontractors.
Covered Contracts
The nondisplacement obligations apply to successor contracts for the “same or similar work” as the predecessor contract and that are covered by the SCA. The Final Rule clarifies that a follow-on contract is considered the same or similar work even where the: (i) follow-on contract is smaller or larger in scope; (ii) contract breaks out portions of the previous contract; (iii) contract merges two smaller contracts into one solicitation; and (iv) contract is not performed at the same location as the predecessor contract, even if the work is performed in a different state. Agencies will be required to evaluate whether performance in the same location is necessary for efficient provision of services. If so, they will be required, to the extent allowed by law, to include a preference in the solicitation for contractors who can perform the services in the same locality.
Importantly, the Final Rule also applies to any “contract-like instrument”, which may encompass licenses, permits, and similar instruments in addition to agreements more traditionally considered contracts.
The Final Rule does not apply to contracts under the simplified acquisition threshold (SAT). However, this does not exclude subcontractors under the SAT from compliance where the prime contractor is at or above the SAT.
Under limited circumstances, an agency can grant a waiver of the requirements. Examples of factors agencies may consider when granting a waiver of the requirement include: (1) disruption of the delivery of services; (2) emergencies; (3) failure of the predecessor workforce; (4) excessive training for niche subject matters; and (5) cost of retention is prohibitive. Should an agency issue a waiver, the agency must provide a written justification and, for IDIQ contracts, the exception must be granted before the solicitation date.
The Final Rule directs contracting agencies to include the requisite FAR clause in covered contracts. However, a missing FAR clause will not bar DOL’s enforcement of the EO. The Final Rule states that prime contractors and subcontractors will have an affirmative obligation to notify the contracting officer if the clause is omitted. DOL can apply the requirements of the EO retroactively if the clause is erroneously excluded. If applied retroactively, successor contractors will be required to offer a right of first refusal of employment to the predecessor’s employees even where the successor hired non-covered employees to perform the work. It is not clear to what extent DOL will hold a contractor to this affirmative obligation and whether the contractor will be responsible for the penalties of non-compliance if the contracting agency omits the FAR clause.
Successor Contractor Requirements
Covered contractors are obligated to exercise good faith in offering employment to predecessor employees and may not issue or publish any job postings until a bona fide offer is made in writing to predecessor employees. Qualified employees must be allowed at least 10 business days to respond to a job offer. The position offered does not need to be the same as the preceding contract, but it does need to be a position for which the worker is qualified.
A successor contractor may be exempt from providing an offer of employment to a predecessor employee when: (1) the number of available positions is less than the number of qualified predecessor employees or (2) where an employee of the predecessor contractor for whom the contractor reasonably believes—based on reliable evidence of the particular employee’s past performance—that there would be just cause to discharge the employee. These exemptions are more restrictive than in prior iterations of this rule and apply a standard generally utilized by unionized workforces.
Incumbent Contractor Obligations
Incumbent contractors must provide the contracting officer with a certified employee list at least 30 calendar days before the completion of the contract. The list must include employees’ names, anniversary dates of employment as defined by the SCA, mailing addresses, and, where available, email addresses and telephone numbers. When changes to the workforce are made after providing the list, the contractor has 10 working days before the completion of the contract to provide the list of employees to the contracting officer. Incumbent contractors must also notify their employees of their rights of first refusal for job opportunities on the follow-on contract. Failure to do so may result in the agency withholding final payment.
Penalties for Non-Compliance
Sanctions for violation of the Final Rule include loss of contract, withheld contract payment, payment of back wages, front pay, offer of employment, reinstatement, and debarment. Non-compliant contractors may also face FCA liability.
Final Thoughts
The Final Rule makes it even more crucial to ensure there is advance transition planning, such as review of the offer letter and onboarding process, as well as confirmation that employees are classified as covered under the SCA (or not) to avoid potential liability. Like many regulations, the nondisplacement obligations seem simple, but contract transition realities often make implementation difficult. Contractors should pay careful attention to the differences between the Final Rule and prior iterations of this rule. This iteration significantly expands coverage and provides additional protection to predecessor employees.
