The Federal Acquisition Regulatory Council and the Department of Labor (“DOL”) recently published proposed regulations that update federal labor laws and create new self-disclosure requirements for violations. The regulations also create significant traps for unwary contractors. In response to a report that a small number of contractors with significant labor law violations were receiving a large amount of taxpayer-funded contracts, the White House issued the Fair Pay and Safe Workplaces executive order on July 31, 2014. The executive order aimed to ensure that federal agencies contract only with “responsible” contractors that comply with labor laws.
On May 28, 2015, proposed regulations and guidance were issued. The proposed regulations will: (1) require self-reporting of labor violations for the past three years when submitting an offer for a contract and thereafter on a semiannual basis; (2) require prime contractors to collect information on labor violations of subcontractors and determine whether they are responsible sources; (3) require certain paycheck transparency measures; and (4) generally prevent federal contractors from requiring employees to arbitrate sexual assault or harassment claims. The government estimates that the proposed regulations will cost the public over $106 million for the first year and over $91 million per year thereafter.
Contractors Must Self-Report Labor Violations
The proposed rules apply to procurement contracts for goods and services exceeding $500,000. For these contracts, prospective contractors must self-certify whether there has been any labor law administrative merits determination, civil judgment, or arbitral award or decision rendered against it within the preceding three-year period. The labor laws covered include the Davis-Bacon Act and the Fair Labor Standards Act. The reporting obligation is limited to procurement contracts and does not include grants and cooperative agreements. The contracting officer for the solicitation must consider the information as part of the responsibility determination prior to making an award.
The DOL has provided guidance on what types of decisions must be disclosed. The DOL has defined “administrative merits determination” to mean notices or findings, whether final or subject to appeal or further review, issued by an enforcement agency following an investigation that indicates that the contractor violated any provision of the labor laws. If an appeal is pending, then the contractor may explain this as a mitigating circumstance. “Civil judgments” include decisions granting partial summary judgment if a court finds that there was a violation but reserves judgment on damages. “Arbitral award or decision” means any award or order by an arbitrator or panel that determines that the contractor or subcontractor violated any provision of the labor laws or enjoined the contractor from violating any provision of the labor laws. This applies whether or not the arbitral proceeding is private or confidential.
If the contractor is awarded the contract, it is subject to additional reporting obligations. Semi-annually during the performance of the contract, contractors must update the information provided about their own labor law violations. This includes any affirmation of a previously disclosed decision. The contracting officer then must consider any new information and determine whether any action is necessary including remedial measures, declining to exercise an option, contract termination, or referral to the agency suspension and debarment official.
The Prime Contractor Must Collect Information On Subcontracts Over $500,000
Similar self-reporting requirements apply to subcontractors where the estimated value of the subcontract exceeds $500,000 and the subcontract is not for commercially available off-the-shelf items. For the prime contractor, this means that at the time of contract execution, the prime contractor must require covered subcontractors to disclose any administrative merits determination, civil judgment, or arbitral award or decision rendered against it for the preceding three years. The prime contractor will then be required to consider, before awarding the subcontract, whether this information affects the finding that the subcontractor is a responsible source with a satisfactory record of integrity and business ethics.
If the subcontract is awarded, then similar reporting obligations are required. Semi-annually during the performance of the contract, contractors must obtain the required updated information for covered subcontracts. If new information about violations is obtained from the subcontractor, then the prime contractor is required to consider whether any action is necessary.
Examples Of Serious, Willful, And Repeated Violations Of Davis-Bacon Act
Under the proposed regulations, violations that are most concerning and will be addressed by contracting officers are those that are serious, willful, and repeated, or pervasive. The DOL provided the following specific examples in its guidance as to serious, willful, and repeated violations of the Davis Bacon Act (“DBA”):
• Serious Violation – DOL issued a letter indicating that a contractor violated the DBA, and that back wages were due in the amount of $12,000. The contractor had previously been investigated by DOL and, to resolve that investigation, had entered into a written agreement to pay the affected workers prevailing wages as required by the DBA.
o This is a serious violation for two reasons. First, a violation of any of the labor laws is serious if back wages of at least $10,000 were due. Second, a violation of any of the labor laws is serious if the contractor or subcontractor breached the material terms of any settlement entered into with an enforcement agency.
• Willful Violation – An Administrative Law Judge’s (“ALJ”) order affirming a violation of the DBA included a finding that the contractor manipulated payroll documents to make it appear as if it had paid workers the required prevailing wages.
o This is a willful violation because the findings of the ALJ support a conclusion that the contractor knew that its conduct was prohibited by the DBA. The ALJ’s finding that documents were falsified indicates that the contractor knew that it was required to pay the workers prevailing wages, yet paid them less anyway.
• Repeated Violation – A federal district court granted a preliminary injunction enjoining a contractor from further violations of the overtime provisions of the Fair Labor Standards Act. Subsequently, DOL sent the contractor a letter finding that the contractor violated the DBA by failing to pay workers at a different worksite their prevailing wages.
o The second violation is a repeated violation because it is substantially similar to a prior violation reflected in a civil judgment. Even though the contractor violated two different statutes, the violations are substantially similar because both involve the practice of failing to pay wages required by law.
Contractors Will Have Certain Paycheck Transparency Obligations
The proposed rules also contain two paycheck transparency requirements. First, they require contractors to provide all individuals working under a covered contract with a document showing the individual’s hours worked, overtime hours, pay, and any additions made to or deducted from pay (i.e., wage statement). This same requirement must be incorporated by prime contractors into covered subcontracts. Second, the proposed rules and guidance require that the contractor inform independent contractors of their status as such.
Contractors Generally Will Be Prevented From Requiring Employees To Arbitrate Title VII And Sexual Assault Or Harassment Claims
The proposed rules require that for contracts in excess of $1 million, contractors must agree that the decision to arbitrate claims arising under Title VII or any other tort related to or arising out of sexual assault or harassment, may only be made with the voluntary consent of employees or independent contractors after such disputes arise. One major exception to the rule is where employees are covered by a collective bargaining agreement. Prime contractors are also required to incorporate the same requirement into subcontracts valued at over $1 million.
For larger federal contractors, the proposed rules pose unique problems. Not only do the rules impose a number of additional administrative tasks, but they require coordination between the persons involved in defending labor violation claims, the persons bidding on solicitations, and the persons managing subcontracts. Without a robust ethics and compliance program, this coordination could break down and the contractor may fail in its reporting obligations. Because the proposed regulations require a certification for each covered contract, providing a false certification by failing to disclose a violation creates the risk of contract termination, suspension and debarment, and False Claims Act liability.