In a Bind

An Obama executive order limits contractors' hiring options.

Less than two weeks after his inauguration, President Obama signed a little-noticed executive order that could dramatically change how federal contractors staff their government projects. The Jan. 30 directive requires service providers that win follow-on contracts to offer jobs to nonmanagerial employees at the previous company. No positions can be advertised until former employees have been granted the right of first refusal, according to the order.

"The federal government's procurement interests in economy and efficiency are served when the successor contractor hires the predecessor's employees," the order states. "A carry- over workforce reduces disruption to the delivery of services during the period of transition between contractors and provides the federal government the benefits of an experienced and trained workforce that is familiar with the federal government's personnel, facilities and requirements."

But unlike some other Obama directives-including the president's March 4 contracting reform memorandum-the order does little to change government's dependence on the private sector. The work still will be performed by contract employees; the order simply limits the pool of talent. Some industry officials question the wisdom and necessity of the order. Service contractors frequently offer jobs to the incumbent company's workers to retain their knowledge and to keep transition costs low.

But mandating such a system, in which a company is stuck with employees it did not hire, could limit the contractor's flexibility, increase personnel and training costs, and stifle innovation, says Stan Soloway, president of the Professional Services Council, an industry trade association. "The biggest concern from an industry perspective . . . is making certain that appropriate flexibility is given that any employer would need to make determinations of suitability for hiring," Soloway says.

Larry Allen, president of the Coalition for Government Procurement, another contracting group, says the directive might make outsourcing more unattractive and unnecessarily burdensome, thereby increasing the need to bring the work in-house. Federal employee unions, which supported Obama during his campaign, have advocated insourcing government jobs and ending the Bush administration's public-private job competitions. The fiscal 2009 omnibus appropriations bill, which Obama signed in March, included provisions that accomplished both goals. But the measures expire on Sept. 30. "If you are a labor union, you are stopping outsourcing, which gets you one step closer to your goal of insourcing," Allen says. "It's a difference of degrees, but in essence it is the same thing as moving a runner from second base to third base. You're not home yet, but you're a lot closer than you were."

He adds that the order does not serve "the interests of industry or government well." Others say the order would make the contract workforce more like the civil service, with built-in unionlike protections.

There are several caveats to the directive. It applies only to jobs covered by the 1965 Service Contract Act, such as building maintenance and processing services, and agency heads can issue exemptions. The incoming contractor reserves the right to perform the work with fewer employees. And the new service provider would not be obligated to hire its predecessor's workers if doing so would require layoffs.

In what might be the murkiest and most controversial language, contractors would be allowed to disregard the order if they believed that, based on "past performance, [he or she has] failed to perform suitably on the job." Making such a determination could require the incumbent contract holder to turn over years of employee performance evaluations to its successor-essentially a competitor.

Robert Burton, a partner at the Washington law firm of Venable LLP, calls that language vague and suspects it will be interpreted broadly by contractors and challenged frequently by employees. "Any time you have mandatory re-quirements and people's jobs are on the line, it can result in disputes of some fashion," says Burton, who was deputy administrator of the Office of Management and Budget's Office of Federal Procurement Policy during the Bush administration. "The language of the order will lend itself to debates about what 'suitably' means."

In a statement, the Labor Department said, "A belief that an employee failed to perform suitably on the job would have to be reasonable and based upon credible information. This would be a fact-based inquiry that would have to be resolved based upon the circumstances present in individual cases. Until further regulatory guidance is developed and finalized, we are not able to comment on additional factors that might be considered in reaching these factual determinations."

This ambiguity might not be re-solved until the end of August-the deadline for the Labor Department and the Federal Acquisition Regulatory Council to develop guidelines for interpreting the order. But the administration's over-riding tone on acquisition policy already is becoming clear, observers say.

"This is part of a larger trend line toward more oversight and more mandatory requirements of government contractors," Burton says. "We have seen that with some of the mandatory reporting of fraud and significant overpayments. And I think we'll see more of it."