Proposed Contracting Rule Would Penalize More Than Just the Bad Apples

Last summer, President Obama signed an executive order requiring prospective federal contractors to disclose to the contracting agency “any administrative merits decision, arbitral award or decision, or civil judgment” related to wage and hour, safety and health, collective bargaining, family and medical leave, or civil rights laws. The order, titled “Fair Pay and Safe Workplaces,” directed the secretary of Labor to develop guidance to assist agencies in determining whether labor law violations were issued for “serious, repeated, willful, or pervasive” offenses. 

Under the proposed guidance, published in the Federal Register on May 28, virtually any determination from any labor and employment enforcement agency will trigger a federal contractor’s reporting requirement. This raises the specter of the government effectively suspending or debarring a contractor without due process. Succinctly, the proposed guidance:

• Requires federal contractors and subcontractors to report any administrative merits decision, arbitral award or decision, or civil judgment both prior to being awarded and for the duration of a federal contract.
• Allows contracting officers and/or labor compliance officers to disqualify potential contractors where any violations are deemed “serious, repeated, willful or pervasive.”
• Imposes penalties not authorized by the underlying labor laws and in addition to the penalties already in the law, including but not limited to the cancellation of a federal contract or requiring a company to enter into a labor compliance agreement.
• Potentially exposes confidential charges and settlement agreements to public scrutiny under the Freedom of Information Act.  
• Prohibits companies with federal contracts over $1 million from maintaining mandatory arbitration agreements, despite the manifest legality of such agreements as determined by the Supreme Court.

Punitive Without Proof

For purposes of the executive order and proposed guidance, the term “administrative merits decision” refers to any notice—whether final or subject to appeal or further review—issued by an enforcement agency following an investigation. The notices include, but are not limited to:

• A WH-56 “Summary of Unpaid Wages” from the Labor Department’s Wage and Hour Division.
• A citation from the Occupational Safety and Health Administration.
• A “show cause” notice from the Office of Federal Contract Compliance Programs.
• A “reasonable cause” letter of determination from the Equal Employment Opportunity Commission.
• Any complaint issued by a regional director at the National Labor Relations Board. 

Notably, administrative merits decisions do not establish a violation of the law, yet can form the basis for denying a federal contract under the proposed Guidance. 

For purposes of the executive order, a serious violation must take into account “the number of employees affected, the degree of risk posed or actual harm done by the violation to the health, safety or well-being of a worker, the amount of damages incurred or fines or penalty assessed with regard to the violation, and other considerations the [Labor] secretary finds appropriate.”  Any fines and penalties over $5,000, back pay in excess of $10,000 or the provision of injunctive relief will be considered “serious.”

A willful violation depends on “whether the entity knew of, showed reckless disregard for, or acted with plain indifference to the matter of whether its conduct was prohibited by” various labor laws. If an enforcement agency seeks liquidated or punitive damages in its administrative merits decision, then the violation will be considered “willful.”

A repeated violation considers “whether the entity has had one or more additional violations of the same or substantially similar requirement in the past three years.”  The standard for “pervasive” should consider “the number of violations of a requirement or the aggregate number of violations of requirements in relation to the size of the entity.” Two or more predicate administrative merits decisions need only be issued by the enforcement agency or uncontested when determining whether a violation is “repeated” or “pervasive.”

Undue Reporting Burden

The proposed guidance will require significant data collection and reporting.  Notably, federal contractors will have to report all administrative merits determinations within three years of a bid proposal.  This reporting obligation continues throughout the bidding process and contract performance, requiring prospective contractors to update their disclosures throughout the term of the contract.  Subcontractors must report violations to their prime contractor, thereby raising significant business disclosure issues.  In addition, the listing of all reportable events is not precluded from disclosure under the Freedom of Information Act.

After contractors comply with the reporting requirements, contracting officers or labor compliance advisers will assess those types of reported violations (from both contractors and subcontractors) to determine whether the violations are serious, repeated, willful or pervasive. Contractors may be required to enter into a Labor Compliance Agreement to address issues disclosed. This would be in addition to the penalties, if any already incurred or before the final resolution of the administrative merits decision.

In addition, to achieve further paycheck transparency for workers, contractors and subcontractors will be required to provide their workers on federal contracts with information each pay period regarding how their pay is calculated (a wage statement) and provide notice to those workers who are independent contractors.  This effectively adopts a right-to-know statute for federal contractors absent congressional action. 

By setting the floor at $5,000 for a fine or penalty or $10,000 for back pay, the proposed guidance drastically increases the burden on federal contractors to report and ultimately be awarded large federal contracts. And these reporting levels may serve to dissuade contractors from entering into voluntary resolutions.  With an administration aggressively pursuing questionable theories on labor law violations that may be rejected inside a courtroom, this proposed guidance essentially deems any adverse decision by any enforcement agency to be grounds to deny a contract.

Paul Kehoe is senior counsel in Seyfarth Shaw LLP’s Labor and Employment practice group in Washington and a former attorney adviser to the Equal Employment Opportunity Commission. Lawrence Lorber, also senior counsel, was formerly deputy assistant secretary of Labor and director of the Office of Federal Contract Compliance Programs.

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