Sweeping Executive Order Increases Government Contractors’ Labor Law Compliance Burdens

August 13, 2014

On July 31, 2014, President Obama issued the Fair Pay and Safe Workplaces Executive Order (E.O. 13,673).  The most recent in a series of Presidential actions aimed at federal contractors, the Order–as described in a related Fact Sheet–aims to "crack down" on employers who do not "play by the rules" by (1) refusing work to contractors and subcontractors that do not "consistently adhere" to labor laws, (2) compelling disclosure of employee wage and hour information, and (3) prohibiting the use of certain mandatory arbitration agreements.  The Order will govern new federal contracts valued at more than $500,000 and is expected to take effect in 2016.  Taken together, the Order’s provisions will place numerous compliance burdens on government contractors, create new suspension and debarment risks, and significantly increase the potential costs of labor and employment disputes.

I.          New Compliance Requirements

The Order directs the contracting officers of each federal Department and agency to deny contracts to contractors lacking "a satisfactory record of integrity and business ethics" as demonstrated by those contractors’ "serious, repeated, willful, or pervasive violations of the labor laws," including the:

• Fair Labor Standards Act;
• Occupational Safety and Health Act;
• National Labor Relations Act;
• Americans with Disabilities Act;
• Family and Medical Leave Act;
• Title VII of the Civil Rights Act;
• Age Discrimination in Employment Act;
• Davis-Bacon Act;
• Service Contract Act;
• Section 503 of the Rehabilitation Act;
• Vietnam Era Veterans’ Readjustment Assistance Act;
• Migrant and Seasonal Agricultural Worker Protection Act;
• Executive Orders 11,246 (Equal Employment Opportunity) & 13,658 (Contractor Minimum Wage); and
• Equivalent State Laws (as defined by the Department of Labor). 

In addition, the Order instructs contracting officers, "as appropriate," to refer contractors determined to lack a satisfactory record of integrity and business ethics to agency suspending and debarring officials.  And the Order directs that all information regarding (1) contractors’ labor violations, (2) efforts to address those violations, and (3) contracting officers’ assessments of those violations be made publicly available through the Federal Awardee Performance and Integrity Information System (FAPIIS). 

            A.        Implementing Guidance 

To help contracting officers make their newly required determinations, the Order directs the Department of Labor to develop guidance for determining "whether administrative merit determinations, arbitral awards or decision, or civil judgments" were issued against contractors "for serious, repeated, willful, or pervasive violations" of the labor laws. 

• The Order does not define what constitutes an administrative merit determination, arbitral award, or civil judgment.  However, other statutes and Department of Labor regulations have instructively defined those terms.  For example, the Department of Labor has broadly defined a "civil judgment" for non-procurement suspension or debarment purposes as the disposition of an action "by verdict, decision, settlement, stipulation, or otherwise" that creates "a civil liability."  29 C.F.R. § 98.105(d).  And the Administrative Dispute Resolution Act defines an arbitral "award" as "any decision by an arbitrator resolving the issues in controversy."  5 U.S.C. § 571(4).  The term "administrative merits determination" does not appear to have been previously defined in labor statutes or regulations, but handicap nondiscrimination regulations describe it as reflecting the "the results of [an] investigation," "findings of fact and conclusions of law," and "a remedy and/or corrective action."  29 C.F.R. § 33.12.   
• The Order similarly does not define what constitutes serious, repeated, willful, or pervasive violations.  Rather, it states only that those terms should reflect any related "existing statutory standards"–which may include those in the Occupational Health and Safety Act (29 U.S.C. § 666(k)) and other statutes (e.g., 40 U.S.C. § 3704(c))–and "take into account" the following principles: 
  • The "serious" nature of a violation should depend on the "number of employees affected, the degree of risk posed or actual harm done," and "the amount of damages incurred or fines or penalties assessed" for a violation; 
  • A violation is "repeated" if a contractor has "one or more additional violations of the same or a substantially similar requirement in the past 3 years" (cf. Reich v. D.M. Sabia Co., 90 F.3d 854, 856 (3d Cir. 1996) (using "substantially similar violation" test for assessing "repeated" nature of violation)); 
  • A violation is likely "willful" if "the entity knew of, showed reckless disregard for, or acted with plain indifference to the matter of whether its conduct was prohibited by the requirements of the labor laws" (cf. Fluor Daniel v. Occupational Safety & Health Rev. Com’n, 295 F.3d 1232, 1239-40 (11th Cir. 2002) (articulating similar definition of a willful violation)); and 
  • Whether a violation is "pervasive" depends on "the number of violations of a requirement or the aggregate number of violations of requirements in relation to the size of the entity."

In addition to requiring guidance from the Department of Labor, the Order also directs the FAR Council to amend the Federal Acquisition Regulation "to identify considerations for determining whether serious, repeated, willful, or pervasive violations of the labor laws . . . demonstrate a lack of integrity or business ethics."  Among other things, the Order notes that these considerations should:  (1) provide that "in most cases a single violation of law may not necessarily give rise to a determination of lack of responsibility"; (2) ensure that "appropriate consideration is given to remedial measures or mitigating factors, including any agreements by contractors or other corrective actions taken to address violations"; and (3) require that contracting officers and Labor Compliance Advisors send information to suspending and debarring officials "in accordance with agency procedures."  The direction for the FAR Council to encourage suspension and debarment referrals is especially notable because it follows a series of recent efforts to increase suspension and debarment actions in the wake of a 2011 Government Accountability Report that criticized agencies for not pursuing such actions more assertively.     

            B.        Labor Compliance Advisors 

To ensure "consistent" application of its terms and further "strengthen . . . compliance with labor laws," the Order also establishes new Labor Compliance Advisors within each agency to oversee contracting officers’ assessment of labor-law violations.  The Order grants these Advisors sweeping authority to: 

• Promote greater awareness and understanding of labor laws among contracting officers; 
• Assist contracting officers in assessing whether labor violations "rise to the level of a lack of integrity or business ethics" and determining a response, "including agreements requiring appropriate remedial measures, decisions not to award a contract or exercise an option on a contract, contract termination, or referral to the agency suspending or debarring official"; 
• Refer complaints to enforcement officials alleging violations by contractors of labor law requirements; and 
• Publicly report an annual summary of agency actions to promote greater labor compliance, including specific responses to serious, repeated, willful, or pervasive violations. 

The Order does not explain how agencies are to select Labor Compliance Advisors, but it suggests that the Department of Labor will play a central role in defining the position. 

            C.        New Required Contractor Actions           

To provide contracting officers with the information necessary to assess labor violations, the Order places a number of unprecedented recordkeeping and disclosure requirements on contractors and subcontractors.  The Order defines these burdens as "pre-award" and "post-award" actions: 

                        i.          Pre-Award Actions 

The Order’s threshold pre-award action is a requirement that contractors report in submitting bids whether they have incurred any adverse administrative merits determination, arbitral award, or civil judgment within the preceding three years for a labor violation.  According to the Order, contractors will submit this report through a new website developed for use in fulfilling "all Federal contract reporting requirements." 

After submitting their labor-violations report, contractors must then consult with a Labor Compliance Advisor and "relevant enforcement agencies" to review for each violation "whether agreements are in place or are otherwise needed to address appropriate remedial measures . . . [or] avoid further violations."  Thus, contractors may need to satisfy a Labor Compliance Advisor that they not only have cured all previously determined violations but also are positioned to avoid any future violations. 

The Order also requires contractors to ensure that their subcontractors report and cure labor violations.  For all subcontracts with an estimated value exceeding $500,000, a contractor must represent to a contracting officer that:  (1) it has required such subcontractors to disclose to it (and update every six months thereafter) all determined labor violations within the preceding three years; and (2) will consider all disclosed information–in consultation with a Labor Compliance Advisor–in determining whether to award work to the subcontractors.  Notably, any information shared by a contractor with a Labor Compliance Advisor may form the basis of a suspension or disbarment proceeding against a subcontractor. 

                        ii.         Post-Award Actions 

During the performance of a contract, the Order instructs that a contractor must provide to contracting officers a supplemental report every six months of all labor-related administrative merits determinations, arbitral awards, or civil judgments rendered against the contractor or any of its subcontractors.  Moreover, the Order also states that Department of Labor will regularly inform contracting officers "of its investigations of contractors and subcontractors on current Federal contracts."  Again, the Order does not define what constitutes Department of Labor investigations, but such investigations presumably do not include those independently conducted by the National Labor Relations Board or Equal Employment Opportunity Commission.   

Using the information provided by contractors’ updates and the Department of Labor’s investigations, contracting officers under the Order will then determine–in consultation with a Labor Compliance Advisor–whether:  (1) new contractor or subcontractor actions are necessary to settle or avoid labor disputes; or (2) disclosed labor violations warrant not exercising a contract option, contract termination, or referral for suspension or debarment.  In this way, contractors and subcontractors will face continuous pressure to settle labor disputes quickly to the satisfaction of Labor Compliance Advisors and enforcement agencies.           

II.        New Paycheck Transparency Rules

The Order also includes a new wage and hour transparency requirement.  This requirement will bolster the disclosure provisions of the Fair Labor Standards Act (FLSA) and other federal and state laws by compelling covered contractors and their subcontractors to provide each employee, in each pay period, with a document showing that employee’s hours worked, overtime hours, pay, and any additions made to or deductions made from pay.  The requirement will apply to employees exempt from the FLSA’s overtime compensation requirements, although contractors and subcontractors will not need to provide a record of hours worked to such employees.  The Order also requires that contractors provide all employees working as independent contractors notification of their work status.

III.       Expanded Prohibition of Pre-Dispute Arbitration Agreements

The Order requires that all contracts and subcontracts over $1 million for non-off-the-shelf goods or services contain provisions allowing arbitration of Title VII, sexual assault, or harassment claims only if both the employer and employee voluntarily agree to arbitrate after a dispute arises.

The White House has asserted that this requirement builds on a policy enacted by Congress for the Department of Defense and implemented by regulation at that agency, but the Order offers no justification for the policy’s expansion to other agency contracts without congressional action.  See Department of Defense Appropriations Act of 2010 § 8116; 48 C.F.R. §§ 222.7401-05.  Perhaps in acknowledgment of this tension, the Order contains two exceptions not present in the Department of Defense regulations:  The Order’s prohibition on pre-dispute arbitration agreements does not apply to (1) employees covered by collective bargaining agreements; or (2) employees who enter into an otherwise valid arbitration agreement before a contractor bids on a covered contract, unless the agreement between the employee and contractor is subject to unilateral change or is renegotiated or replaced.

IV.       Analysis and Next Steps

Through the Fair Pay and Safe Workplaces Executive Order, government contractors are again bearing the brunt of the President’s efforts to advance the interests of organized labor and diminish employers’ ability to contest alleged labor and employment violations.  By making contractors’ receipt of contracts contingent on their bureaucratically-determined lack of labor violations, the Order has dramatically raised the stakes of resisting union action and litigating employment disputes.  Contractors will now seriously have to weigh the costs of capitulating to unjustified demands and settling meritless claims against the risks of suspension or debarment that may result from challenging such actions.  Indeed, by requiring contracting officers and Labor Compliance Advisors to make suspension and debarment referrals for "appropriate" labor violations without providing clear guidance to define such violations, the Order creates a very real risk that minor or meritless labor violations may result in a company facing suspension or debarment.  At a minimum, the Order makes it likely that contracting officers may consider such violations as indicative of a lack of present responsibility, which could negatively affect a contractor’s evaluation during award or result in contract termination.

In addition, because the Order will make all contractor-reported information and contracting officers’ assessments of that information publicly available through FAPIIS, contractors may face increased public scrutiny and bid protests on the basis of those violations that they decide to challenge.  And contractors will now need to monitor their subcontractors to an unprecedented extent–reviewing their past and present labor violations to gauge the business risks that they may pose.

The President’s Order may be subject to constitutional challenges on due-process or separation-of-powers grounds, but contractors should begin preparing for its implementation.  To do so, contractors and subcontractors should plan to participate in, and submit comments following, the informal "listening sessions" that the White House has said will precede issuance of rules and guidance related to the Order.  Contractors also should consider developing systems for tracking the labor- and employment-related determinations and awards that the Order eventually will require them to report.  Moreover, contractors with significant existing or pending labor or employment issues should begin formulating strategies for successfully addressing those issues without jeopardizing future contract work.

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