Contractor Blacklisting: Sweeping “Labor Violation” Reporting Duties in the Proposed “Fair Pay and Safe Workplaces” Guidance and Procurement Rules

President Obama’s July 2014 Fair Pay and Safe Workplaces Executive Order 13673 mandates that federal contracting agencies collect information concerning a potential prime contractor’s 3-year violation history with respect to 12 federal labor, employment, wage payment, and safety laws, 2 other executive orders, and all “equivalent State laws.” Under the executive order, prime contractor (and subcontractor) “violations” of any of the 14 federal laws and executive orders noted below for the past three years must be reported:

• the Fair Labor Standards Act;
• the Occupational Safety and Health Act of 1970;
• the Migrant and Seasonal Agricultural Worker Protection Act;
• the National Labor Relations Act;
• the Americans with Disabilities Act of 1990;
• the Family and Medical Leave Act;
• Title VII of the Civil Rights Act of 1964;
• the Age Discrimination in Employment Act of 1967;
• the Davis-Bacon Act;
• the McNamara-O’Hara Service Contract Act;
• Section 503 of the Rehabilitation Act of 1973;
• Vietnam Era Veterans’ Readjustment Assistance Act of 1972 and the Veterans’ Readjustment Assistance Act of 1974;
• Executive Order 11246 (Equal Employment Opportunity); and
• Executive Order13658 (Establishing a Minimum Wage for Contractors).

The executive order further instructs that the government weigh these labor violations for purposes of assessing whether a company should be permitted to bid on new federal government work or continue working on existing federal projects. Once it is implemented, the executive order will apply to a wide swath of federal procurement contracts for goods and services over $500,000, including federal construction projects.

On May 28, 2015, the U.S. Department of Labor (DOL) issued proposed guidance (80 Fed. Reg. 30574) designed to implement the executive order. The Federal Acquisition Regulatory Council (FAR Council) simultaneously issued its own proposed implementing regulations (80 Fed. Reg. 30548), which would amend existing federal procurement regulations known as the Federal Acquisition Regulations (FAR). The proposed FAR rules expressly incorporate the DOL’s proposed “labor violation” definitions and proposed standards for the government to evaluate the severity of the reportable “labor violations” and make a labor law-based “responsibility determination” concerning a contractor’s fitness to bid on new federal business and remain working on previously awarded federal jobs. The DOL and FAR Council’s implementation proposals, for which public comment is due by July 27, 2015, are further discussed below.

Mandatory Pre-Award and Post-Award Reporting of Contractor and Subcontractor “Labor Violations”

Under the proposed FAR rules, each prime contractor (and subcontractor at any tier) that wants to remain in contention for most federal procurement contracts over $500,000 would have to report its three-year “labor violation” history at the time it is bidding for the work. In addition, to these pre-award duties, contractors awarded federal work would have a continuing post-award duty. They would be required to provide labor violation updates every six months during the contract.

The regulatory and contractual reporting duties contained in the proposed FAR rules would have significant ramifications for prospective and existing federal contractors alike. Notwithstanding existing business ethics requirements already provided in the FAR, the proposed FAR amendments, coupled with the DOL guidance, would enable federal agencies to disqualify contractors from new federal business or suspend or terminate the contract of a government contractor working on a previously awarded federal contract based solely on its reported “labor violations.”

For example, Proposed FAR 22.2004-2, “Pre-award evaluation of an offeror’s labor violations” clause, and Proposed FAR 22.2004-3, “Post-award evaluation of a prime contractor’s labor violations” clause, authorize an awarding agency upon review of “labor violations” reported by a contractor on an existing federal project to,

Refer the matter to DOL for action, which may include a new or enhanced labor compliance agreement;

Do not exercise an option . . .

. . .

Notify the agency Suspending or Debarring Official if there are such serious, repeated, willful or pervasive labor violation(s) that the violation(s) demonstrate a lack of integrity or business ethics of a contractor or subcontractor.

Initial Certification of a Contractor’s Three-Year “Labor Violations” History

Under the proposed FAR rules, contractors and subcontractors would essentially have to provide a yes or no answer to the following government statement:

There has been an administrative merits determination, arbitral award or decision, or civil judgment, rendered against the Offeror within the three-year period preceding the date of the offer for violations of labor laws.

Proposed FAR 52.222-AA(c)(1-2).

Answering yes after performing potentially burdensome, company-wide due diligence would trigger a regulatory and contractual duty to provide the government with backup information evidencing the reportable “labor violations.” Proposed FAR 52.222-AA(d)(1). To begin with, for each reportable “labor violation” the contractor bidding on the work would have to provide:

• the labor law that was “violated”;
• the case number, inspection number, charge number, docket number, or other unique identification number;
• the date that the determination, judgment, award, or decision was rendered; and
• the name of the court, arbitrator, agency, board, or commission that rendered it.

(Pursuant to FAR 9.105-1(a), federal procurement officials already have a duty to obtain such additional information as may be necessary to be satisfied that a prospective contractor has a satisfactory record of integrity and business ethics.)

Prime contractors would be warned in their contract that they “may” be deemed unfit (i.e., a “nonresponsible” federal contractor) if they refuse to provide the required labor law certification, or certified to having a “labor violation” but then failed to provide “such information as requested” by the government procurement official.

In addition, the contractor would also be invited, under the proposed FAR amendments, to provide such additional mitigating information as the contractor deemed necessary to demonstrate its status as a “responsible” federal contractor in an attempt to overcome the reported “labor violations.” The proposed guidance anticipates that this would potentially include reciting mitigating circumstances, remedial measures that the contractor undertook (to include “labor compliance agreements”), and other steps taken to achieve labor law compliance.

Armed with the proposed contractor’s reported “labor violations” and supporting information, under Proposed FAR 52.222-AA(d)(ii), a government procurement official charged with “consider[ing] all information provided” would sit in judgment over whether the bidder was ethically fit, based on its reported, three-year, “labor violations” history, to continue competing for the federal contract.

Significantly, at least some of the “labor violation” details reported by the contractor would remain lodged in a publicly-accessible contractor violator system database maintained by the government. The FAR Council is currently seeking public comment from contractors and interested parties on the scope of documents that should be publicly disclosed.

The Scope of a Contractor’s Required Public Reporting of its “Labor Violations”

While the executive order was unclear as to how broadly labor violations would be defined, the proposed guidance contains sweeping definitions of what constitutes an “administrative merits determination,” “civil judgment,” and “arbitral award or decision.” These proposed definitions raise fundamental fairness and due process concerns.

“Administrative Merits Determinations”

.It appears premature to impose a regulatory duty on companies to report government enforcement notices as “labor violations” before the evidence of a contested violation is decided by a neutral fact finder. Still, the guidance proposes that each of the following count immediately toward a federal contractor’s reportable three-year “labor violation” history:

1. from the DOL’s Wage and Hour Division:

• • a letter indicating that a DOL investigation disclosed a violation of sections six or seven of the Fair Labor Standards Act (FLSA) or a violation of the Family and Medical Leave Act (FMLA), McNamara-O-Hara Service Contract Act (SCA), Davis-Bacon Act (DBA), or Executive Order 13658;
  • a WH-56 “Summary of Unpaid Wages” form;
  • a WH-103 “Employment of Minors Contrary to The Fair Labor Standards Act” notice;
  • a letter, notice, or other document assessing civil monetary penalties;
  • a letter that recites violations concerning the payment of special minimum wages to workers with disabilities under section 14(c) of the FLSA or revokes a certificate that authorized the payment of special minimum wages;
  • a WH-561 “Citation and Notification of Penalty” for violations under the Occupational Safety and Health (OSH) Act’s field sanitation or temporary labor camp standards;
  • an order of reference filed with an administrative law judge.

2. from DOL’s Occupational Safety and Health Administration (OSHA) (or any equivalent state agency charged with enforcing an OSHA-approved State Plan):

• • • an OSHA citation;
    • an OSHA imminent danger notice;
    • an OSHA notice of failure to abate; or
    • any state equivalent

3. from DOL’s Office of Federal Contract Compliance Programs:

• • • a show cause notice for failure to comply with the requirements of Executive Order 11246, Section 503 of the Rehabilitation Act, the Vietnam Era Veterans’ Readjustment Assistance Act of 1972, or the Vietnam Era Veterans’ Readjustment Assistance Act of 1974

4. from the Equal Employment Opportunity Commission ( EEOC):

• • • a letter of determination that reasonable cause exists to believe that an unlawful employment practice has occurred or is occurring; or
    • a civil action filed on behalf of the EEOC

5. from the National Labor Relations Board (NLRB) :

• • • a complaint issued by any NLRB Regional Director;

6. a complaint filed by or on behalf of an enforcement agency with a federal or state court, an administrative judge, or an administrative law judge alleging that the contractor or subcontractor violated any provision of the labor laws; or

7. any order or finding from any administrative judge, administrative law judge, the DOL’s Administrative Review Board, the Occupational Safety and Health Review Commission (or state equivalent), or the NLRB that the contractor or subcontractor violated any provision of the Labor Laws.

Perhaps anticipating the fairness concerns raised by imposing a duty on companies to report the first six items listed above as “labor violations, the DOL indicates that its listing is “exhaustive”—meaning only these “administrative merits determinations”—would be reportable and thereby evaluated by the government in making its labor law “responsibility determination.” In its guidance, the DOL stated that it will publish in the Federal Register at a future date a second proposal addressing which state laws are equivalent to the 14 federal labor laws and executive orders. DOL’s guidance, however, clarifies that even at this juncture it considers “OSHA-approved State Plans”—of which there are more than 20—as “equivalent State laws.” As such, the troublesome aspects of the proposed “labor violation” definition will be compounded when the proposed definition includes all sorts of notices of violation and complaints issued by numerous state enforcement agencies.

Civil Judgments and Arbitral Awards Would Also Be Reportable

The two additional elements of the proposed “labor violation” definition—“civil judgment” and “arbitral award or decision”—are less controversial since they contemplate an adversarial proceeding. The guidance defines a civil judgment as,

any judgment or order entered by any federal or State court in which the court determined that the contractor or subcontractor violated any provision of the Labor Laws, or enjoined or restrained the contractor or subcontractor from violating any provision of the Labor Laws even if the order or decision is subject to further review in the same proceeding, is not final, can be appealed, or has been appealed.

Similarly, the proposal defines an arbitral award or decision as “any award or order by an arbitrator or an arbitral panel in which the arbitrator or arbitral panel determined that the contractor or subcontractor violated any provision of the Labor Laws, or enjoined or restrained the contractor or subcontractor from violating any provision of the Labor Laws.”

Controversial Standards for Weighing the Severity of Reported Labor Violations

In addition to the sweeping “labor violations” definition, the guidance proposes severity standards (i.e., “serious,” “repeated,” “willful,” and “pervasive”) for assessing reported labor violations. The guidance includes four appendices that identify types of violations that would fall within each of these proposed standards, another appendix that instructs agencies on how to measure violations against the proposed standards, and Appendix E which offers selected examples of “mitigating factors” when assessing labor violations. Although the guidance is quite detailed, it largely relies on individualized case-by-case severity determinations—which leave room for subjective labor law “responsibility determinations” and inequitable and inconsistent application by different federal agencies.

As a threshold matter, it is questionable whether the president has the legal authority to direct executive branch officials to develop culpability standards—whether through formal rulemaking (disclaimed here by the DOL) or mere administrative “guidance” —that would establish degrees of violation that Congress refrained from including in the enforcement and remedies provisions in most of the federal statutes covered by the executive order. (The OSH Act, by contrast, expressly defines what constitutes a “serious” or repeat violation).

Under the proposed FAR amendments, agency procurement officials would confer with an agency labor compliance advisor (LCA), a new position created by the executive order, and consider the LCA’s advice in evaluating any disclosed violations. The guidance and FAR proposed regulations grants these advisors sweeping authority to “serve as labor subject matter experts on all issues specific to part 22 and it prescribed contract clauses and provisions.”  FAR 22.104(c). An LCA is supposed to turn labor law “responsibility” recommendations around in three business days; but, ultimately, the contracting officer would make a responsibility determination of a prospective contractor.

The proposed FAR rules and DOL guidance afford agencies leverage to promote “labor compliance agreements.” Rather than determine the severity of a contractor’s labor violations, the LCA could recommend that the contractor negotiate a labor compliance agreement or “enhance” an existing one. Thus, a contractor could face a blacklisting dilemma to agree to “remediate” reported “violations” to an enforcement agency’s satisfaction in exchange for being kept in the running for new federal work (or remaining as a prime contractor or subcontractor on an existing project).

This is important to keep in mind in reviewing the proposed severity standards, briefly summarized below, and when attempting to forecast how a particular federal LCA, who is the purported “labor subject matter expert” under Proposed FAR 22.104(c), would recommend applying those standards to a particular contractor’s three-year labor violation history.

A labor violation is “serious,” for purposes of the proposed guidance, if it involves at least one of the following circumstances:

• • • an OSH Act or OSHA-approved State Plan citation was designated as serious, there was a notice of failure to abate an OSH Act violation, or an imminent danger notice was issued under the OSH Act or an OSHA-approved State Plan;
    • the affected workers comprised 25 percent or more of the workforce at the worksite;
    • fines and penalties of at least $5,000 were assessed or back wages of at least $10,000 were due or injunctive relief was imposed by an enforcement agency or a court;
    • the contractor’s or subcontractor’s conduct violated Migrant and Seasonal Agricultural Worker Protection Act (MSPA) or the child labor provisions of the FLSA and caused or contributed to the death or serious injury of one or more workers;
    • the employment of a minor who was too young to be legally employed or who was employed in violation of a Hazardous Occupations Order;
    • the contractor or subcontractor engaged in an adverse employment action (including discharge, refusal to hire, suspension, demotion, or threat) or is responsible for unlawful harassment against one or more workers for exercising any right protected by any of the labor laws;
    • the findings of the relevant enforcement agency, court, arbitrator, or arbitral panel support a conclusion that the contractor or subcontractor engaged in a pattern or practice of discrimination or systemic discrimination;
    • the findings of the relevant enforcement agency, court, arbitrator, or arbitral panel support a conclusion that the contractor or subcontractor interfered with the enforcement agency’s investigation; or
    • the contractor or subcontractor breached the material terms of any agreement or settlement entered into with an enforcement agency or violated any court order, any administrative order by an enforcement agency, or any arbitral award.

The guidance provides a table with selected examples of serious violations at Appendix A.

Under the proposed guidance, a labor violation would be deemed “willful” under the following circumstances:

• • • For purposes of a citation issued pursuant to the OSH Act or an OSHA-approved State Plan, the citation at issue was designated as willful or any equivalent state designation (i.e., “knowing”), and the designation was not subsequently vacated.
    • For purposes of the FLSA (including the Equal Pay Act), the administrative merits determination sought or assessed back wages for greater than two years or sought or assessed civil monetary penalties for a willful violation or there was a civil judgment or arbitral award or decision finding the contractor or subcontractor liable for back wages for greater than two years or affirming the assessment of civil monetary penalties for a willful violation.
    • For purposes of the ADEA, the enforcement agency, court, arbitrator, or arbitral panel assessed or awarded liquidated damages.
    • For purposes of Title VII or the ADA, the enforcement agency, court, arbitrator, or arbitral panel assessed or awarded punitive damages for a violation where the contractor or subcontractor engaged in a discriminatory practice with malice or reckless indifference to the federally protected rights of an aggrieved individual.
    • For purposes of any of the other labor laws, the findings of the relevant enforcement agency, court, arbitrator, or arbitral panel support a conclusion that the contractor or subcontractor knew that its conduct was prohibited by any of the labor laws or showed reckless disregard for, or acted with plain indifference to, whether its conduct was prohibited by one or more requirements of the labor laws.

The guidance notes that generally, willfulness will be found in one of two circumstances. One is where the findings of the enforcement agency, court, arbitrator, or arbitral panel support a conclusion that the contractor or subcontractor knew that its conduct was prohibited by law, yet engaged in the conduct anyway. The second type of willful violation is where the findings of the enforcement agency, court, arbitrator, or arbitral panel supports a conclusion that a contractor or subcontractor acted with reckless disregard or lain indifference toward the labor law’s requirements. The guidance provides a table with selected examples of willful violations at Appendix B.

Repeated violations may include violations of any establishment of a contractor and may be “similar” even if they involve different employment practices. A violation is “repeated”  if it is the same as or substantially similar to one of more other violation of the labor laws by the contactor or subcontractor as reflected in one or more civil judgments, arbitral awards, or decisions, or adjudicated or uncontested administrative merits determinations  issued within the last three years. Substantially similar does not mean exactly the same, but the violations should share “essential elements in common.” For example, a violation of the overtime requirements of the FLSA may not be “similar” to a violation of the child labor provisions. However, violations of different statutes (such as Title VII, the Equal Pay Act, and EO 11246) could constitute a similar violation if they involve “overlapping protected status (such as race, gender, disability) even if they do not involve the same employment practice—such as hiring, firing, harassment, or compensation.

Two or more notice posting or record-keeping violations of any statute would be a repeat violation and an employer that commits two or more violations involving retaliation will be found to have engaged in repeated violations. Significantly, repeat violations may be considered on a company-wide basis. Thus a prior violation by any establishment of a multi-establishment company can render subsequent violations repeated. The guidance notes that to the extent a prior civil judgment, arbitral award or decision, or administrative merits determination has been reversed or vacated in its entirety, it cannot render a subsequent violation repeated. In light of the significant delay that contractors may encounter before vindication of a prior judgment, decision, or determination, this proposed provision offers little solace to a contractor that is engaged in the bidding process. The guidance provides a table with selected examples of repeated violations at Appendix C.

“Pervasive” Labor Violations

Pervasive violations need not be similar and may result from a single investigation. In the complete absence of any statutory guidance for the new category of pervasive violations, the DOL asserts that violations are “pervasive” if they reflect a basic disregard by the contractor or subcontractor for the labor laws as demonstrated by a pattern of serious or willful violations, continuing violations, or numerous citations. The category is intended to identify those contractors and subcontractors whose numerous violations of labor laws indicate that they may view sanctions for their violations as merely part of “the cost of doing business.”

Unlike repeat violations, pervasive violations need not be substantially similar or even similar at all, as long as each violation involves one of the labor laws. The guidance does not provide a specific numeric threshold for pervasive violations. Under the guidance, one relevant factor in determining whether violations are pervasive is the involvement of higher-level management officials. The guidance provides a table with selected examples of pervasive violations at Appendix D.

Subjective Guidance for Violations of Labor Laws and Mitigating Factors

The proposed guidance requires consideration of the totality of the facts and circumstances of the violations, as well as any mitigating factors. Section III of the guidance outlines considerations an agency or prime contractor may take into account when assessing the severity of violations as well as mitigating factors. Although the guidance is quite detailed, it largely relies on individualized case-by-case determinations—which would lead to subjective determinations and inequitable and inconsistent enforcement by different agencies and different contracting officials within each agency.

Factors to consider when assessing the severity of a violation include:

• • • whether the violations are pervasive such that they demonstrate a basic disregard for the labor laws;
    • whether the violations meet two or more of the “serious,” “repeated,” “or “willful” categories;
    • whether the violations are reflected in final orders; and
    • whether the violations are of particular gravity as described in the guidance.

Mitigating factors include, among others, remediation of a violation, including labor compliance agreements; commission of only one violation as opposed to repeated acts; a low number of violations relative to the size of the contractor; implementation of safety and health programs or grievance procedures; whether violations can be traced to a recent legal or regulatory change; good faith efforts to ascertain legal obligations and follow the law; and a significant period of compliance following violations. The guidance provides a table identifying violations of particular concern and selected examples of mitigating factors to be used when assessing a violation of the labor laws at Appendix E.

Possible Phased-In Labor Violation Reporting for Subcontractors

Under the proposed FAR amendments, contractors would be charged with collecting labor law certifications from all of their proposed subcontractors usually prior to awarding them work. Significantly, they would be required to sit in judgment, after consultation with the DOL, of whether each of their subcontractors was ethically fit, based on its reported, three-year “labor violations” history, to continue competing for proposed federal subcontracts of over $500,000. They would be subject to a regulatory and contractual duty to monitor their subcontractor’s labor law-based “responsibility” status throughout a project by reviewing the subcontractors’ biannual post-award “labor violation” reporting. Most contractors are ill-equipped to satisfy these unprecedented and continuing requirements.

While the executive order was issued invoking the president’s congressionally-delegated powers to promote efficiency in federal procurement, the FAR Council already recognizes how unsettling, unwieldy, and burdensome some aspects of the proposed contractor blacklisting program would likely be for contractors and the FAR’s finely-tuned procurement process. The FAR Council’s preamble specifically requests comments on best practices for reporting subcontractor “labor violations” to higher-tiered contractors, including potentially having subcontractors report directly to the DOL instead of to contractors or phasing in subcontractor reporting of labor violations.

Proposed Paycheck Information Requirements Include Notice to Exempt Employees and Independent Contractors

The proposed guidance contains a separate section that addresses the paycheck transparency provisions of the executive order. Each pay period, covered federal contractors and subcontractors must provide all individuals performing work under the contract a wage statement containing the employee’s hours worked, overtime hours, pay, and any additions or deductions made in pay. It also discusses various state law requirements for wage statements and compliance with this requirement of the executive order.

For those employees not covered by the overtime provisions of the FLSA, the guidance proposes to clarify that contractors are not required to include a record of hours worked but must provide written notice to the worker stating that the worker is exempt from the FLSA’s overtime compensation requirements. The guidance would allow contractors to provide workers with electronic versions of these documents.

In addition, the guidance proposes a requirement that contractors provide a document to workers who they treat as independent contractors informing them of their independent contractor status before they perform any work under the contract. The guidance clarifies that oral notice would not be adequate. The notice does not lead to a presumption that the worker has been properly classified as an independent contractor and the DOL would not even consider the notice when evaluating whether a worker is properly classified. Proposed FAR 22.2005 would implement the paycheck transparency requirements.

Proposed Restrictions on Use of Employment Arbitration in Title VII and Sexual Assault or Harassment Claims

Finally, the executive order prohibits pre-dispute arbitration agreements applicable to claims arising under Title VII or any tort related to sexual assault or sexual harassment where the value of the contract exceeds $1 million. Any agreement to arbitrate such a claim must be voluntarily made only after the dispute arises. (The executive order includes an exception to the pre-dispute arbitration agreement prohibition for collective bargaining agreements.)

The proposed guidance does not address this aspect of the executive order. However, Proposed FAR 22.2006 implements the anti-arbitration complaint and dispute requirements, even though this provision would appear to ignore decisions by the Supreme Court of the United States and circuit courts of appeal that neither the FAR Council nor the DOL mentioned or addressed.

60-Day Comment Period

Both the DOL guidance and FAR Council notice of proposed rulemaking provide for a 60-day comment period that expires on July 27, 2015. It is important that federal contractors and subcontractors submit comments to these proposals. Even employers that are not federal contractors or subcontractors should consider filing comments, particularly on the anti-arbitration and paycheck transparency provisions. The current administration and some members of Congress seek to eliminate the use of any pre-dispute arbitration agreements and require employers to provide greater pay and work information to their employees. In fact, the DOL’s Wage and Hour Division continues to maintain its “right-to-know” regulatory agenda item as a long-term action item. Once the DOL finalizes this guidance, it will use the paycheck transparency provision as justification for moving forward on its right-to-know regulatory proposal.

Conclusion

By all indications, the administration intends to finalize these proposed FAR amendments and DOL proposed guidance as soon as possible so agencies can begin to implement the mandates in procurement solicitations and contracts by mid-2016. Accordingly, short of derailing these proposed contractor blacklisting rules through a court order or congressional intervention, contractors bidding on new federal procurement work likely will face an unprecedented set of complicated, unsettling, and burdensome regulatory and contractual duties imposed on them as set forth in the proposed FAR amendments and DOL guidance.