Yesterday, the U.S. Department of Labor (“DOL”) issued a press release announcing the publication for notice and comment of its proposed guidance and the FAR Council’s proposed regulations regarding the Fair Pay and Safe Workplaces Executive Order (the “Order”). On July 31, 2014, President Obama signed the Order, which imposes additional disclosure and compliance obligations on federal government contractors with contracts valued at $500,000 or more. Among other things, the Order, once implemented, will require contractors to disclose violations of numerous labor, employment, wage payment and safety laws during the contract bidding process. These violations will be taken into account when awarding government contracts. 

The long anticipated guidance and regulations will finally lend some clarity to the intended scope of the Order’s application. The proposed guidance and regulations cast a wide net, incorporating a range of violations into the Order’s reporting requirements and placing an enormous amount of discretion into the hands of the federal contracting officials. Any contractors looking to comment on the proposed guidance must do so no later than July 26, 2015. Any contractors that want to comment on the proposed regulations must do so no later than July 27, 2015.

Scope of Covered Violations

The first major topic that the proposed guidance addresses, and arguably the topic that has caused the most controversy over the past nine months, is the scope of the covered violations. The Order lists fourteen federal labor laws (along with their “state equivalents”), violations of which must be reported to the Contracting Officer. Included within the definition of violations are administrative merits determinations, arbitral awards or decisions, and civil judgments.

It had been unclear how broadly “violations” would be defined. If the proposed guidance and regulations are read literally (and not amended before they are made final), the answer is very broadly. For example:

• DOL proposed that administrative merits judgments will include notices or findings issued by an enforcement agency following an investigation. While the proposed guidance provides an exhaustive list of covered administrative determinations, the list is extremely broad. For example, it includes, but is not limited to: (1) a citation from OSHA; (2) a show cause notice from the OFCCP; (3) and a complaint filed by a regional director of the NLRB.

• If the guidance is implemented in current form, civil judgments will include any judgment or order entered by any federal or State court finding the violation of a covered labor law. This includes: (1) preliminary injunctions; (2) partial summary judgment; and (3) consent judgments or default judgments so long as there is some recognition of a labor law violation. However, private settlements would not covered where no civil judgment is entered.

• The proposed guidance would define arbitral awards to include any award or order in which the arbitrator finds that the contractor or subcontractor violated any provision of a covered labor law, or enjoined the contractor from violating any provision of a covered labor law.

Absent from the proposed guidance is discussion of which state laws are “equivalent” to the federal labor laws set forth in the Order. DOL states in a footnote that it will issue a “second proposed guidance addressing which State laws are equivalent to the 14 federal labor laws” at an unspecified “future date.”

Contractor Reporting Requirements

The proposed guidance also clarifies reporting requirements that would be imposed on contractors. When bidding on a new contract, contractors must first represent whether any covered violations have been issued against them. At this phase, they merely must respond to a yes or no question as part of the representations and certifications process of submitting a bid.

Under the proposed guidance, if a contractor makes it to the responsibility determination stage of the bid process and the contractor responded that it has violations to report, the contractor will be required to provide additional information, including: (1) the labor law that was violated; (2) the case number; (3) the date that the determination was rendered; (4) the name of the court, arbitrator(s), agency, board, or commission that rendered the determination; and (5) any information supporting mitigation efforts by the contractor. After a contract is awarded, contractors would be required to update this information semi-annually.

As the DOL has proposed, contractors would also be required to police their subcontractors by collecting data on any administrative merits determinations, civil judgments, or arbitral awards or decisions rendered against the subcontractor within the preceding three-year period. The contractor would then then assess whether the subcontractor satisfies responsibility requirements. The subcontractor reporting requirement will be phased in gradually to allow the contracting community to familiarize itself with the new guidance and regulations.

Assessing If A Contractor Is Responsible

The most subjective aspect of the proposed guidance and regulations involves with the responsibility assessment. When assessing violations of the labor laws by a contractor or subcontractor, the proposed guidance requires contracting officials to consider the totality of the facts and circumstances of the violations, as well as any mitigating factors. Although the proposed guidance provides the officials with detailed guidance on what is considered serious, it largely relies on individualized, case-by-case assessments by contracting officials, leaving substantial room for inequitable and inconsistent enforcement.

The proposed guidance identifies certain violations that the DOL considers particularly concerning. These include:

• Pervasive violations;

• Violations that meet at least two of the following categories: (1) serious; (2) repeated; or (3) willful;

• Violations reflected in final orders; and

• Violations of particular gravity—which include violations related to the death of an employee; violations involving retaliation, violations detrimentally impacting the working conditions of all or nearly-all of the workforce at a worksite, and violations with damages exceeding $100,000.

Suspension and Debarment

The proposed guidance and regulations are eerily silent on suspension and debarment. The proposed guidance and regulations merely provide contracting officials with the discretion to determine if referral to the debarring official is appropriate. With the recent push for more suspension and debarment proceedings by agencies, this may provide an easy avenue to ramp up suspension and debarment programs, and to directly target any contractor that a specific government agency feels is a problem.

Paycheck Transparency Provisions

The proposed guidance and regulations also discuss the Paycheck Transparency Provisions of the Order.  The proposed guidance requires employers to provide a host of details regarding each employee’s pay with every paycheck.  For example, the proposed guidance would require that employers provide employees with: (1) total number of hours worked in the pay period; (2) the number of those hours that were overtime hours; (3) the gross pay for the pay period; and (4) any deductions from or additions to that gross pay.

With respect to overtime hours, the proposed regulations state that an employer must provide the overtime hours broken down by the period used to calculate overtime.  This means that if an employer uses a 40 hour workweek to calculate overtime, but pays employees every two weeks, the wage notice must contain overtime broken down by each week.  Nothing in the proposed regulations states that this information cannot be included in the paystub received by employees.  According to the guidance, the goal of this provision is to increase transparency which will in turn, make employees more aware of their rights.

The Order and the corresponding proposed guidance also require federal contractors to provide notice to “those workers whom they treat as independent contractors with a document informing the individual of this independent contractor status.”  This document must be separate from any contract entered into between the federal contractor and the independent contractor.  It is important to note that the notice does not lead to a presumption that someone has properly been classified as an independent contractor.

Indeed, the DOL will not even consider the notice in evaluating whether an individual is properly classified as an independent contractor. Such notice must be provided each time the independent contractor is engaged to perform work for the federal contractor. The proposed guidance provides little information about the form of the notice, other than it be in writing and in a language other than English “if a significant portion of the contractor’s or subcontractor’s workforce is not fluent in English.”

Key Takeaways

Although the guidance and regulations are not final and may be revised before implementation, federal contractors need to start preparing now for their implementation. Contractors must be mindful of the fact that any “administrative merits determinations,” “arbitral awards or decisions,” or “civil judgments” entered today will be reportable after the implementation of the regulations as part of the bid process. As such, contractors must factor into their risk management analysis the impact of having to report an adverse determination when assessing threatened claims. Moreover, federal contractors should expect government investigators and plaintiffs’ counsel to use the impact of an adverse determination as leverage in settlement discussions. However, contractors must avoid the trap of settling all claims out of fear of reporting adverse determinations. Doing so will mark the contractor as a target for plaintiffs’ counsel, which will result in increased claims, increased settlements, increased risk of reportable violations, and increased costs to the contractor. As such, contractors must be judicious in determining which threatened claims to settle and which to litigate.

Relatedly, contractors should undertake comprehensive compliance audits to ensure that they are in compliance with the labor and employment laws (and state equivalents) subject to the Order. The best way to avoid having to disclose an adverse determination is to avoid claims and investigations in the first place. A robust compliance program will avoid violations and provide the federal contractor with the best opportunity to defend claims and investigations. Reviewing the prior violations and existing claims will allow the contractor to identify key risk areas that require attention. Such audits should be conducted under attorney supervision.

In addition, once the regulations and guidance are final, contractors must be prepared to provide the adverse determination information to federal Contracting Officer in connection with any bids. Contractors should not leave such information gathering to the last minute. Assessing which determinations are reportable will require a careful review of the regulations. Contractors need to ensure not to over- or under-report such determinations. Moreover, contractors may wish to provide explanatory information concerning any reportable determinations. Such information needs to be carefully crafted with input from counsel. It cannot be “thrown together” at the bid deadline. Contractors should also develop methods to ensure that new reportable determinations are collected centrally so that they can be used in connection with new bids or provided to contracting officials for existing contracts.

Additionally, federal contractors should begin implementing systems to comply with the Order’s pay transparency requirements. Federal contractors should review their current paystubs now to determine whether they contain all of the necessary information. Moreover, federal contractors need to ensure their independent contractors receive the required notice at the outset of each engagement. Furthermore, because the Order makes the penalties for misclassification of independent contractors even more costly, contractors should engage counsel to conduct a privileged assessment of their independent contractor relationships to ensure they will pass muster if investigated by a government agency or raised in litigation.

U.S. Secretary of Labor Thomas E. Perez has repeatedly stated that “the opportunity to contract with the federal government is a privilege, not an entitlement.” With the Order and the proposed regulations and guidance, that “privilege” comes with increased compliance costs and risks. Proactive steps by federal contractors now can help ensure they are not disadvantaged (and even help them gain an advantage) in competing for federal contract opportunities.