Executive Order Increases Risks and Burdens for Federal Contractors

Introduction

On July 31, 2014, President Obama signed the Fair Pay and Safe Workplaces Executive Order,  Executive Order 13673 (the “Order”), which includes the so-called “blacklisting” procedures for federal contractors.  The Order’s stated purpose is to enhance employee protections by linking federal contractors’ ability to secure government contracts to their labor and employment law compliance.  The Order imposes three new and significant requirements: 1) it requires prospective contractors to disclose violations under multiple federal laws and their state law equivalents; 2) it requires disclosure of certain pay-related information to employees and independent contractors; and 3) it prohibits the use of mandatory arbitration agreements for certain employment-related claims.

The Order is set to be implemented on the following schedule:

• October 25, 2016: The final rule, issued by the Federal Acquisition Regulatory Council and the Department of Labor (“DOL”), took effect.  All prospective federal contractors for contracts with a total value of $50 million or more must disclose any violations of the listed laws.  The disclosure period initially covers only violations within the past year, but will extend to cover the prior three-year period by October 25, 2018.
• January 1, 2017: The Paycheck Transparency clause takes effect. 
• April 25, 2017: The threshold of covered contracts drops from $50 million to $500,000.
• October 25, 2017: Subcontractors must begin disclosing violations and being assessed by the DOL.

Compliance with Labor Laws

Section 2 of the Order governs the disclosure requirements for labor and employment law violations. The Order will ultimately apply to any prospective federal contractor and subcontractor seeking a contract valued at $500,000 or more (although the threshold is initially set at $50 million and limited to prime contractors).  These contractors will be required to disclose “whether there has been any administrative merits determination, arbitral award or decision, or civil judgment” of any of a number of federal laws that occurred during the disclosure period.  The disclosure period will initially extend back to October 25, 2015. After October 25, 2018, the disclosure period will be limited to any violations within the preceding three years.  Federal contractors will be required to supplement their disclosures every six months.

The laws at issue include:

1. Fair Labor Standards Act;
2. Occupational Safety and Health Act of 1970;
3. Migrant and Seasonal Agricultural Worker Protection Act;
4. National Labor Relations Act;
5. Davis-Bacon Act;
6. Service Contract Act;
7. Executive Order 11246 of September 24, 1965 (Equal Employment Opportunity);
8. Rehabilitation Act of 1973;
9. Vietnam Era Veterans’ Readjustment Assistance Act of 1974;
10. Family and Medical Leave Act;
11. Title VII of the Civil Rights Act of 1964;
12. Americans with Disabilities Act of 1990;
13. Age Discrimination in Employment Act of 1967;
14. Executive Order 13658 of February 12, 2014 (Establishing a Minimum Wage for Contractors); and
15. Equivalent state laws, as defined in guidance issued by the DOL.

An administrative merits determination is defined as any notice or finding (final, or subject to appeal or further review) issued after a full investigation by the relevant enforcement agency that indicates the contractor violated any provision of the enumerated labor laws.  This could include things like an agency’s decision to issue a Complaint (in the case of the National Labor Relations Board, for example) or a safety citation, even when no evidentiary hearing has yet occurred.

Along with the disclosures of any violations, contractors will be given the opportunity to provide any mitigating factors, contextual explanations, or steps taken to correct the violations and improve compliance.  Once the disclosures are made, a Labor Compliance Advisor designated by each agency will determine whether the contractor is "a responsible source that has a satisfactory record of integrity and business ethics."

Paycheck Transparency

In addition to the disclosure requirements for labor and employment law violations, federal contractors also have additional requirements concerning pay-related information.  Under Section 5 of the Order, contractors must provide all individuals performing work with pay stubs, every pay period, detailing the number of “hours worked, overtime hours, pay and any additions made to or deductions made from pay.”  If employees are exempt and their hours are not tracked, they must be informed of their exempt status.  Individuals hired as independent contractors must also be informed of their status.

Complaint and Dispute Transparency

Section 6 of the Order prohibits the use of mandatory arbitration agreements for claims “arising under Title VII of the Civil Rights Act of 1964 or any tort related to or arising out of sexual assault or harassment.”  Unlike the other requirements, the arbitration limitation only applies to federal contractors with contracts valued above $1 million.  Individuals must be given the choice to arbitrate claims after the dispute arises, but they are not required to agree to arbitration as a precondition of employment.  There are two exceptions to this requirement:  1) it does not apply to employees who are covered under collective bargaining agreements, and 2) it does not apply to employees or independent contractors who entered into a valid agreement to arbitrate under a contract not covered by the Order.  However, if the contractor is permitted to change the terms of the contract, or if the contract is renegotiated or renewed, the exception no longer applies.

What This Means for Employers

Unfortunately a large degree of uncertainty exists about how the agencies will use their authority.  According to the DOL, only “serious, repeated, willful, or pervasive” violations will raise red flags, with these terms to be defined by the Secretary of Labor.  And “in most cases” a single violation of law “may not” give rise to a determination of lack of responsibility.  But the sanctions vary from requiring agreements to remedy the violations to suspension and even debarment.

Although not expected to be successful, legal challenges have already begun as contractors take a final shot at halting the regulations.  As we await more guidance from the agencies, and possibly the courts, federal contractors should begin considering methods for tracking their compliance with the covered laws.  They should also begin evaluating their current practices regarding pay stubs.  If the Secretary of Labor deems state and local pay stub requirements substantially similar, a federal contractor that is already complying will have fulfilled this obligation.  Federal contractors should examine their arbitration programs and get them into compliance.  Finally, in any settlement with a government agency, contractors should attempt to achieve both a “no admission of wrongdoing” clause and a rescinding of any action that constitutes an administrative merits determination that would trigger the Order’s disclosure requirement.