President Obama Signs Executive Order Mandating Government Contractor and Subcontractor Disclosure of Labor Law Violations

On July 31, 2014, President Barack Obama signed The Fair Pay and Safe Workplaces Executive Order. The executive order is unprecedented in scope, requiring covered federal contractors periodically to disclose various labor law violations to the government pre- and post-contract award and to collect similar information from subcontractors. The executive order also (a) adopts guidelines for how reported violations should be considered by agencies in making contract awards, (b) adds new paycheck “transparency” requirements, and (c) attempts to limit the use of mandatory arbitration for certain employment disputes.

Labor Law Violation Reporting

Pre-Award Disclosure

The executive order first requires contractors bidding for federal procurement contracts for goods and services (including construction contracts) valued at more than $500,000 per contract to disclose to the contracting agency whether there has been “any administrative merits determination, arbitral award or decision, or civil judgment” rendered against the bidding contractor within the past three years for violations of the following (collectively, “a labor law violation”):

1. The Fair Labor Standards Act
2. The Occupational Safety and Health Act of 1970
3. The Migrant and Seasonal Agricultural Worker Protection Act
4. The National Labor Relations Act
5. The Davis-Bacon Act
6. The Service Contract Act
7. Executive Order 11246
8. Section 503 of the Rehabilitation Act of 1973
9. The Vietnam Era Veterans’ Readjustment Assistance Act of 1974
10. The Family and Medical Leave Act
11. Title VII of the Civil Rights Act
12. The Americans with Disabilities Act
13. The Age Discrimination in Employment Act
14. Executive Order 13658 (establishing a minimum wage for contractors)
15. “Equivalent state laws”

Under the executive order, a contractor’s disclosure must then be reviewed by an agency’s contracting officer to determine whether a bidding contractor is “a responsible source that has a satisfactory record of integrity and business ethics.”

Post-Award Disclosure

In addition to pre-award disclosure, during the performance of a covered contract, federal contractors must update their pre-award labor law violation disclosures to the contracting agency every six months.

Further, for federal subcontracts valued at more than $500,000 each and that “are not for commercially available off-the-shelf items,” prime contractors must:

• require each applicable subcontractor to disclose labor law violations to it as part of a subcontract award, with updates every six months;
• “before awarding a subcontract” (or within 30 days of subcontract award for subcontracts effective within 5 days of execution) “consider the information submitted by the subcontractor...in determining whether a subcontractor is a responsible source that has a satisfactory record of integrity and business ethics”; and
• incorporate language regarding the subcontractor disclosure obligation in applicable subcontracts.

Contractor reporting disclosures, once effective, will be made via a website to be developed by the federal administrator of general services.

Violation Consideration by Contracting Agencies

Under the executive order, each agency will be required to designate a senior official to act as “a labor compliance advisor,” who will be responsible for working with contracting officers to determine whether a bidder or current contractor is “a responsible source.” Labor compliance advisors also are tasked with, among other things:

• consulting with “relevant enforcement agencies” (e.g., the Department of Labor, Equal Employment Opportunity Commission, Office of Federal Contract Compliance Programs) regarding “appropriate actions to be taken in response to violations identified”;
• advising the contracting officer “whether agreements are in place or other otherwise needed to address appropriate remedial measures, compliance assistance, steps to resolve issues to avoid further violations, or other related matters”; and
• helping agency officials determine the “appropriate response” to address disclosed violations, with particular emphasis on “serious, repeated, willful, or pervasive violations.”

“Appropriate responses” can include “agreements requiring remedial measures, decision to not award a contract or exercise an option on a contract, contract termination, or referral to the agency suspending or debarring official.”

Notably, in addition to agency pressure that will be brought to bear on contractors deemed out of compliance, the Department of Labor (DOL) will be required to inform contracting agencies of its investigations of federal contractors and subcontractors so that agencies can “help the contractor determine the best means to address any issues, including compliance assistance and resolving issues to avoid or prevent violations.”

It is unlikely that such “help” will include contracting agency support of employers who disagree with enforcement agencies about whether a labor law violation has, in fact, occurred or the appropriate remedy for an alleged violation.

Factors for Agency Consideration

The executive order instructs the Federal Acquisition Regulatory (FAR) Council, in consultation with various entities, to promulgate amendments to the Federal Acquisition Regulation “to identify considerations for determining whether serious, repeated, willful, or pervasive violations” are deemed to “demonstrate a lack of integrity or business ethics.” Per the executive order, the proposed regulations must:

• provide that in most cases a single violation of law “may not necessarily give rise to a determination of lack of responsibility,” depending on the nature of the offense;
• “ensure appropriate consideration is given to any remedial measures or mitigating factors, including any agreements by contractors or other corrective action taken to address violations”; and
• ensure that contracting officers and labor compliance advisors “send information, as appropriate, to the agency suspending and debarring official, in accordance with agency procedures.”

The executive order also requires the secretary of labor to develop guidance to assist agencies in implementing any final rule issued by the FAR Council. Such guidance must, “where available, incorporate existing statutory standards for assessing whether a violation is serious, repeated or willful.” Where no such statutory standard exists, the executive order requires that DOL guidance take into account the following:

1. For determining whether a violation is serious, consider “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 penalties assessed with regard to the violation, and other considerations as the Secretary finds appropriate.”
2. For determining whether a violation is repeated, consider “whether the entity has had one or more additional violations of the same or a substantially similar requirement in the past 3 years.”
3. For determining whether a violation is willful, consider “whether the entity knew of, showed reckless disregard for, or acted with plain indifference to the matter of whether its conduct was prohibited.”
4. For determining whether a violation is pervasive, consider “the number of violations of a requirement or the aggregate number of violations of requirements in relation to the size of the entity.”

“Paycheck Transparency”

In addition to labor law violation disclosure, the executive order requires “paycheck transparency” for all employees and independent contractors performing work under a contract for whom the employer is required to maintain wages under the Davis-Bacon Act, the Service Contract Act or “equivalent State law.”

Specifically, federal contractors and subcontractors covered by the executive order must provide such workers a document “in each pay period” that contains information concerning the individual’s “hours worked, overtime hours, pay, and any additions made to or deductions made from pay.” However, exempt employees need not be given a record of hours worked if the contractor or subcontractor informs such workers of their overtime exempt status. Contractors and subcontractors also must provide any worker who is treated “as an independent contractor, and not an employee” with a written document regarding the worker’s status.

Limits on Mandatory Arbitration

The executive order also requires that, for each contract with an estimated value in excess of $1 million (except for contracts for commercially available off-the-shelf items), contractors and subcontractors must agree that “the decision to arbitrate 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 may only be made with the voluntary consent of employees or independent contractors after such disputes arise.”

This requirement is a direct attempt to ban the use of pre-claim mandatory arbitration agreements used by many employers. However, per the executive order, the limits on mandatory arbitration do not apply to employees employed pursuant to collective bargaining agreements. The limits on mandatory arbitration also do not apply to an employee or independent contractor “who entered into a valid contract to arbitrate prior to the contractor or subcontractor bidding on a contract covered by this order,” unless the contractor is permitted to change the terms of the mandatory arbitration agreement or the agreement is later renegotiated or replaced.

Contractor Take-Aways

The accompanying White House fact sheet to the executive order notes that the Obama Administration expects the order “to be implemented on new contracts in stages, on a prioritized basis, during 2016,” giving the FAR Council and secretary of labor time to promulgate regulations and guidance. In the meantime, whether certain parts of the executive order are “good law” likely will be the subject of heavy litigation. Examples include the following:

• The executive order’s ban on mandatory arbitration appears to conflict with prior federal court precedent, upholding the enforceability of mandatory arbitration clauses used by federal contractors and subcontractors under the Federal Arbitration Act (FAA).
• The role of agency “labor compliance advisors” in actively pressuring contractors “to resolve issues to avoid further violations” in order to get or keep a contract appears to violate due process protections provided to employers under current statutes. This is especially true given the White’s House’s trumpeting of the executive order as a mechanism “to encourage companies to settle existing disputes.”

Whether violations reported under the executive order will be deemed public information subject to disclosure under the Freedom of Information Act (e.g., to the media, unions, plaintiffs’ attorneys) is also an open question.

Nevertheless, final regulatory details aside, federal contractors and subcontractors will want to start working now toward putting steps in place to address the new reporting and other obligations. In doing so, employers face several challenges.

1. Contractors will need a compile an accurate list of adverse labor decisions that may be subject to reporting.
2. Contractors should be ready to defend any decision to report some labor law “violations” but not others, consistent with regulations to be issued later.
3. Because the executive order applies to certain labor law violations stretching back for three years, contractors should take steps to implement a labor dispute tracking system in coordination with human resources, legal, compliance and other company personnel and outside counsel.
4. Contractors should be ready to challenge any agency findings that they are not “responsible sources”, which can render otherwise acceptable contract bids ineligible for award (and jeopardize ongoing contracts).
5. If contractors have experienced particularly serious or numerous negative, alleged labor law violation outcomes in the last three years, they should prepare for the possibility of having to defend against potential suspension or debarment proceedings.

Copies of the executive order and White House fact sheet are available online.

For questions about the new executive order or other issues related to the plethora of other recent regulatory compliance obligations imposed on federal contractors, please reach out to the authors, your McGuireWoods contact, or a member of the firm’s affirmative action team, labor and employment group or government contracts team.