Avoiding Common Affirmative Action Plan Design Mistakes as a Federal Contractor

June 26, 2009

The best laid schemes o’ mice an’ men gang aft agley (often go awry). – Robert Burns

The same is also often true when designing affirmative action plans required of federal contractors and subcontractors (collectively “contractors”).

Executive Order 11246, Section 503 of the Rehabilitation Act of 1973, and Section 402 of the Vietnam Era Veterans Readjustment Assistance Act of 1972 each impose non-discrimination and affirmative action obligations on certain holders of covered federal government contracts and their subcontractors.

For smaller government contracts and subcontracts (generally $10,000 – $49,999), these laws require non-discrimination and limited affirmative action practices, but no written affirmative action plan (AAP). In contrast, the requirement to implement and maintain a written AAP generally arises for:

  • Federal Contractors. A company with 50 or more employees and that: (a) has a contract of $50,000 or more to supply goods or services (non-construction) to a covered agency of the federal government; (b) has government bills of lading which in any 12-month period total $50,000 or more; (c) serves as a depository of government funds in any amount; or (d) is a financial institution that is an issuing and paying agent for U.S. savings bonds and savings notes in any amount.
  • Federal Subcontractors. A company with 50 or more employees and a subcontract of $50,000 or more to supply goods or services (non-construction) to a covered federal government contractor, provided such goods or services are, in whole or in part, “necessary” for the performance of a government contract.

Although this may seem straight forward, many contractors make common plan design mistakes when initially setting up their AAPs that end up costing their organizations later during compliance audits.

Not Enough “Family” Members

As a general rule, if a contractor has multiple related legal entities (e.g., parent or subsidiary companies) but only some are involved in the delivery of the federal contract or subcontract, the Office of Federal Contract Compliance Programs (OFCCP) has historically applied a “single entity” test to determine which companies in the “family” must have written AAPs.

In analyzing such issues, the OFCCP has generally used a five-factor “actual control” test as outlined in Liberty Mut. Ins. Co. v. Friedman. Under this approach, the OFCCP evaluates the ownership, management and operations of the separate legal entities to determine whether they are so intertwined that they should be treated as a single enterprise for purposes of OFCCP jurisdiction. The result is that unless the entities are legally and operationally distinct with respect to the day-to-day control of employees at all levels of an organization (e.g., finance, HR, marketing) and meet the other four parts of the five-factor test, once a legal entity within a family of companies is deemed to be a federal contractor or subcontractor, the OFCCP will typically take the position that all of the U.S. legal entities of that “family” must have written AAPs. This is the case even if only one legal entity actually holds and performs the federal contract or subcontract.

Not Enough Sites

With some limited exceptions, contractors are required to develop and maintain a written AAP for each of their establishments that has “50 or more employees” at such location. See 41 CFR 60-2.1(b)(1). For small “establishments” with fewer than 50 employees, contractors have a choice. They can include employees at a small establishment in an AAP that covers:

  • Just the small establishment;
  • “The location of the personnel function which supports” the small establishment; or
  • “The location of the official to whom they report.”

As an alternative approach, a contractor can design its AAPs based on functional or business units (i.e., by corporate operational boundaries instead of by establishment). However, to do so, a contractor is required to petition the OFCCP for advance approval. See 41 CFR 60.2.1(d)(4).

Not Enough Thought

Although the regulatory requirements summarized above provide a good start for considering where and how many AAPs to have, contractors are also well-advised to work with counsel to analyze the pros and cons of different design alternatives. For example:

  • Separate and apart from the issue of how many AAPs a contractor must have, there are numerous rules for which employees get included into which plan.
  • Although combining smaller establishments into a larger “master” AAP for a larger site may be easier from an administrative standpoint, it also provides a larger data set and liability target when audited by the OFCCP.
  • A contractor’s overall statistical profile portrayed by an AAP may look far better under some AAP designs than others.

For assistance preparing affirmative action plans, implementing data tracking and document retention programs that comply with OFCCP requirements, or preparing for or responding to an OFCCP audit, please contact any member of McGuireWoods’ Federal Contract Compliance Team within the Labor & Employment Group, including: