Dazed & Confused: What’s a Federal Contractor To Do?

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A hypothetical conversation with a frustrated and overwhelmed federal contractor

Dear Cara:

I work in human resources for a federal contractor, and I keep reading about President Obama’s executive actions directed towards federal contractors. We have a very small legal department in our company, and we are having a difficult time keeping track of all these new requirements. Can you please help us?!?

Dazed & Confused in Federal Contractor Land


Dear Dazed & Confused:

I can certainly understand your feelings of being overwhelmed. With five executive actions in seven months, President Obama has increased the pressure on federal contractors and their already over-burdened staff. Let me give you the quick low-down on the President’s recent actions, the status of the changes for contractors, and some of the issues about which you should be aware.

Minimum Wage Increase for Some Contractors

On February 12, 2014, President Obama issued the first Executive Order of the year aimed at federal contractors. Although the Executive Order grabbed headlines, it will not have much effect on the majority of contractors. The Order sets $10.10 as the minimum wage for workers involved in certain types of federal contracts. The Order only applies to new contracts if the wages of the workers involved are governed by the Fair Labor Standards Act (FLSA), the Service Contract Act (SCA), or the Davis-Bacon Act (DBA), and if:
  1. it is a procurement contract for services or construction;
  2. it is a contract for services covered by the SCA;
  3. it is a contract for concessions;
  4. it is a contract entered into with the federal government in connection with federal property or lands and related to offering services for federal employees, their dependents, or the general public.
Because prevailing wage thresholds for the DBA and SCA are typically higher than $10.10 and because contractors solely providing goods to the government are not covered, the impact of this Executive Order is not as significant as many initially thought.

In June 2014, the Department of Labor (DOL) issued its Notice of Proposed Rulemaking to implement this minimum wage requirement. In typical fashion, the DOL took the plain language from the Executive Order and expanded its application. The proposed regulations suggest that all employees of a contractor who provide support work for a covered contract would be subject to the minimum wage requirement. For example, all employees covered by the FLSA who support DBA or SCA contract work would receive the new minimum wage, not just those employees who work directly onsite. Any employees performing duties “necessary to the performance of the contract” would be entitled to the increased minimum wage. Certainly, application of this requirement would be burdensome for most contractors.

The comment period for these proposed regulations closed on July 17, 2014, so we are awaiting the DOL’s Final Rule. There are many other potential issues addressed by the regulation, so if your organization is, or may be covered by these new requirements, you should pay close attention to the specifics of that Final Rule.

No More Pay Secrecy

In April 2014, President Obama issued an Executive Order prohibiting contractors from taking action against employees for discussing compensation. The Order amends Executive Order 11246 by adding the following language:
The contractor will not discharge or in any matter discriminate against any employee or applicant for employment because such employee or applicant has inquired about, discussed, or disclosed the compensation of the employee or applicant or another employee or applicant.
The Order makes an exception for employees who have access to compensation information as an essential function of their job and who disclose compensation information to individuals who do not otherwise have access to that information.

This is another action with little practical impact. Despite many employers’ continued insistence on prohibiting employees from talking about their pay, the National Labor Relations Board (NLRA) has long taken the position that discussing employee compensation is “protected concerted activity” and a right enjoined by union and non-union employees. This Executive Order would extend protection to managers and supervisors not covered by the NLRA, but it otherwise will not affect any real change.

The OFCCP issued its proposed rule to implement this Executive Order (EO) on September 17, 2014. The OFCCP is proposing three main changes to the regulations:
  • Revising the EO clauses to be included in federal contracts and federally assisted construction contracts
  • Establishing defenses to allegations of retaliation
  • Requiring contractors to notify applicants and employees of the non-retaliation protections
The OFCCP proposes that these new requirements apply to all federal contracts entered into or modified on or after the effective date of the Final Rule that exceed $10,000 in value. These new requirements will only apply to covered contracts that have the EO clause; therefore, contractors will not be required to comply until they have entered into or modified a contract on or after the effective date of the Final Rule issued by the OFCCP.

The language to be added to the EO clauses is the same as that used in the Executive Order:
The contractor will not discharge or in any other manner discriminate against any employee or applicant for employment because such employee or applicant has inquired about, discussed, or disclosed the compensation of the employee or applicant or another employee or applicant. This provision shall not apply to instances in which an employee who has access to the compensation information of other employees or applicants as a part of such employee’s essential job functions discloses the compensation of such other employees or applicants to individuals who do not otherwise have access to such information, unless such disclosure is in response to a formal complaint or charge, in furtherance of an investigation, proceeding, hearing, or action, including an investigation conducted by the employer, or is consistent with the contractor’s legal duty to furnish information.
Contractors would be required to include the EO clause in all covered subcontracts.

The OFCCP is also proposing a new section to the regulations entitled, “Contractor Obligations and Defenses to Violation of the Nondiscrimination Requirement for Compensation Disclosures.” Under this section, a contractor would not be in violation if the employment decision that adversely affects an employee or applicant would have been taken “in the absence of the employee’s or applicant’s protected activity.”

For example, the contractor could prove that it would have “disciplined the employee for violation of a consistently and uniformly applied rule, policy, practice, agreement, or other instrument that does not prohibit, or tend to prohibit, employees or applicants from discussing or disclosing their compensation or the compensation of other employees or applicants.” The OFCCP provides an example of an employee who violates rules against disrupting the workplace by constantly asking other employees about their compensation despite their requests that she stop.

In addition, the non-retaliation clause does not apply to an “employee who has access to the compensation information of other employees or applicants as a part of such employee’s essential job functions [and who] discloses the compensation of such other employees or applicants to individuals who do not otherwise have access to such information” except in the limited circumstances noted above.

The OFCCP proposes to define “essential function” as “fundamental job duties of the employment position an individual holds” and excludes “marginal functions of the position.” To determine whether a function is essential, the OFCCP suggests considering the same factors used in determining whether a function is essential to the job under the Americans with Disabilities Act:
  • The reason the position exists is to perform that function
  • The limited number of employees available among whom the performance of that job function can be distributed
  • The function may be highly specialized so that the incumbent in the position is hired for his or her expertise or ability to perform the particular function
This, however, ignores those situations where an individual may be authorized to access employees’ compensation, though it may not be an “essential function” of their position.

The proposed regulations also do not specifically address the appropriate way to respond to employees who access employee compensation information without authorization. This would normally be considered a violation of a workplace rule for which an employer could take disciplinary action. However, as discussed above, the proposed rule provides that a contractor cannot base its defense on a rule that prohibits or tends to prohibit individuals from discussing or disclosing their compensation or the compensation of others. Would a rule that precludes employees from accessing confidential compensation information be a defense under this proposed rule if its purpose is to prohibit knowledge of and discussion about such information? It is not clear whether the proposal would allow individuals who do not have authorized access to compensation information, but who nonetheless gain access, to discuss that information without reprisal. Hopefully, the OFCCP will explicitly address this quandary in the Final Rule and afford protection to contractors.

The OFCCP also plans to publish a “non-discrimination provision” that contractors would be required to incorporate into existing manuals or handbooks and disseminate to employees and applicants. Such dissemination could be accomplished by an electronic posting or posting the provision in conspicuous places available to applicants and employees.

Interested parties may submit comments up to 90 days after publication of the proposed rule, or by December 16, 2014.

Equal Pay Report

On Equal Pay Day, April 8, 2014, President Obama announced a memorandum directing the DOL to propose regulations requiring federal contractors to submit data on employee compensation. Unlike the other actions discussed above, this presidential action will have a costly affect on most contractors.

DOL issued its Notice of Proposed Rulemaking on August 8, 2014, recommending that contractors be required to submit an annual Equal Pay Report as a supplement to the EEO-1 Report. Contractors that are required to file the EEO-1 Report have more than 100 employees, have a contract, subcontract, or purchase order worth $50,000 or more, and covers a time period of at least 30 days would be required to file the Equal Pay Report. Each establishment, including a company’s headquarters location, would file separate Equal Pay Reports. A consolidated report would not be required.

The OFCCP is proposing a filing window that extends from January 1st through March 31st. The data submitted would include all compensation from the preceding January 1st through December 31st. The OFCCP is proposing that covered contractors include the following information in their annual filings for each location:
  • Total number of workers within each EEO-1 category by race, ethnicity, and sex
  • Total W-2 earnings for all workers in each EEO-1 category by race, ethnicity, and sex
  • Total hours worked for all workers in each EEO-1 category by race, ethnicity, and sex
Total W-2 earnings include all compensation for each employee as of the end of the calendar year for each worker who was included in the contractor’s EEO-1 Report (required to be filed by September 30th each year). Therefore, contractors will have many employees in their year-end W-2 report who should not be included in the Equal Pay Report because they were not employed during the EEO-1 “snapshot.”

Total hours worked for non-exempt employees would be based on actual hours worked. For exempt employees, contractors could use actual hours worked if recorded, or default to 2080 hours for full-time and 1040 hours for part-time. Contractors would be allowed to adjust reported hours to account for partial year work, such as using hire date or dates of leave, but the OFCCP would not mandate this approach.

If a contractor’s systems capture all of this data on the same system, reporting this information will likely be fairly straightforward. However, many contractors do not house W-2 earnings in the same place as race, ethnicity, gender, EEO-1 category, and/or hours worked. Compiling all of this information on individuals included in the EEO-1 Report from September based on total earnings through December is not likely to be as simple as the OFCCP suggests.

The OFCCP states that the main purpose of the Equal Pay Report is to provide a mechanism for identifying potential discrimination in compensation. The agency intends to aggregate the submitted data by industry and compare contractors’ individual data to this “industry standard.” Those contractors whose compensation differences depart the most from the industry standard are most likely to be subject to a compliance review.

It is not entirely clear if the OFCCP will be focusing on differences in total compensation from the industry standard or differences between members of different racial, ethnic, and gender groups from the average industry standard differences, or both. It does appear, however, that those contractors that pay employees less than the industry standard may be more likely to be selected for a compliance review. If that is the case, such a system would neither target those most likely to be discriminating nor encourage non-discrimination. It would simply incentivize contractors to raise compensation above the industry standard to avoid being targeted by the OFCCP.

The OFCCP states that the Equal Pay Report is also intended to create greater voluntary compliance by contractors and to deter contractors from “noncompliant behaviors.” The OFCCP states that it will publicize summarized compensation data from contractors’ reports on an annual basis to allow contractors to self-assess their pay practices and “provide useful data to current and potential employees.” The OFCCP specifically notes that many “employers will not want to be identified as having pay standards that are significantly lower or different from those of their industry peers, since this may encourage valuable employees to consider moving to other employers, or discourage applicants who see that higher paying jobs may be available elsewhere. Employers do not want to be known as one of the lowest paying members of their industry, and may voluntarily change their pay structure.” Again, this suggests the Equal Pay Report is designed to force employers to pay higher wages, rather than to address actual compensation differences at any one particular employer.

The OFCCP does note, however, that it does not intend to use the Equal Pay Report as a means to allege compensation discrimination against a contractor. Instead, it will be used “to inform and refine its scheduling process for compliance evaluations.”

Comments to this proposed rule are due November 6, 2014.

Prohibiting Discrimination Because of Sexual Orientation or Gender Identity

In July 2014, the President signed an Executive Order amending Executive Order 11246 by adding sexual orientation and gender identity to the categories of individuals protected from discrimination, and for which contractors must take affirmative action.

President Obama has left much to the DOL to implement in its regulations. Here are just some of the basic questions that the regulations will need to address:
  • What is the definition of “sexual orientation” and “gender identity?” We all know generally what these terms mean, but we will need a technical, legal definition. Presumably, the definition of “gender identity” will go beyond the sexual-stereotyping theory that the EEOC and some courts have used to find such discrimination, which is already prohibited by Title VII.

  • What is the “affirmative action” that contractors will be required to take with respect to LGBT applicants?

  • Will the DOL interpret this “affirmative action” obligation to require outreach toward the LGBT community? What about tracking the LGBT demographics of applicants and employees? Will contractors be required to analyze selection decisions to ensure there is no adverse impact against LGBT individuals?

  • Will contractors have to develop written affirmative action plans and/or set goals for LGBT representation in their workforces as required for females, minorities, individuals with a disability, and protected veterans?

  • Will contractors be required to submit a report on LGBT data, similar to the EEO-1 or VETS-100A Reports?

  • How will contractors satisfy the requirement that job advertisements sufficiently notify applicants that they will be considered without regard to their LGBT status? Will the addition of “LGBT” to the current EOE tagline suffice?

  • Will there be any exemption for small contractors, or will the existing thresholds for coverage under EO 11246 apply?

  • How does the current religious exemption in EO 11246 apply to these new obligations? Currently, the non-discrimination and affirmative action provisions do not apply to a contractor that is a “religious corporation, association, educational institution, or society, with respect to the employment of individuals of a particular religion to perform work connected with the carrying on by such [entity] of its activities.” However, such religious entities are not excused from complying with the other provisions of the EO. Presumably, because the new EO did not include any special exemption for religious organizations – despite significant pressure on President Obama to do so – the DOL will likely provide that even religious entities are prohibited from discriminating against LGBT individuals because they are not “individuals of a particular religion.”
We await proposed regulations from DOL to answer these concerns.

Fair Play & Safe Workplaces

Last, but certainly not least, President Obama signed the “Fair Play and Safe Workplaces” Executive Order on July 31, 2014 to
“crack[] down on federal contractors who put workers’ safety and hard-earned pay at risk.” Although the Federal Acquisition Regulation Council will propose regulations to implement it, the Executive Order contains detailed substantive provisions.

The first provision in the Executive Order requires federal agencies to ensure that they are not doing business with companies that repeatedly violate employment and labor laws. Solicitations for new contracts worth more than $500,000 must include a provision requiring the bidder to represent whether there has been “any administrative merits determination, arbitral award or decision, or civil judgment” rendered against the bidder during the prior three years for violations of any of the following:
  • Fair Labor Standards Act
  • Occupational Safety and Health Act
  • Migrant and Seasonal Agricultural Worker Protection Act
  • National Labor Relations Act
  • Davis-Bacon Act
  • Service Contract Act
  • Executive Order 11246
  • Section 503 of the Rehabilitation Act
  • Vietnam Era Veterans’ Readjustment Assistance Act
  • Family and Medical Leave Act
  • Title VII of the Civil Rights Act
  • Americans with Disabilities Act
  • Age Discrimination in Employment Act
  • Executive Order 13658 (Establishing Minimum Wage for Contractors)
  • Equivalent state laws (as defined in guidance issued by DOL)
Each federal agency shall have a Labor Compliance Advisor who will be responsible for assessing whether the bidder “is a reliable source that has a satisfactory record of integrity and business ethics… .” The Labor Compliance Advisor will also consult regarding whether it is appropriate to refer a contractor to the agency’s “suspending and debarring official.”

After being awarded a contract, federal contractors will be obligated to update the information on their labor law violations every six months. Based on this information, the contracting agency will determine whether any action is necessary, including “agreements requiring appropriate remedial measures, compliance assistance, and resolving issues to avoid further violations, as well as remedies such as decisions not to exercise an option on a contract, contract termination, or referral to the agency suspending and debarring official.”

In addition, federal contractors will be responsible for obtaining similar assurances from their subcontractors. For each subcontract worth more than $500,000 that is not for commercially available off-the-shelf items, contractors must require that their subcontractors disclose the same type of labor law violations and update the information every six months. Before awarding a subcontract, contractors must determine whether the subcontractor “is a responsible source that has a satisfactory record of integrity and business ethics…” Contractors may consult with their contracting officer, the Labor Compliance Advisor, or the DOL for assistance in making this determination. The agency itself may also decide to take action regarding subcontractors.

Based on the language in the Executive Order, it is unlikely that “violations” will be defined in the regulations to include voluntary settlements. Indeed, according to the White House’s Fact Sheet on the Executive Order, one purpose of the President’s action is “to encourage companies to settle existing disputes, like paying back wages.” Thus, federal contractors may feel more pressure than other companies to resolve lawsuits and administrative actions, rather than contest good faith disputes, due to concerns that an adverse result will cost them federal contracts. Further, each individual employment dispute will potentially have a much greater significance for federal contractors.

The Executive Order also provides specific criteria “for determining whether serious, repeated, willful, or pervasive violations of the labor laws…demonstrate a lack of integrity or business ethics.” For example, “in most cases,” a single violation “may not necessarily” be sufficient, “depending on the nature of the violation.” [That’s what we call wiggle room, folks!] Agencies should also consider remedial measures or mitigating factors to address violations.

The DOL will also develop guidance to assess whether violations are serious, repeated, willful, or pervasive. Where no relevant statutory standards exist, the Executive Order directs DOL to develop standards that take into account such items as:
  • the number of employees affected;
  • the degree of risk posed or actual harm done;
  • the amount of damages incurred or fines or penalties assessed;
  • whether the contractor has had one or more additional violations of the same, or a substantially similar requirement in the past three years;
  • whether the contractor knew of, showed reckless disregard for, or acted with plain indifference; and
  • the number of violations in relation to the size of the contractor.
Contracts worth more than $500,000 must also include a provision requiring contractors to provide employees covered by the FLSA, DBA, SCA, or similar state laws with a document each pay period showing hours worked, overtime hours, pay, and any additions or deductions made to pay. This provision must also be included in subcontracts worth more than $500,000 that are not for commercially available off-the-shelf items. The Order states that individuals exempt from the overtime provisions of the FLSA do not have to receive a record of hours worked if the contractor informs the employees of their exempt status. Similarly, contractors must advise independent contractors of their status as such.

Contracts and subcontracts that exceed $1 million (except those for commercial items or commercially available off-the-shelf items) must include a provision requiring contractors to “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 dispute arises” (emphasis added). This provision will not apply to employees covered by a collective bargaining agreement or to valid arbitration agreements entered into prior to the contractor’s bid on a covered contract.

Although the White House touts this Executive Order as a means to promote “efficient federal contracting” and to save taxpayer money, the additional administrative burdens this places on federal contractors may deter those very reliable and ethical businesses the government seeks to attract. The obligation to survey an entire company and all of its subcontractors on a six-month basis is extremely onerous – especially for larger organizations with dozens or hundreds of subcontractors. It is unclear how such a task can be effectively carried out. Moreover, the Executive Order creates yet another government worker, the Labor Compliance Advisor, in every federal agency, adding even more bureaucracy to a process already overburdened with red tape.

Although the Executive Order is effective immediately, it will not apply to new solicitations until after the Federal Acquisition Regulatory (FAR) Council issues a Final Rule to implement the Order. This is not expected to occur until 2016.

Dazed & Confused,

I hope this summary helps you manage and prioritize all your new obligations. When all the Final Rules are published, we will know the details of these new requirements. Until then, let’s hope there are no more Executive Orders!

Sincerely,

Cara Crotty