‘Mere Mayhem’ Predicted as Contractor Rule Finalized

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By Ben Penn

Aug. 23 — Guidance announced Aug. 23 on the president’s controversial executive order requiring federal contractors to disclose certain labor law violations contains a new requirement: Subcontractors must send the information directly to the Labor Department.

The subcontractor reporting change to the Fair Pay and Safe Workplaces executive order “is a huge development,” James Murphy, who represents defense contractors at management firm Ogletree Deakins Nash Smoak & Stewart PC in Washington, told Bloomberg BNA. “However, it probably moves the needle from utter chaos to mere mayhem,” said Murphy, who was previously the labor and employment counsel for defense contractors Northrop Grumman Corp. and General Dynamics Corp.

Government contractors and their trade associations, as well as some GOP lawmakers, have dubbed the Fair Pay and Safe Workplaces policy the “blacklisting” order. They argue that it places unnecessarily burdensome requirements on companies and could remove law-abiding businesses from the federal procurement process.

However, Labor Secretary Thomas Perez and other White House officials said on a call with reporters that the rules are not intended to expel contractors. Rather, the rules are meant to promote compliance and ensure that taxpayer dollars don’t reward bad actors, the officials said.

The administration also extended the compliance timeline, implementing the executive order in gradual phases. Once the regulation is fully implemented, businesses seeking contracts valued at $500,000 or more will need to submit violations of 14 federal labor and employment laws—and their state law equivalents—for the previous three years.

The final version calls for government subcontractors to report their violation histories directly to the Labor Department, rather than to their prime contractors, the White House announced. This is a significant modification from the proposed rule.

The full rules and guidance will be issued Aug. 24.

The Labor Department and Federal Acquisition Regulatory Council, which published the final guidance and regulation, directed agency contracting officers to only consider the most egregious violators when using the disclosures to affect contract awards.

Professor: Reporting Change a Big Deal

Charles Tiefer, who wrote a national casebook on government contract law, told Bloomberg BNA the subcontractor reporting revision is “enormously important.”

“The original version made prime contractors an enforcement arm of the government over their subcontractors,” said Tiefer, a federal procurement law professor at the University of Baltimore. He questioned whether the Labor Department will be able to keep up with the filings.

“The Labor Department is going to be overwhelmed with confusing submissions by potential subcontractors and not be able to separate the important from the unimportant,” he said.

Gradual Phase-In

The administration also extended the compliance timeline, implementing the executive order in phases. The first step begins Oct. 25, 2016, when prime contractors will be required to disclose violations from the previous one year, and only when seeking contracts valued at $50 million or more.

Six months later, on April 25, businesses will be subjected to the rules when bidding on contracts of $500,000 or more.

Subcontractors won't begin reporting until Oct. 25, 2017.

Further, after initially only reporting violations from the past year, contractors will need to disclose violations from the previous three years by Oct. 25, 2018, according to a fact sheet issued to reporters.

At a later time, the DOL said it will initiate a new proposed guidance specifying which state equivalent laws will also be subject to reporting requirements.

The rules also imposes paycheck transparency requirements on contractors, effective Jan. 1, 2017. They will have to provide wage statements to workers that cover hours worked, overtime hours and other information.

The rules also forbid businesses with federal contracts of at least $1 million from forcing employees to arbitrate sexual assault or civil rights claims. This provision is effective Oct. 25, 2016.

“The administration recognizes the initial proposal had many problems,” Marc Freedman, executive director of labor law policy at the U.S. Chamber of Commerce, told Bloomberg BNA, after learning of the revisions.

“They’ve tried to make this more acceptable and I think the big change in the subcontractor reporting provisions are a recognition that what they had initially put out was unworkable. I don’t think we’re prepared to say that this version of it is necessarily workable.”

The White House Aug. 23 also issued an amendment to the original executive order that prompted this rulemaking. This provided for the switch in subcontractor reporting.

Due Process Concerns

Among the provisions that management attorneys and private sector contractors are paying the closest attention to is whether administrative merits determinations need to be disclosed as a labor violation. The final version of the rule still requires reporting of such determinations.

Mandating the reporting of alleged violations that haven't been fully adjudicated, business lobbyists and attorneys say, is a constitutional violation of employers’ due process rights.

“Let’s say that takes you two to three years to get to the court of appeals” over a National Labor Relations Board ruling, “and during that entire time you are forced to make disclosures about that adverse finding against you,” Murphy said. Who knows how many contracts would be affected? he said.

Victory for Worker Groups

Unions and worker advocacy groups said they're thrilled the rulemaking is finally completed. They credited administration officials for working tirelessly to finish a complex regulation that affects every government agency.

On top of the tens of thousands of workers directly employed on federal contracts who will benefit from this rule, “there are 28 million people that are employed by the companies that do business with the federal government,” Mary Kay Henry, president of the Service Employees International Union, said on the White House call. “So we believe that not only the workers that are directly impacted by the federal contracts, but the companies that employ other workers are incentivized to play by the rules thanks to the way this rule was written.”

In addition to the SEIU, the Center for American Progress urged the White House to implement this policy. “The administration went through a long and rigorous process, and all signs are that they worked very hard to get this right, to balance all the various complications in ensuring that this executive order does what it intends to do, which is ensure that companies clean up their act and comply with the law,” David Madland, a senior adviser to CAP’s American Worker Project, told Bloomberg BNA.

Battle Shifts to Congress, Courts

Following the 2014 executive order (E.O. 13,673) and 2015 proposed rules and guidance, the final Fair Pay and Safe Workplaces regulations come amid the backdrop of intense lobbying and legal research into potential litigation.

The House and Senate passed National Defense Authorization Act bills for fiscal year 2017 that would exempt defense contractors from the order. That provision of the NDAA is subject to removal as the bill heads to conference committee when Congress reconvenes in September.

“It appears that the administration is full steam ahead on all the problematic provisions of this proposal, and this will only further reinforce congressional efforts to prevent this from being approved, rather than assuage any concerns from those who want to move forward,” Rosario Palmieri, vice president for labor, legal and regulatory policy at the National Association of Manufacturers, told Bloomberg BNA.

Perez noted on the call that the White House and DOD have already issued statements opposing this section of the defense bill, and recommending that the president veto it unless the executive order language is stripped.

Asked by Bloomberg BNA about the prospect of litigation, the labor secretary said that “getting sued after you do things” is “an occupational reality of everything we do.”

“I have a lot of confidence not only in the final product but in the process that led to the final product. That’s why we took a little longer than we had hoped,” Perez said. “I will not at all be surprised if someone decides to file a lawsuit, and I have every confidence that we will be able to successfully defend it.”

In addition to due process claims, contractor attorneys say that the National Labor Relations Act preempts the president from adding new penalties to past labor violations. Those arguments and others are expected to form the basis of lawsuits filed before the executive order takes effect.

A public version of the fact sheet, as well as the full final regulations and guidance will be posted on the Federal Register on Aug. 24.

To contact the reporter on this story: Ben Penn in Washington at bpenn@bna.com

To contact the editor responsible for this story: Susan J. McGolrick at smcgolrick@bna.com

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