By Cheryl Bolen
Nov. 30 — President Barack Obama took office in 2009 promising to regulate only when necessary, but federal contractors say he is using regulation now to promote his social agenda.
“There is, I think, a long history of trying to enact change, policy you can't get through Congress, by looking to federal contractors first,” said Michael Eastman, vice president of public policy at the Equal Employment Advisory Council (EEAC), which represents federal contractors.
Case in point is the president's Executive Order No. 13,673 on Fair Pay and Safe Workplaces. The order, signed on July 31, 2014, is intended to ensure contractors comply with 14 federal labor laws or equivalent state laws.
The proposed regulation implementing the order cites three studies as proof that federal contractors need better incentives to comply with labor laws. The research found a total of 104 federal contractors with egregious violations over the past decade, or about 0.4 percent of 24,000 federal contractors nationwide.
The policy assumes federal contractors are egregiously violating labor laws. But requests by Bloomberg BNA for additional data on labor law violations by contractors were denied by the Department of Labor and the White House's Domestic Policy Council.
Contractors say what little problem exists is already being addressed by current law, or if that is not enough, existing penalties could be increased. Labor advocates counter that there is enough of a problem in the contracting community to justify a new regulation and there should be a high standard when deciding which companies get taxpayer dollars.
And, contractors fear even more midnight regulations in Obama's final year in office, stemming from 2014 and 2015 executive orders on minimum wage, paid leave and nondiscrimination.
Labor advocates point to horrendous violations in the past that have resulted in worker deaths and multimillion-dollar fines. Yet these companies continued to get federal contracts. In April 2010, for example, seven workers were killed in an explosion at a Tesoro Corp.-owned refinery in Anacortes, Wash. The state issued 44 citations and a $2.38 million fine to Tesoro for safety and health violations.
“We think that there's still a lot of evidence of real problems out there of not respecting workers’ rights, and that it's absolutely appropriate for the government to take measures like this to try to get at that problem,” said Lynn Rhinehart, general counsel at the AFL-CIO.
Contractors counter that in March 2010, a final rule (RIN: 9000–AL38) was issued by the major contracting agencies to improve the government's ability to evaluate the business ethics and expected performance quality of prospective contractors.
The rule also stated it was “part of an ongoing initiative by the administration to increase consideration of contractor integrity” in awarding federal contracts.
The scope of the current problem was laid out in the three studies cited by the proposed regulation.
Using the administration's estimate that “tens of thousands” of contract workers are being denied fair wages or safe workplaces, the regulation would potentially protect slightly more than 0.35 percent of the 28 million employees in the contracting workforce.
The Office of Management and Budget declined to provide additional evidence of contractor violations.
The new regulation is being written by the Department of Defense, General Services Administration and the National Aeronautics and Space Administration—together known as the Federal Acquisition Regulatory (FAR) Council. The executive order also directed DOL to issue guidance to assist contracting agencies in applying the order's requirements.
The proposed regulation would impose $106.57 million in compliance costs on contractors in the first year, and has been classified as a major regulation (RIN 9000-AM81), according to the cost estimate of the proposal by the FAR Council.
Contractors argue the costs will be far greater. Eastman said the most significant components of the cost estimate rest on faulty assumptions about the number of contractors and subcontractors that will have violations to report.
The proposed regulation and guidance were issued May 27. The public comment period was extended, with public comments due on Aug. 26. The FAR Council and DOL are now reviewing comments, and the latest regulatory agenda estimates the final rule will be issued in April 2016.
In a statement e-mailed to Bloomberg BNA, a DOL spokeswoman said that it is worth noting that the fair pay executive order does not impose any new obligations on government contractors to comply with basic workplace protections.
“The EO only adds the requirement that prospective contractors share information about their compliance history before being awarded a contract,” she said.
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The president has broad authority to regulate the federal contracting process, so legally, he is regulating in well-established territory.
However, in January 2011, Obama reaffirmed and strengthened his administration's commitment to the regulatory principles established in 1993 by former President Bill Clinton in Executive Order No. 12,866 on Regulatory Planning and Review. That order states that federal agencies should promulgate only such regulations as are required by law, are necessary to interpret the law, or are made necessary by compelling public need, such as material failures of private markets.
Under the 2014 fair pay executive order, agencies must require prospective contractors to disclose labor law violations from the past three years before they can get a contract. The order requires agency contracting officers and newly created labor compliance advisers to assess the violations, and contractors with “serious, repeated, willful or pervasive” labor law violations will not get contracts.
Daniel Yager, president and general counsel of the HR Policy Association, said contractors already are supporting a lawsuit against the regulation that will, in part, challenge the president's authority to preempt labor law.
The president's contracting authority is pretty broad, but at the same time, the courts are going to be looking to existing law, Yager said.
As precedent, Clinton signed an executive order in 1995 barring the federal government from contracting with employers that hired permanent replacement workers during a strike, Yager said.
The order was challenged and the U.S. Court of Appeals for the District of Columbia Circuit ruled that the executive order was preempted by the National Labor Relations Act (Chamber of Commerce v. Reich, D.C. Cir., No. 95-5242, 2/2/96).
Essentially, the court said the law had already been decided under the NLRA and that hiring replacement workers had nothing to do with the performance of the contract, Yager said.
“To do something like this, [Obama] has to be able to show that there is a connection with the performance of the contract,” Yager said.
The fair pay executive order states that contractors that consistently adhere to labor laws are more likely to have workplace practices that enhance productivity and increase the likelihood of timely, predictable and satisfactory delivery of goods and services to the federal government.
“At the end of the day, these executive orders are very, very vulnerable to legal challenges,” Yager said.
In contrast to the closed process of drafting an executive order, contractors say that there is more “sunlight” in the legislative process, which allows the other side to object and for lawmakers to consider alternatives.
Nancy Hammer, senior government affairs policy counsel at the Society for Human Resource Management, said she understood the president's frustration with congressional inaction.
But some of these executive orders go into tremendous minutiae, Hammer said. The new executive order on paid leave doesn't just require federal contractors to offer paid leave; it specifies the number of hours, requires leave to roll over, and defines the reasons it can be used, she said.
Obama signed Executive Order No. 13,706 on Establishing Paid Sick Leave for Federal Contractors on Sept. 7 (See previous story, 09/09/15).
“It's really having the White House write an individual employer's handbook, and I think that goes too far,” Hammer said. “There needs to be some sort of balancing of the cost of compliance against what benefit does the government really get in procurement.”
The justification that is written into the paid leave order is similar to the fair pay order, in that when employees are healthier and happier they do better work and that's better for the U.S. procurement economy, Hammer said.
The paid leave order states that providing access to paid sick leave will improve the health and performance of employees of federal contractors. It further states that these savings and quality improvements will lead to improved economy and efficiency in government procurement.
It's also possible that giving employees Starbucks gift cards would make them happier and improve the efficiency of government contracting, Hammer said. But there needs to be a balance and it can't be done through executive order, she said.
“While I understand the frustrations, we have a system and we have a system of checks and balances for a reason,” Hammer said. “And when we do all of our legislating through executive order, it takes away our ability to be more balanced in how we're proceeding.”
In its proposed fair pay regulation, the FAR Council said that in recent years, the administration and Congress have taken a number of steps to improve the selection process for federal contractors.
Among these steps was deployment of the Federal Awardee Performance and Integrity Information System (FAPIIS), which is an online database to help contracting officers determine whether a company has the “requisite integrity” to do business with the federal government.
The FAR Council also noted that the violations found in two of the three studies it cited as evidence of contractor wrongdoing had occurred before these steps were put into place.
But a 2013 report released by former Sen. Tom Harkin (D-Iowa), then-chairman of the Senate Committee on Health, Education, Labor and Pensions, found continued problems, even after some of the steps had gone into effect, it said.
The Harkin report is not without controversy. In total, the report found 49 federal contractors with serious health, safety and wage violations over a six-year period that continued to get contracts.
Stan Soloway, president and chief executive officer of the Professional Services Council, which represents the government technology and professional services industry, testified in February that there have been few reports in recent years examining companies with labor law violations that continued to get federal contracts.
“These reports are riddled with flaws that seek to paint a picture of contractor abuse that is woefully inaccurate,” Soloway said in his prepared testimony.
The Harkin report listed several contractors as owing back wages to their employees, yet it was an error in the contract and not the contractor's behavior that was at fault for the violations, Soloway said.
Harkin's report also did not limit its findings to cases that had been fully resolved, “thus falsely inflating the appearance of contractor violations,” Soloway said.
On Nov. 13, the Center for American Progress Action Fund (CAP), a policy institute and advocacy organization, released a report on the contracting workforce authored by two of its scholars and two scholars from the National Employment Law Project, a worker advocacy organization.
The report said that “jobs created through government contracting are often substandard, paying very low wages and involving poor working conditions where workplace law violations are common.”
As evidence for this claim, the study cited an earlier CAP Action Fund study released in December 2008. That study was primarily focused on federal contracting work in the low-wage service sector.
The 2008 study said that “evidence from a number of sources suggests that mistreatment of federally contracted workers is a widespread problem.”
It cited, for example, a 2005 Government Accountability Office report pointing to an investigation by the DOL into Service Contract Act complaints that found 80 percent of the contractors investigated in violation of the act.
Labor advocates argue that regulating for societal change is a worthy pursuit and that, for contractors, it is the cost of accepting lucrative, taxpayer-funded federal contracts.
The fair pay order is “complementary” to existing systems, such as debarment, said the AFL-CIO's Rhinehart. It is necessary because the data show that existing systems are insufficient to ensure that the companies that get federal contracts respect workers’ rights, she said.
“I think there's a real difference in perspective on how much of a burden this executive order really is going to be for the vast majority of companies,” she said.
Regulating federal contractors is a “tried and true method” of accomplishing policy objectives that goes back to the Johnson administration, and maybe before, Rhinehart said.
Indeed, Republican and Democratic administrations alike have attached conditions to being a federal contractor, she said.
The EEAC's Eastman conceded that no one is required to be a federal contractor. But there are considerations that go into regulating, because every requirement has a cost, he said.
One consideration is the federal budget and the price of contracts being greater than what the government could get on the commercial market, Eastman said.
At a more practical level, the administration's recent executive orders seem to be based on laudable policy goals, but the consequences do not appear to be fully thought through—the costs, whether there is a better or more efficient way to do them, and whether a new mandate on contractors is the right solution or the best solution, he said.
“And so we see a lot of—as we go through the various executive orders—there are lots of things that maybe could have been done better, or are simply confusing or hard to implement,” Eastman said.
Labor advocates say that DOL regulators “get it” and understand all too well the fine balance between overburdening employers and protecting workers.
Judy Conti, federal advocacy coordinator at the National Employment Law Project, said employers say costs are exorbitant and burdens unbearable every time there is a new regulation.
“If you follow the law, then there's not going to be any adjudications against you and your reporting is going to be one second, because there's nothing to report,” she said.
But contractors say this argument misses the point for most of them, because self-reporting is far simpler than auditing the company's countless suppliers every six months.
Some projects may have up to 1,000 subcontractors, and contractors are concerned that mistakenly including a subcontractor that turns out to have unreported labor law violations could make them liable.
Deborah Berkowitz, senior fellow at NELP and former senior policy adviser at the Occupational Safety and Health Administration, said that the majority of employers in America follow the law.
“The reason you have the government [intervening] is because there are still many that don't and cut corners,” Berkowitz said.
The FAR Council and DOL have carefully considered this, come up with a proposal and are now pulling everything together, Berkowitz said.
Regulators have to respond to the public comments and they'll write the rule that is best for everybody, including the American worker as well as the contractor, she said.
Conti said worker protection needs to take into account the realities of employers and their business practices, but that the DOL is employee-focused. “They're supposed to care most about workers,” she said.
Berkowitz said that from everything Obama and Labor Secretary Thomas Perez have said about this rule, it is not intended to go after contractors that have small violations here and there.
This rule is aimed at serious violators that have not come into compliance and that still have outstanding and serious safety hazards and wage and hour violations, Berkowitz said.
The proposal is clear that agencies want to work with contractors with violations to see if they can bring them into compliance and show they are no longer in violation, she said.
Contractors counter that no one knows exactly how the violations will be assessed.
According to the proposed guidance, contracting officers and labor compliance advisers are going to look at serious, repeated, willful or pervasive violations, then look at mitigating factors, and then make a recommendation.
But there's still no bright line and still no way to know what is severe enough to block a contract. One contractor asked what level of violation would stop the construction of a fighter jet.
And will the standard be different if it is something that is not as necessary to the military, such as a cafeteria in a federal building?
Contractors also object to reporting all violations that have been filed, rather than only those that have been fully adjudicated.
Amanda Wood, director of employment policy at the National Association of Manufacturers, said that now, if there is an allegation of a misclassified employee in the wage and hour division, a federal contractor may say it had no idea and settle quickly, and the employee goes home happy.
“But what this executive order contemplates is that a mere allegation of a misclassification could actually prevent that company from getting a contract,” she said.
Misclassifications can occur when an employer mistakenly classifies an employee as “exempt” from the overtime pay provisions of the Fair Labor Standards Act, rather than as an hourly worker who is eligible for overtime pay.
If a settlement could be viewed as a violation, the company is going to be less motivated to settle, contractors say. Instead, the company may feel compelled to fight, which drives up litigation costs.
“We in the business community are scratching our heads because we don't think that this [order] is necessary,” Wood said. “It doesn't solve making workplaces safer or making sure people aren't misclassified,” she said.
If DOL is concerned about bad actors, there's a process already in place that gives any agency the ability to suspend or debar a federal contractor, Wood said.
But Wood said the way this proposal is written, the administration could not have contemplated how broad it really is and how it will capture every allegation.
On Nov. 10, White House press secretary Josh Earnest was asked about the president's use of executive actions to advance his agenda.
The president believes that it is important to follow the strictures of the Constitution, Earnest said. However, the Constitution affords significant power to the president, he said.
“But when you see Congress do next to nothing, it means that executive actions need to be considered, even if they would not advance the country as far as common-sense congressional action would,” he responded.
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