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Recently Effective FAR Modification Creates Confusion Regarding Uncompensated Overtime for Service Contractors

In light of a recent modification to the Federal Acquisition Regulation (“FAR”) regarding the identification of uncompensated overtime in service contracts, now, more than ever, contractors must make sure that:  (1) they have in place clear policies and processes regarding time recording and estimating, and accumulating and reporting labor hours, labor rates, and indirect costs; and (2) they are complying with said policies and processes.

Effective March 2, 2015, the FAR was amended to add the definitions of “adjusted hourly rate” and “uncompensated overtime” to FAR 37.101 and also to clarify that “[w]henever there is uncompensated overtime, the adjusted hourly rate . . . shall be applied to all proposed hours, whether regular or overtime hours.”  FAR 37.115-2(d), FAR 52.237-10.  This means that when a proposal for a service contract is based upon uncompensated overtime hours, the proposal’s proposed hourly rates must be consistent with the total time proposed, including the uncompensated overtime hours.

The comments to the FAR’s Modification state that the amended rule clarifies existing FAR policy which is that there is no requirement to record uncompensated overtime and base labor and indirect costs on both compensated and uncompensated labor hours.  In other words, the Modification does not expressly require that proposals be prepared based upon uncompensated overtime hours or that labor rates be based on uncompensated labor hours in all circumstances.

Despite that the Modification is merely a “clarification,” the amended rule is somewhat unclear and thus creates risks for contractors.

Recently Effective FAR Modification Creates Confusion Regarding Uncompensated Overtime for Service Contractors

DOL Employee Classification FAQ

The Office of Federal Contract Compliance Programs (“OFCCP”) in the U.S. Department of Labor (“DOL”) recently posted answers to Frequently Asked Questions (“FAQs”) regarding how federal contractors should determine whether a worker is an employee versus an independent contractor.

The distinction between employees and independent contractors is extremely important for contractors because compliance obligations are frequently based on the number of employees in a company.  Companies can face significant penalties for misclassifying workers, even if unintentional.  For example, the Affordable Care Act (“ACA”) employer mandate applies to companies with 50 or more full-time equivalent (“FTE”) employees and can result in significant penalties to a contractor who fails to provide prescribed coverage to a sufficient percentage of full-time employees.  A contractor may seek to classify more workers as independent contractors in order to avoid the ACA employer mandate (trying to stay below the 50 FTE threshold) or in order to lessen the number of full-time employees to whom it must offer prescribed coverage.  If a mistake is made, the contractor could face large penalties based on its entire full-time employee population (not just the workers who are misclassified).  Contractors choosing this strategy must be extremely careful to classify workers consistent with the FAQs and other applicable laws.

So how does one determine whether a worker is an employee or an independent contractor?  The newly posted FAQs list twelve factors to be considered in determining whether an individual is an employee.  These factors include: who controls when, where and how the job is performed; whether a worker is hired for specialized skills, knowledge and expertise; the location of the work; the source of equipment and materials; and the provision of benefits to the worker.  These factors are not designed to provide a bright-line test, but are applied to the specific facts available on a case-by-case basis.  For a complete list of factors and additional analysis, the FAQs can be accessed here.

DOL Employee Classification FAQ

New Executive Order Targets Federal Contractors

President Obama has issued yet another executive order that will impose additional labor compliance requirements on companies that choose to do business with the federal government.  Entitled “Fair Pay and Safe Workplaces,” the new Order requires contractors and subcontractors to disclose their own labor law violations and requires federal agencies to exclude from federal contracting those companies with a history of poor labor law compliance.   This new Order revives the Administration’s long intended push for a so-called “High Road Contracting” system, wherein contractors must guarantee strict and ongoing adherence to a broad spectrum of labor laws or face potential termination of contract — or even debarment.

The Order, which also seems to follow on a report issued by the Senate HELP Committee last December, targets the following areas:

  • Disclosure of Labor Law Violations: The Order requires that contractors seeking to procure a contract valued in excess of $500,000 must disclose whether whether an administrative merits determination, arbitral award, or civil judgment was rendered against it in the previous three year period.  This new disclosure requirement applies to violations of many different labor laws and Executive Orders, including the National Labor Relations Act.
  • “Paycheck Transparency”: Contractors must provide their employees with information regarding that employee’s hours worked, overtime hours, pay, and any additions or deductions to that employee’s paycheck.  Contractors must also include in their contracts with subcontractors a requirement that the subcontractor make the same paycheck disclosures.
  • Limiting arbitration agreements: While D.R. Horton has already severely limited an employer’s ability to make use of mandatory arbitration agreements (at least according to the NLRB), the Order limits the ability of certain contractors to arbitrate claims brought by employees pursuant to Title VII.  Covered contractors are now also prohibited from compelling an employee to arbitrate claims arising from a sexual harassment or assault unless the employee agrees to arbitration after the dispute arises.  However, the limits placed on mandatory arbitration agreements do not apply to employees covered by a collective bargaining agreement.

It is likely that it will take some time before employers and labor watchers get a clear picture as to an employer’s actual obligations stemming from the President’s Order.  Nevertheless, in conjunction with the President’s other recent executive orders establishing a $10.10 minimum wage for employees of contractors and addressing discrimination against LGBT employees of contractors, federal contractors will have significant new compliance obligations to digest as new regulations are issued over the next year.

New Executive Order Targets Federal Contractors

More of the Same: Air Force Prevails Over Another Insourcing Challenge

Over the last few years, we have followed DOD insourcing initiatives and how contractors have attempted to challenge agency insourcing decisions.   Many of the recent challenges have been lodged before the Court of Federal Claims (COFC) under the Tucker Act (28 USC § 1491) with little success.  Now the Court of Appeals for the DC Circuit weighs-in on this ongoing saga in Fisher-Cal Industries, Inc. v. United States (Apr. 8, 2014).  Appealing the District Court’s decision, Fisher-Cal argued that that the Air Force violated the Administrative Procedures Act when it decided to insource the parties’ contract instead of renewing it – specifically the Air Force failed to perform a proper cost comparison analysis under 10 USC §§ 129a and 2463.  Unsurprisingly, the DC Circuit affirmed the lower court’s dismissal of the claim for lack of jurisdiction.  Following the Federal Circuit’s lead, the DC Circuit found that the COFC has exclusive jurisdiction under the Tucker Act to entertain an insourcing challenge because it fits within the definition of a “procurement” under 28 USC § 1491(b)(1).  As this decision confirms, any contractor challenging an insourcing decision must focus its efforts before the COFC.

More of the Same: Air Force Prevails Over Another Insourcing Challenge

Navigating the Overlap Between President Obama’s “Equal Pay” Orders for Federal Contractors and the NLRA

On April 8, 2014, President Obama signed an Executive Order directing the Department of Labor (“DOL”) to propose new regulations and rules to prohibit Federal contractors from discriminating against employees for inquiring, discussing or disclosing their compensation, or the compensation of other employees.  The new order, entitled “Non-Retaliation For Disclosure of Compensation Information,” amends Executive Order 11246 of September 24, 1965, which prohibits federal contractors and federally-assisted construction contractors and subcontractors who do over $10,000 in Government business annually from discriminating in employment decisions on the basis of race, color, religion, sex, or national origin.

Specifically, the new Executive Order amends Section 202 of Executive Order 11246 to include a new paragraph as follows:

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. (Emphasis added).

The President has directed the Secretary of Labor to propose regulations implementing this new rule on or before September 15, 2014.  These requirements would apply to all contracts entered into after the effective date of those regulations.

Likewise, the Senate yesterday attempted to advance the “Paycheck Fairness Act” (S. 84), which would apply more broadly to all employers subject to the Fair Labor Standards Act.  That bill, which failed to advance past a cloture vote, would amend the FLSA to make it unlawful for an employer to discriminate against or discipline an employee because the employee:

has inquired about, discussed, or disclosed the wages of the employee or another employee.

Curiously, both these provisions address conduct which is already largely covered by the National Labor Relations Act (“NLRA”).  Longstanding National Labor Relations Board case law already prohibits an employer from forbidding employees from, or disciplining employees for, discussing their wages with each other. See, e.g., Double Eagle Hotel & Casino, 341 NLRB 112 (2004); Mobil Exploration, 323 NLRB 1064 (1997).

With respect to the Executive Order, many government contractors whose employees are not organized may not be fully aware of this — or other aspects of the NLRA (which nevertheless does apply in non-union workplaces). Also, despite some language suggesting exemption for some management personnel, the order may also apply more broadly to contractors’ supervisors who are not covered by the NLRA.  In sum, this may well be the next step in the Administration’s ongoing effort to expand the use of labor law compliance information for the disqualification or debarment of Federal contractors.

Of course, the Senate bill — unlikely to go anywhere prior to 2014 midterm elections — would facilitate class action suits and provide compensatory and punitive damages, which are remedies which the NLRA does not provide.

Still, as this conduct is unlawful under current and longstanding NLRA precedent, employers would be prudent to review workrules, handbooks and policy and practice manuals with counsel to ensure compliance.

Navigating the Overlap Between President Obama’s “Equal Pay” Orders for Federal Contractors and the NLRA

Minimum Wage Hike May Be First Of Many New Labor Obligations For Federal Contractors

During the recent State of the Union Address, President Obama announced that he is preparing to sign an Executive Order raising the minimum wage to $10.10 per hour for those working on future federal contracts for services.  According to a “Fact Sheet” posted online by the White House, the Order would cover “workers who are performing services or construction and are getting paid less than $10.10 an hour.”  It would apply only to new contracts after the effective date of the Order.

All federal contractors with employees performing covered work should begin to prepare now for the likely issuance of this Order.  Covered contractors should review their current and intended future payroll practices to assess compliance with this increased minimum.  Moreover, prudent contractors may review their entire payroll structure to gauge the potential impacts of wage compression at other levels of compensation – e.g., what impact will this new minimum wage have on employees currently earning $10-11 per hour, etc.  Wage compression can be a source of employee friction and discontent, which can lead to broader legal challenges for employers.

There are almost certain to be legal challenges to the Order itself, brought on in part by apparent conflicts between the President’s announced intent and the McNamara-O’Hara Service Contract Act (SCA).  The SCA requires certain federal contractors and subcontractors to pay service employees at minimum wage rates expressly spelled out in their service contracts with the government.  Section 6703 of the SCA, however, provides that the specified minimum wage to be paid under a particular service contract is to be:

determined by the Secretary or the Secretary’s authorized representative, in accordance with prevailing rates in the locality, or, where a collective-bargaining agreement covers the service employees, in accordance with the rates provided for in the agreement, including prospective wage increases provided for in the agreement as a result of arm’s length negotiations.  (Emphasis supplied)

This statutory provision – requiring an Act of Congress to amend – may provide grounds for challenging such an Executive Order.  Clearly, if $10.10 per hour were a “prevailing rate” for the covered work in a variety of jurisdictions, there would be little, if any, impetus for this intended increase.

Moreover, contractors should remain vigilant as this may be just the first announced step in a longer-term agenda of increased regulatory aim at the nation’s government contractors.  As we reported on our blog, LaborRelationsToday, just last month, the Senate Health, Education, Labor and Pensions (HELP) Committee, unveiled a Committee report, titled “Acting Responsibly? Federal Contractors Put Workers Lives and Livelihoods at Risk.” The lengthy report recommends significant changes to the federal contracting process to “ensure that taxpayer dollars are spent in a way that promotes compliance with federal law and improves the quality of life for working Americans.” Among its recommendations, the HELP Committee believes it is necessary to increase the availability to contracting officers of DOL and GSA information on workplace safety and labor law violations; and, establishing tools beyond the existing determination, suspension and debarment processes, that contracting officers can use to increase compliance with federal labor laws.

Contractors looking a little farther down the road may consider performing a thorough audit of their labor and employment policies and practices, to prepare for compliance with an increasingly complex and rigorous set of legal obligations.

Minimum Wage Hike May Be First Of Many New Labor Obligations For Federal Contractors

Senate HELP Committee Seeks to Change Federal Contracting Rules to Disqualify Employers with Labor Law Violations

On Wednesday, U.S. Senator Tom Harkin (D-IA), Chairman of the Senate Health, Education, Labor and Pensions (HELP) Committee, unveiled a Committee report, taking direct regulatory aim at the nation’s federal government contractors.  The Senator proclaimed that “[s]ome of the nation’s largest federal contractors fail to pay their workers the wages they have earned or provide their employees with safe and healthy working conditions.”  The HELP Committee report, titled “Acting Responsibly? Federal Contractors Put Workers Lives and Livelihoods at Risk,” recommends significant changes to the federal contracting process to “ensure that taxpayer dollars are spent in a way that promotes compliance with federal law and improves the quality of life for working Americans.”

Among the report’s recommendations, the HELP Committee believes it is necessary to:

  • Increase the availability and transparency of the Department of Labor’s and General Services Administration’s information on workplace safety violations so that contracting officers can use it for responsibility determinations.
  • Require contracting officers to consult with, and obtain recommendations from, a designated official at the Department of Labor about contractors’ violations of federal labor law when making responsibility determinations.
  • Establish additional tools – beyond the existing responsibility determination and suspension and debarment process – that contracting officers, in consultation with the Department of Labor, can use to ensure that contractors comply with federal labor law.






If these recommendations come to bear, federal contractors will have yet another burden to meet and overcome in the pre-award process – and perhaps to retain contracts — as they will be required to defend their labor and employment practices as part of the responsibility determination. Not only can failure to comply with federal and state labor laws result in the denial of a contract, but perceived labor law violations asserted by third parties could also be a factor in whether a contract is awarded. As such, labor unions and activist groups might seek to take advantage of the opportunity to assert and present evidence of potential labor law violations to exert pressure on a federal contractor in furtherance of their own objectives vis-à-vis the contractor such as recognition of a union.

We encourage federal contractors to review the HELP Committee’s report to evaluate how it might affect them, including their strategy for handling any government investigations into any alleged labor law violations, and, if necessary, to evaluate their options for responding to the report and any future efforts to implement the HELP Committee’s recommendations.

Senate HELP Committee Seeks to Change Federal Contracting Rules to Disqualify Employers with Labor Law Violations