Introduction

Large government contractors last Monday received a reprieve, at least preliminarily, from the implementation of the U.S. Department of Labor’s (DOL) so-called “blacklisting” rules, under which covered contractors (including subcontractors) would be required to report to the government a panoply of labor violations. On October 24, Judge Marcia Crone, a federal judge in the Eastern District of Texas, granted a preliminary injunction blocking the portions of the rules addressing labor law violation disclosure requirements and restrictions on the use of arbitration agreements. The DOL issued the Rules under President Obama's Executive Order on “Fair Pay and Safe Workplaces,” and they were scheduled to go into effect October 25. The case is Associated Builders and Contractors of Southeast Texas, et al., v. Rung, case no. 16-cv-00425-MAC (E.D. Tex.).

The injunction bars the DOL from requiring large government contractors to report past and current labor violations under fourteen federal labor laws, including “administrative merits determinations” reached by federal agencies without a full hearing, whenever they seek to bid? for government work. Such reports would be reviewed by contracting agencies and could be used to declare a contractor “non-responsible” and ineligible to bid on contracts, even if some or all of the labor “violations” had not been finally adjudicated.

Unfortunately, this is only a preliminary, not permanent, injunction, and this ruling also is open to immediate appeal by the DOL. More importantly, some portions of the Rules are in effect. If the labor violation reporting provisions of the Rules are reinstated, this would likely be done retroactively to October 2016, so contractors should take steps to protect themselves. An overview of the Rules is set out below.

Background

On July 31, 2014, the President issued Executive Order 13673, Fair Pay and Safe Workplaces, requiring government contractors and subcontractors (jointly, contractors) to file reports with the DOL of labor law violations. Those reports would then be provided to Agency Labor Compliance Advisors (ALCAs) appointed to each contracting agency to aid contracting officers in determining the “responsibility” of the contractors and their eligibility for federal contracts. The Senior DOL Labor Compliance Advisor is Lafe Solomon, the controversial former Acting General Counsel of the National Labor Relations Board (NLRB).

The Executive Order instructed the Federal Acquisition Regulations (FAR) Council and DOL to issue appropriate regulations and guidance to enforce the Executive Order. The new FAR regulations and DOL guidance were published in the Federal Register on August 25, with an effective date of October 25, 2016. The regulations’ explanations and guidance are more than 500 pages and 300 pages in length, respectively, and spell out the basis and reasoning for the government’s decisions regarding the interpretation and enforcement of Executive Order 13673.

Reporting

Covered contractors have extensive new reporting requirements under the Rules, which require reports on multiple kinds of federal “labor law violations.” The Executive Order and Rules explicitly contemplate reporting of state labor law violations at a later time. Because of the extremely expansive definition given to the term “labor law violations,” covered contractors could be forced into very tough decisions about whether and when to settle OFCCP, EEOC, NLRB, OSHA, and Wage-Hour charges, among others, as all violations, including settled cases, must be reported. Even labor violations found as a result of an arbitration are reportable. What impact those reports will have on the ability to receive contracts remains to be seen.

Only contracts of $500,000 or more (not aggregated) are covered, and subcontracts of $500,000 or more (not aggregated), except for contracts for Commercial Off-The-Shelf (COTS) items, are also covered.

If covered, the contractor must disclose all labor law violations for a period going back three years. Note that, unlike OFCCP practice, FAR practice is followed here, meaning only the legal entity which signed the contract is required to report and not affiliated companies. Although there is a phase-in period with a shorter reporting period, contractors should be working now to implement systems that will track covered violations for this period of time because this portion of the Rules may be reinstated. Labor law violations include civil judgments and arbitrations, but also include “administrative merits determinations” that a violation of a federal labor law occurred.

bq lquo Reports must be made even if the matter is settled without an admission of liability or of any violation. bq rquo

Of particular note to employers, EEOC reasonable cause determinations, NLRB complaints, Wage-Hour WH-56 unpaid wages forms, OSHA citations, and OFCCP Show Cause Notices (but not Notices of Violation) are all defined as administrative merits determinations that must be reported. Reports must be made even if the matter is settled without an admission of liability or of any violation. The National Labor Relations Board is already routinely advising employers that if cases are settled before an administrative complaint is filed, then no Fair Pay report needs to be made.

Virtually the only time reporting will not be required is when the matter is fought out at trial, and the employer emerges victorious. Even then, an initial report of the original “merits” finding must be reported, noting that it is contested. Thus, deciding whether to settle an OFCCP, NLRB, EEOC, or DOL Wage-Hour complaint will likely be a more complicated analysis than ever before, because it will not be clear what impact the settled violation report might have on ALCAs’ and contracting officers’ decision-making.

In rejecting the Rules, Judge Crone relied on the language of the statutes for which violations must be reported. She found that the government exceeded its authority because procurement laws do not permit contractor responsibility determinations to be made on alleged (not adjudicated) violations of private sector labor laws, as Congress has dictated a process to find violations and impose debarment from contracts. Specific labor law provisions relating to contracting, for example, under E.O. 11246 and related laws, also provide for debarment only after a full hearing and adjudication. Thus, the Judge felt there was a likelihood plaintiffs would succeed in showing the Rules are unlawful. This result harks back to similar cases from the 1970s.

During the Carter administration, there was an attempt to “pass over” bidding contractors with two or more pending complaints at OFCCP. That attempt was rejected in 16 injunction proceedings heard in federal courts, which unanimously held that effectively debarring a contractor without the due process of a hearing was unconstitutional. See, e.g., Illinois Tool Works, Inc. v. Marshall, 601 F.2d 943 (7th Cir. 1979). OFCCP then abandoned its pass over rules.

The 2016 rules make an attempt to avoid the due process issue by allowing contractors to tell their side of the story to “mitigate” their violations report to contracting officers. The government tried to allay some concerns by pointing out that ALCAs do not need to give as much weight to non-final decisions, such as the examples above, as compared to fully adjudicated cases. The government also took some pains to point out differences between minor and serious, repeated, or willful violations. However, the Court was not moved by these attempts to soften the Rules. The Court also struck down the Rules because they forced “compelled speech” on contractors. By forcing public reporting of “violations” prior to a hearing and adjudication, contractors’ First Amendment rights are violated, the Court determined.

Pay Transparency and Other Requirements

Additionally, the new regulations require contractors to notify employees working under the contract each pay period of their worked hours, overtime calculations, rate of pay, gross pay, additions or deductions from pay and to state in writing whether they are exempt from overtime status, and to provide independent contractors working under the contract with notices of that status. This part of the Rules was upheld and goes into effect on January 1, 2017. Contractors with a contract in excess of $1 million are forbidden to mandate arbitration for Title VII and certain other claims, unless employees are governed by a collective bargaining agreement. The Court found this provision in conflict with the Federal Arbitration Act, which encourages private arbitration agreements.

What You Should Be Doing Now

The Judge’s ruling did uphold the paycheck transparency requirements. Thus, contractors need to adjust to be sure their pay systems will provide the required information about hours, exemption, etc.

Moreover, in view of the possibility that the preliminary injunction could be reversed and that the reporting provisions could be applied retroactively, covered contractors should at least be thinking about systems to track “labor law violations,” and how to recover necessary historical data about such “violations,” remembering that the three-year reporting period will take effect in October 2017 if reporting is reinstated. Simply ignoring this possibility is not a wise course, and collecting this information may provide contractors with better knowledge about their own practices, strengths, and vulnerabilities.

Finally, contractors should be watching this litigation carefully so they have as much notice as possible if reporting or other obligations become effective in the future.

Election Update

President-elect Trump has made frequent statements about reversing many of President Obama’s executive actions. Thus, it will be interesting to see whether, and how quickly, the Fair Pay and Safe Workplaces Executive Order is rescinded after President Trump takes office. If the Order is rescinded, larger contractors will breathe a sigh of relief and the present legal proceedings will be moot.