New Proposed Regulations and Guidance for Federal Contractors: Complying With President Obama's Fair Pay and Safe Workplaces Executive Order

Federal contractors and subcontractors will soon face new requirements regarding disclosures of labor law violations and notifications on pay transparency and independent contractor status, as well as restrictions on mandatory pre-dispute arbitration agreements. On May 28, 2015, the Federal Acquisition Regulatory (FAR) Council and the US Department of Labor (DOL) published the long-anticipated proposed regulations¹ and guidance² to implement President Obama's July 31, 2014 Executive Order 13673, "Fair Pay and Safe Workplaces" (Executive Order).³     

The proposed regulations and guidance will require federal contractors and subcontractors with certain contracts valued at more than US$500,000 to disclose violations of specified labor, employment, wage payment, and safety laws during the contract bidding process and semi-annually during contract performance. Contracting officers will have wide discretion to consider these violations when awarding government contracts and while monitoring contract performance. Federal contractors and subcontractors also must provide pay transparency information in every employee's paycheck and provide independent contractors with separate notification of their independent contractor status. Finally, contractors must agree not to enter into any mandatory pre-dispute arbitration agreements covering certain employment laws with their employees or independent contractors for federal contracts valued at more than US$1 million.

The purpose of the Executive Order and proposed regulations is to promote economy and efficiency in the procurement process by contracting only with responsible contractors and subcontractors that comply with labor laws. The regulations incorporate the DOL guidance and provide direction on disclosure mechanisms, responsibilities of contracting officers and Labor Compliance Advisors, and methods to address labor law violations. Interested parties have until July 27, 2015 to submit comments on the proposed rule. The Executive Order will likely not take full effect until 2016 when the implementing regulations have been published.

Disclosures and Semi-Annual Reporting of Labor Violations 

Under the Executive Order, a federal contractor must disclose whether it has had any adverse decision within the past three years for violations of any of 14 federal labor laws or executive orders or any equivalent state laws-including those addressing wage and hour, safety and health, collective bargaining, family and medical leave, and civil rights protections. 

The 14 federal labor laws and executive orders include:

• The Fair Labor Standards Act (FLSA);
• The Occupational Safety and Health Act of 1970 (OSHA);
• The Migrant and Seasonal Agricultural Worker Protection Act (MSPA);
• The National Labor Relations Act (NLRA);
• Davis-Bacon Act (DBA), 40 U.S.C. chapter 31, subchapter IV; 
• Service Contract Act (SCA), 41 U.S.C. chapter 67;
• Executive Order 11246 of September 24, 1965 (Equal Employment Opportunity);
• Section 503 of the Rehabilitation Act of 1973;
• The Vietnam Era Veterans' Readjustment Assistance Act of 1972 and the Vietnam Era Veterans' Readjustment Assistance Act of 1974;
• The Family and Medical Leave Act (FMLA);
• Title VII of the Civil Rights Act of 1964 (Title VII);
• The Americans with Disabilities Act of 1990 (ADA);
• The Age Discrimination in Employment Act of 1967 (ADEA); and
• Executive Order 13658 of February 12, 2014 (Establishing a Minimum Wage for Contractors).

The DOL will publish a second proposed guidance addressing which state laws equate to the 14 federal labor laws and executive orders identified in the Executive Order. For example, violation of a state human rights law or wage/hour law will require disclosure.

Contractors must disclose during the bidding process for contracts valued at more than US$500,000  whether, in the past three years, they were found to have violated labor laws, and provide semi-annual reports during performance of those contracts. Further, prime contractors will have to collect comparable data from subcontractors with whom the prime contractors have subcontracts of more than US$500,000, excluding commercially available off-the-shelf items (COTS) subcontracts. The FAR Council is considering allowing contractors to direct their subcontractors to report violations directly to DOL, which would then assess the violations. The subcontractors would still have to inform relevant prime contractors of their violations so that the prime contractors can make a subcontractor responsibility determination.

Agency Review and Contractor Disqualification

Contracting officers from each agency will have to consider a contractor's history of labor law violations as a factor in determining whether the contractor has a satisfactory record of integrity and business ethics and qualifies as a responsible source eligible for contract award. 

Where a contractor reports a new labor law violation during the term of a contract, a contracting officer will need to consider whether to take responsive action. Actions may include entering into agreements requiring appropriate remedial measures and measures to avoid further violations, as well as declining to exercise an option on a contract, contract termination in accordance with relevant FAR provisions, or referral to the agency suspension and debarment official.

Contracting officers, in consultation with agency Labor Compliance Advisors, a position created by the Executive Order, must consider the types of reported violations (including whether the violations are serious, repeated, willful, or pervasive) and whether any mitigating circumstances exist. According to the DOL guidance, Labor Compliance Advisors should consult with contractors that report these types of violations and coordinate assistance with the relevant enforcement agencies. It remains unclear, however, how each agency will structure the advisor's role, how much expertise the advisor will actually have, and how accessible and responsive the advisor will be to contractors. 

The DOL guidance assists federal agencies in implementing the Executive Order's requirements by providing guidance on:

• How a "labor violation" will be defined, e.g. expansive definitions of (1) administrative merits determinations; (2) awards or decisions from an arbitration; and (3) civil judgments; and whether violations should be considered serious, repeated, willful, and pervasive;
• Whether a labor violation is reportable; and what information about a labor violation the contractor must disclose;
• How contracting officers, Labor Compliance Advisors, and contractors with respect to their subcontractors should analyze the severity of reported violations as well as mitigating factors; and
• What actions agencies and contractors should take to address violations.

The DOL guidance states that contracting officers should focus only on the most significant violations when determining a contractor's or subcontractor's integrity and business ethics. Minor violations of workplace safety and wage-and-hour requirements should not trigger specific actions. Where action is required, the regulations direct contracting officers to focus on helping the contractor come into compliance, and on taking mitigating steps which may include the development of a labor compliance agreement. These provisions, however, place enormous discretion into the hands of federal contracting officers, many of whom may have little or no experience with analyzing these labor issues, which is likely to create uncertainties and inconsistencies for federal contractors and subcontractors.

Pay Transparency and Independent Contractor Notices

The Executive Order and proposed regulations require federal contractors to provide all contract and subcontract employees with numerous details regarding each employee's pay with every paycheck, including (1) total number of hours worked in the pay period; (2) the number of those hours that were overtime hours; (3) the gross pay for the pay period; and (4) any deductions from or additions to that gross pay. 

The Executive Order's wage statement requirement will be deemed satisfied if the wage statement complies with an applicable state or local wage statement requirement that DOL has determined is substantially similar to the Executive Order's wage statement requirement. Most current pay statements already contain the required information, but contractors and subcontractors will need to review their pay status or wage statements carefully with their payroll providers or outside counsel to ensure compliance. 

Additionally, the Executive Order and proposed regulations require federal contractors and subcontractors to provide notice to their independent contractors informing them of their independent contractor status. The notice must supplement any independent contractor or consulting agreement entered into between the federal contractor and the independent contractor, notwithstanding that this may be duplicative and unnecessary. Contractors and subcontractors must provide the notice to an independent contractor prior to commencement of work or at the time a contract is established with the individual. The mandatory independent contractor notices, however, will provide no protection in the event that DOL challenges the proper classification of an individual as an independent contractor.

Prohibition on Certain Mandatory Pre-Dispute Arbitration Agreements

The proposed regulations and guidance would implement the Executive Order's requirement that contractors that enter into contracts (for non-commercial items) worth more than US$1 million must not enter into any mandatory pre-dispute arbitration agreement with their employees or independent contractors on any matter arising under Title VII of the Civil Rights Act, as well as any tort related to or arising out of sexual assault or harassment. The Executive Order does not cover or address the enforceability or legality of mandatory arbitration provisions for other claims.

Contractors must also incorporate this requirement into subcontracts where the estimated value of the supplies acquired and services required exceeds US$1 million, subject to certain exceptions. 

The US government's stated objective for this prohibition is to reduce employee discrimination by increasing the risk of public exposure, class-action suits, and higher damages awards. The Executive Order expands upon a similar prohibition on mandatory arbitration imposed on contractors contracting with the Department of Defense.

Preparing for Implementation of the Regulations and Guidance

The Executive Order, along with the proposed regulations and guidance, place significant new disclosure and compliance obligations on federal contractors and subcontractors. While the regulations and guidance are not in their final version and are subject to a comment and review period, federal contractors and subcontractors should start preparing to address these new requirements prior to their implementation. Interested parties should consider filing comments with the government. Comments may be submitted viahttp://www.regulations.gov on or before July 27, 2015.

As a consequence of these new requirements, federal contractors and subcontractors will need to:

• Factor the potential risks and costs of disclosure of an adverse labor determination into their risk management analysis when assessing litigation and settlement of threatened claims;
• Work with Human Resources, Legal, and outside counsel to develop comprehensive compliance audits to ensure that they are in compliance with the relevant federal and state labor and employment laws; 
• Institute procedures in order to track and report accurately on past labor law violations and all mitigating information;
• Review and update all relevant subcontracts to reflect and incorporate accurately the Executive Order's new flow-down requirements;
• Review all independent contractor relationships to verify that workers are in fact independent contractors; and develop a compliance system to trigger issuance of the independent contractor notice each time an independent contractor commences work or enters into a contract; and
• Review and update pay statements, independent contractor notices, and mandatory arbitration provisions.

* Emma K. Dinan contributed to this article. She is a Columbia Law School graduate employed at Arnold & Porter LLP.  Ms. Dinan is not admitted to the bar.