Another Toss of the Political Football: DOL Issues Updated Rule on the Nondisplacement of Qualified Workers Under Service Contracts

Late last year, the Department of Labor (DOL) issued a final rule implementing Executive Order (EO) 14055 entitled “Nondisplacement of Qualified Workers under Service Contracts” (the Final Rule).¹ The Final Rule, which took effect February 12, reintroduces the requirement that contractors and subcontractors performing on covered federal service contracts, with limited exceptions, offer in good faith the right of first refusal of employment to service employees working under the predecessor contract. This Advisory reviews the history of the service-employee nondisplacement requirements, explains contractors’ obligations under the new DOL regulations, and discusses the impacts on federal contractors.

Brief History of the Nondisplacement Rule

The Final Rule, consistent with President Biden’s EO, aims to protect service employees who might otherwise be replaced or displaced in a transition between contractors. DOL claims the Final Rule seeks to minimize disruption during contract transition, help ensure physical and information security, and retain the advantages of an experienced workforce. If this sounds familiar, that is because it is. The nondisplacement requirements for federal contractors have been a political football of sorts dating back nearly three decades, repeatedly instituted and revoked with successive presidential administrations.

The origins of the requirements can be traced back to at least 1994, when President Clinton issued an EO creating a nondisplacement requirement applicable to contracts for maintenance of public buildings. President George W. Bush revoked that EO in 2001, eliminating the requirement during his administration. In 2009, President Obama issued EO 13495, reviving and extending the nondisplacement requirement to workers under federal service contracts. Although it took some time, President Trump ultimately revoked the requirements in 2019. In November 2021, President Biden issued EO 14055, predictably resuscitating the nondisplacement requirements for service contracts. While President Biden’s EO aligns closely with President Obama’s EO, the more recent EO includes the most expansive iteration of the nondisplacement requirements to date. As discussed below, it adds new requirements and narrows previous exceptions.

The Final Rule, published on December 14, 2023, implements EO 14055 by adding Part 9 to Title 29 of the Code of Federal Regulations (CFR). EO 14055 mandated the Federal Acquisition Regulatory Council (FAR Council) to amend the Federal Acquisition Regulation (FAR) to incorporate the requirements within 60 days of DOL publishing this Final Rule. The FAR Council did not issue its rule by the EO’s deadline of February 12, 2024. In the Federal Register notice, DOL states that the Final Rule “will apply to solicitations issued on or after the effective date of the final regulations issued by the [FAR Council].”² Notably, the DOL requirements are not limited to FAR-covered contracts; the Final Rule includes a contract clause that is prescribed for non-FAR contracts covered by the Service Contract Act of 1965 (SCA).³ It is not perfectly clear whether DOL intends to require the clause for covered non-FAR contracts as of the effective date of the Final Rule, February 12, 2024, even though the FAR rulemaking is delayed. Further, it is possible that agencies could implement the requirements for FAR contracts before a FAR rule is effective.⁴

A Comparison of the New Nondisplacement Requirements to Prior Requirements

The DOL regulations implemented through the Final Rule are similar in many respects to the regulations adopted during President Obama’s administration. Like the prior rules, the new rules include the following:

• The nondisplacement requirements apply to service contracts and subcontracts covered by the SCA. The SCA generally applies when the prime contract’s primary purpose is furnishing services to the federal government with service employees.⁵
• The requirements generally apply to service contracts with values equaling or exceeding the simplified acquisition threshold.⁶ The current, general threshold is $250,000.⁷
• The Final Rule will require a covered successor contractor to offer a right of first refusal of employment to the predecessor contractor’s service employees unless an exception applies.⁸ A successor contractor generally must grant a right of first refusal to the predecessor contractor’s employees currently performing the contract.
• The predecessor contractor must provide the contracting officer a certified list of all service employees working on the contract and subcontracts, not less than 30 calendar days before contract completion.⁹
• In case of a violation, the offending contractor or subcontractor may need to pay back wages to and hire the affected employee in a position for which the employee is qualified. The violating contractor or subcontractor may be subject to debarment or other adverse actions.¹⁰

The Final Rule, however, adds several important nuances that were not present in the prior iteration of DOL’s nondisplacement regulations, including the following:

• The nondisplacement requirements will apply to follow-on service contracts for “same or similar work,” regardless of whether they are performed in the same location as the predecessor contract.¹¹
• The Final Rule requires successor contractors to offer the right of first refusal only in writing, unlike the Obama-era nondisplacement rule that allowed both oral and written offers.¹² The Final Rule creates a higher procedural bar for an agency to exempt a contractor from the nondisplacement requirements, requiring a written explanation citing one of the grounds enumerated in the regulations, as discussed below.¹³
• The Final Rule dictates that solicitations for covered contracts will need to include a requirement or preference for the follow-on contract to be performed in the same locality or localities, if the agency determines doing so is “reasonably necessary to ensure economical and efficient provision of services.”¹⁴
• The Final Rule limits the circumstances in which the successor contractor is excused from the obligation to offer employment to a covered employee of the predecessor contractor based on a perceived lack of fitness. The successor contractor must reasonably believe based on “reliable evidence … that there would be a just cause to discharge the employee(s) if employed by the contractor or any subcontractors.”¹⁵

Under the Final Rule, contractors competing for or transitioning into a follow-on contract should stay alert to the nondisplacement requirements, which will likely add costs and a layer of complexity to proposal development and contract administration. The rule requires agencies to maintain the same performance location if necessary for efficiency, which may provide additional grounds for unsuccessful incumbent contractors to protest follow-on contract awards. Additionally, successor contractors now must support, with “reliable evidence,” their decision not to extend an employment offer to a predecessor employee. Complying with such requirements will require contractors to maintain careful records or such decisions, which likely increases contractors’ already-substantial compliance obligations.

The balance of the Advisory summarizes both the old and new aspects of the Final Rule in greater detail.

Applicability of Nondisplacement Requirements and Exceptions

Under the Final Rule, the nondisplacement requirements will apply to service contracts and subcontracts covered by the SCA. The prime contract must be for the same or similar work as the predecessor contract, and its amount must equal to or exceed the current simplified acquisition threshold of $250,000. The Final Rule covers only service employees whose employment would be terminated as a result of the award of the successor contract or expiration of the predecessor contract. Also, the rule does not extend to a predecessor employee whose duties include work that is not under a covered contract. For example, the successor contractor will not be required to extend the right of first refusal for employment if a predecessor employee (1) would continue to be hired by the outgoing contractor or (2) had a job providing services under both a federal contract and a commercial contract.

The Final Rule empowers contracting agencies to except specific solicitations from the nondisplacement requirements. To do so, the senior procurement executive must publish a written determination citing one of the enumerated reasons that justify an exception, which are: (1) applying some or all of the requirements will not advance the Federal Government’s interest in economy and efficiency; (2) market analysis shows applying some or all of the requirements would substantially reduce the number of potential bidders; or (3) applying some or all of the requirements is otherwise inconsistent with the applicable statutes, regulations, EOs, or presidential memoranda.

Summary of Contractor Requirements

The Final Rule, like the regulations implemented during President Obama’s administration, imposes requirements on both the predecessor contractor transitioning off the agency’s requirements and the successor contractor transitioning into those requirements. Covered successor contractors must take affirmative steps to attempt to retain eligible employees from the predecessor contractor. The contractors’ obligations are extensive and require going beyond simply offering covered employees the right of first refusal. The Final Rule describes how successor contractors must offer employment to covered workers, in addition to imposing notice and recordkeeping requirements.

Good Faith Offer of Employment

Before filling positions for a follow-on service contract, successor contractors must extend “good faith offers of employment,” which means the successor contractor may not design an offer to discourage the employee from accepting it.¹⁶ The contractor need not offer the employee the same position as the employee held under the predecessor contract, but it must be a position for which the employee is qualified. The offer must be in writing, and expressly give the predecessor employee 10 or more business days to consider and accept the offer.

Burden To Demonstrate the Inapplicability of Right of First Refusal

Under the Final Rule, a predecessor employee is not entitled to the right of first refusal of employment from the successor employee if (1) the predecessor contractor will retain the employee after the contract transition (i.e., there is no displacement); (2) the predecessor employee would have just cause to terminate the employee; or (3) the employee had worked, in whole or in part, on nonfederal contracts (i.e., the employee was not staffed exclusively on federal contracts). When determining whether to extend a job offer to a predecessor employee, the successor contractor must presume that the employee is entitled to the right of first refusal. For the successor contractor not to offer employment, it must “demonstrate a reasonable belief” that the employee is excluded by reason of (1) nondisplacement, (2) allocation to non-federal work, or (3) just cause for termination, based on “reliable information provided by a knowledgeable source” including the predecessor contractor, the employees themselves, or the contracting agency. This standard is higher than the standard that applied under DOL’s last iteration of the nondisplacement requirements.

Differing Positions and Terms and Conditions

The successor contractor need not offer identical job positions or employment terms and conditions as those under the predecessor contract. The position offered may be different as long as the predecessor employee is qualified to perform the new position based on “credible information” available to the successor contractor.¹⁷ Similarly, the successor contractor may change the terms of employment by modifying pay, benefits, or working conditions, as long as the change is not intended to discourage the employee from accepting an offer.¹⁸ It remains to be seen how difficult it will be to rebut a complaint that an offer was not made in good faith.

Reduced Staffing and Extended Duration of Right of First Refusal

The Final Rule also does not require the successor contractor to employ as many service employees to perform the successor contract as the predecessor contractor employed to perform the predecessor contract.¹⁹ Thus, if the successor contract utilizes fewer employees, the successor contractor is not expected to offer the right of first refusal to all the predecessor’s employees who are or had been performing the contract. Notably, however, the predecessor employees’ right of first refusal extends for 90 calendar days after contract performance begins. As a result, if the successor contractor terminates or loses an employee during the 90-day window, it generally must first offer the vacant job to a qualified predecessor employee who was not originally offered a position on the successor contract due to reduced staffing.

Relocation Costs

The successor contractor is not required to pay relocation costs to predecessor employees who accept the successor contractor’s job offer.²⁰ As noted above, the contracting agency is required to assess whether performing the follow-on contract in the same locality as the prior contract is “reasonably necessary to ensure economical and efficient provision of services.”²¹ If the agency determines that retaining the same performance locality is necessary, the contracting officer will add a requirement or stated preference for performance in the same locality. When performance is in the same location, relocation costs should not be implicated. When performance is in a new location, because the contract does not mandate the successor contractor maintain the same performance location, the contractor is expected to offer the right of first refusal to qualified employees but need not cover relocation costs for the offer to be considered made in good faith.

Successor Contractor Recordkeeping

Contractors are required to keep relevant employment records, which could be subject to production to DOL.²² A successor contractor must maintain written records of (1) its employment offers (which, again, must be written); (2) justifications for excluding certain predecessor employees from job offers; (3) employee lists received from, or provided to, the contracting agency; (4) back wage payments where required due to violations; and (5) relevant notices given to workers to satisfy the requirements.

Predecessor Obligation To Provide Notice to Employees and Certified List of Service Employees To Contracting Agency

The Final Rule obligates the outgoing contractor to send the contracting officer a certified list of all service employees under the contract at least 30 days before the completion of its covered contract.²³ The list must include the following information for each employee: (1) name, (2) mailing address, (3) the location of employment, (4) phone number and email address, if available, and (5) anniversary date of employment on the current service contract and its predecessor contracts. Before the last day of contract performance, the outgoing contractor must provide notice to all service employees that they may have a right of first refusal to employment with the successor contractor. The successor contractor, in turn, will use a certified list of workers submitted by the predecessor contractor to determine which employees must receive an offer of first refusal.²⁴

The outgoing contractor may also be subject to the Worker Adjustment and Retraining Notification (WARN) Act of 1988, which requires most employers with 100 or more employees to provide notice 60 calendar days before closing a worksite or conducting a “mass layoff” to employees who are affected.²⁵ While the exact interplay between the predecessor contractor’s WARN Act notice obligations and the nondisplacement requirements may be unsettled in some respects, outgoing contractors would benefit from providing broad WARN notices even to service employees who might lose jobs due to the contractor transition.

Enforcement

Covered contractors may be subject to civil remedies and administrative penalties for violating the Rule.²⁶ DOL’s Wage and Hour Division may investigate a covered contractor on its own initiative or upon a complaint by a current or former employee of the covered contractor or the predecessor contractor. An investigation could entail workplace interviews with employees, as well as inspection of contractor records. The contractor may be required to produce documents or evidence relating to the alleged violation.

If found to have violated an obligation owed to an employee, the contractor must take corrective action, which may include hiring the affected predecessor employee and/or paying back wages plus interest. Further, the contracting agency may withhold payment of contract funds until the contractor remedies the violation. Lastly, if a contractor willfully violates the requirements, the Secretary of Labor may debar (for up to three years) the contractor, its responsible officers, and any firm that has a “substantial interest” in the violation. However, the contracting agency must offer a hearing to those facing debarment.

© Arnold & Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.