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On January 22, 2016, the FAR Council proposed adding a new rule (link here) prohibiting federal dollars from going to companies that require employees to sign confidentiality agreements that could limit the ability of employees to report suspected fraud and abuse to the government.

The proposed rule comes at a time of increased attention on the use of confidentiality agreements by government contractors. As described here, a 2015 Report by the Office of the Inspector General for the State Department found that almost half of the thirty-highest grossing contractors had policies containing provisions that could have a “chilling effect on employees who wish to report fraud, waste, or abuse to a Federal official.” In April, the SEC fined contractor KBR for requiring employees to sign confidentiality agreements that the SEC believed prevented potential whistleblowers from reporting concerns to government agencies.

The proposed FAR rule implements Section 743 of the 2015 Consolidated and Further Continuing Appropriations Act. The rule requires that each offeror, in order to be eligible for award, must represent by submission of its offer that it does not require employees or subcontractors to sign internal confidentiality agreements that could restrict employees from lawfully reporting waste, fraud, or abuse. The proposed rule would apply to all contracts, except those related to personal services contracts with individual workers, regardless of amount, even including ones below the simplified acquisition threshold. Contracts for the purchase of commercial items, both special-order and off-the-shelf, would also be subject to the rule. The proposed rule requires modification of existing contracts to include the new FAR clause before obtaining Fiscal Year (“FY”) 2015 or subsequent FY funds that are subject to the same prohibition on confidentiality agreements.

In light of the proposed rule — and the 2015 Department of Defense class deviation implementing the substance of the rule on DoD contracts — contractors will want to review their internal policies and confidentiality agreements. Companies have a legitimate interest in protecting privileged and confidential information in connection with internal investigations, but companies may need to revise the language in their agreements if the agreement could be construed as restricting employees from providing the government with information regarding potential violations of law.