On August 25, 2016, the Obama Administration published the long-awaited Federal Acquisition Regulation (FAR) final rule and Department of Labor (DOL) final guidance implementing the “Fair Pay and Safe Workplaces” executive order (“Executive Order”) (available here and here). The underlying executive order has been amended (available here) with purportedly technical corrections to conform the final rule and guidance to the Executive Order.

The rule adds subpart 22.20 to the FAR and imposes new obligations on government contractors and subcontractors, including: pay transparency obligations, restrictions on arbitration provisions, and a requirement to report labor “violations.” In response to feedback from interested parties on the proposed rule, the FAR Council and DOL incorporated several notable changes prior into the final rule and guidance. Nevertheless, many are concerned that the rule as written will create significant new burdens – at extraordinary cost – and potentially pave the way for “blacklisting” companies from procuring federal government contracts. Below is an overview of key provisions of the final rule, along with a summary of changes from the proposed rule.

Implementation. The administration extended the compliance timeline, and will implement the rule in phases. Starting on October 25, 2016, the rule will only apply to contracts of at least $50 million. Beginning on April 25, 2017, the rule will apply to contracts of at least $500,000. Subcontractors will not to start reporting violations until October 25, 2017. In addition, the disclosure reporting period will be limited to one year and gradually increase over the next three (3) years, with a full three-year reporting period required beginning on October 25, 2018.

Applicable Labor Laws. Under the reporting requirement, contractors bidding on covered contracts will be required to disclose whether there has been any “administrative merits determination,” “arbitral award or decision,” or “civil judgment” rendered against the contractor for violations of 14 enumerated statutes and executive orders: Fair Labor Standards Act; Occupational Safety and Health Act; National Labor Relations Act; Americans with Disabilities Act; Family and Medical Leave Act; Title VII of the Civil Rights Act; Age Discrimination in Employment Act; Davis-Bacon Act; Service Contract Act; Section 503 of the Rehabilitation Act; Vietnam Era Veterans’ Readjustment Assistance Act; Migrant and Seasonal Agricultural Worker Protection Act; Executive Orders 11246 (Equal Employment Opportunity) & 13658 (Contractor Minimum Wage). In a notable departure from the original executive order, but consistent with the proposed rule, the only “equivalent state laws” covered by the rule are OSHA-approved State Plans. According to the final rule, the administration will identify additional “equivalent state laws” in a future rulemaking. In short, the final rule did not contain any material changes to the proposed rule with regard to the labor laws at issue.

Administrative Merits Determinations, Arbitral Awards or Decisions, and Civil Judgments. These key terms are defined in the Guidance and incorporated into the FAR rule. The Guidance defines “administrative merits determinations” to include, among other things: (1) issuance of a Form WH-56 or a “letter indicating that an investigation disclosed a violation of sections six or seven of the FLSA or a violation of the FMLA, SCA, [or] DBA” issued by the DOL’s Wage and Hour Division; (2) an OSHA citation or notice of imminent danger; (3) a “show cause” notice issued by the Office of Federal Contract Compliance Programs; (4) a complaint issued by any Regional Director of the NLRB; and (5) a letter of determination from the EEOC that reasonable cause exists to believe that an unlawful employment practice has occurred or is occurring. In short, under the definition of “administrative merits determinations” contractors will need to disclose alleged violations that haven’t been fully adjudicated. Thus, a contractor might ultimately prevail on the merits but be forced to report the violation for several years potentially jeopardizing a contract award. These key provisions of the proposed rule, including the requirement to report “administrative merits determinations,” are unchanged in the final rule, notwithstanding significant contractor concern over reporting on alleged violations that have not yet been the subject of a full and fair hearing on the merits.

Pre-Award. FAR 22.2004-2 mandates that Contracting Officers (COs) address labor law compliance when determining contractor and subcontractor responsibility. COs must carefully consider a contractor’s actions (either through a labor compliance agreement or remediation) when making a responsibility determination. Where previous attempts to secure adequate remediation by the contractor are unsuccessful, and it is necessary to protect the Government’s interests, the CO may consider a non-responsibility determination or exclusion action. In addition, under FAR 22.2004-2, COs must consider a prospective contractor’s compliance with labor laws when past performance is an evaluation factor. FAR sections 22.2004-1(c), 22.2004-2(b) and 22.2004-3(b) address the newly established role of the Agency Labor Compliance Advisor (ALCA). Federal agencies are required to designate a senior agency official to serve as an ALCA in order to advise COs when assessing labor law violations, mitigating factors, and remedial measures. According to the rule, the ALCA provides COs with analysis and advice, but the final rule notes that this does not disturb the CO’s independent authority in determining contractor responsibility. Again, these key provisions of the proposed rule and guidance remain unchanged.

Post-Award. Under FAR 22.2004-3, a contractor’s obligation to disclose alleged labor law violations continues after an award is made. Semiannually during the performance of the contract, contractors must update the information provided. If a contractor discloses information regarding labor law violations during contract performance, or similar information is obtained through other sources, the CO, in consultation with the ALCA, considers whether action is necessary. Such action may include requiring the contractor to enter into a labor compliance agreement, declining to exercise an option on a contract, terminating the contract in accordance with relevant FAR provisions, or referring the contractor to the agency suspending and debarring official. It remains to be seen whether COs, who have needed to be reminded to conduct meaningful FAR 9.1 present responsibility determinations in recent years, will have the bandwidth or the capability to conduct this analysis, or whether they will outsource the decisions to the ALCAs or suspending and debarring officials. These provisions of the proposed rule and guidance remain unchanged in the final rule.

Weighing Violations of Labor Laws. The Guidance defines the terms “serious,” “repeated,” “willful,” and “pervasive” and attempts to provide guidelines for COs who are weighing and considering alleged labor law violations. For example, violations of particular gravity (such as terminating employees in retaliation for exercising their rights under the covered labor laws, or violations related to an employee’s death) are given the most weight. The guidance also addresses mitigating factors that COs must consider when weighing violations, including good faith efforts to remedy past violations, internal processes for expeditiously and fairly addressing reports of violations, and/or plans to proactively prevent future violations. The Appendix to the Guidance includes an extensive chart of illustrative examples.

Paycheck Transparency. FAR 22.2005 requires contractors performing work on covered contracts and subcontracts to provide employees covered by the FLSA, the Davis Bacon Act, and the Service Contract Act with information concerning the individual’s pay, hours worked, overtime hours, if applicable, and any additions made to or deductions made from the individual’s pay. The rule also requires contractors to provide to any independent contractors performing work on the contract a document informing them of their status as independent contractors. The paycheck transparency requirements will become effective on January 1, 2017. These provisions of the proposed rule and guidance remain largely unchanged in the final rule.

Dispute Resolution. For contracts over $1 million, FAR 22.2006 requires contractors to agree that the decision to arbitrate claims arising under title VII of the Civil Rights Act of 1964 or any tort related to or arising out of sexual assault or harassment may only be made with the voluntary consent of employees or independent contractors after such disputes arise, subject to certain exceptions. This flows down to subcontracts exceeding $1,000,000 other than for the acquisition of commercial items. This provision of the proposed rule and guidance likewise remains largely unchanged and a significant concern for employers who have adopted robust arbitration and claims resolution procedures.

Significant Changes.

• Subcontractors. Perhaps the most significant change in the final rule is the reporting regime for subcontractors. Under the proposed rule, subcontractors were to report alleged labor law violations to prime contractors. This would have required subcontractors to share such alleged violations with potential competitors for future procurements, and would have increased the administrative burdens placed on prime contractors, who would have had to process and report subcontractor labor compliance data as well as their own. The final rule addresses this concern by requiring subcontractors to report directly to the DOL via a web portal. However, it remains to be seen if DOL will have the bandwidth to review and analyze what could be a large of volume of information, since the rule provides incentives for subcontractors to provide information about mitigating factors and remedial measures.
• Public Disclosure. In another significant change, the proposed rule did not specify what labor law violation history would be made publicly available, but the final rule compels public disclosure in the Federal Awardee Performance and Integrity Information System (FAPIIS) of some basic information about violations. Contractors will have the option to publicly disclose mitigating factors.
• Pre-assessment. In a new development, DOL has created a voluntary “pre-assessment” process through which contractors can proactively have their labor compliance history reviewed before a specific acquisition. If there are concerns, this change permits the contractor to attempt to negotiate a labor compliance agreement and start taking steps to mitigate issues before there is a specific acquisition. According to the information presently available (the “pre-assessment” process is unprecedented and was not contemplated in the proposed rule), participating in pre-assessment “will be considered in future acquisitions as a mitigating factor.” This change only amplifies the importance of “labor compliance agreements” – a heretofore undefined term – and likely only heightens contractor concerns over the apparent authority of so-called “Labor Compliance Advisors.”

Potential Legal Challenges and Congressional Action. Based on the scope of the requirements and its impact on the contracting community, the final rule – along with the Executive Order – could be subject to a legal challenge by a combination of affected companies and industry trade groups. Moreover, Congress could impede the rule’s implication. For instance, the House and Senate passed National Defense Authorization Act bills for fiscal year 2017 that would exempt defense contractors from the Executive Order. That provision of the NDAA is subject to removal when Congress reconvenes in September, and the White House has issued statements opposing this provision of the bill.

Next-Steps for Contractors. Given the rapid phase-in of the new rule over the next several months, contractors who are not already preparing for “Day One Compliance” should take steps immediately to do so. Significantly, contractors without a compliance plan in place will be at risk of (i) competitive disadvantage in the procurement process, and worse, (ii) potential suspension and debarment action if the Government determines that their labor compliance history – and failure to “mitigate” or explain that history in context – warrants exclusion from the contracting process.