Understanding the Defense Base Act:

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1 Understanding the Defense Base Act: Defusing a Liability 20 Contract Management June 2010

2 Learn how to protect your company and avoid costly mistakes by ensuring that mandatory DBA coverage is obtained and claims are filed promptly. BY Olga Wall and Krista Pages Contract Management June

Understanding the Defense Base Act: Defusing a Liability Time Bomb The failure of federal contractors and subcontractors to obtain Defense Base Act 1 (DBA) insurance under federal contracts overseas

Some contractors seem to have simply put their heads in the sand, choosing to ignore the requirements for obtaining DBA insurance even though it is expressly included in federal government contracts

3 Understanding the Defense Base Act: Defusing a Liability Time Bomb The failure of federal contractors and subcontractors to obtain Defense Base Act 1 (DBA) insurance under federal contracts overseas is a ticking time bomb of liability. Discussions with numerous government contractors indicate that there is extensive confusion about the application and coverage of the DBA. Some contractors seem to have simply put their heads in the sand, choosing to ignore the requirements for obtaining DBA insurance even though it is expressly included in federal government contracts for work overseas. Others, especially those with fixed-price contracts, opt to under-invest; they fail to obtain sufficient coverage for all required employees or to include or enforce coverage in subcontracts. In either case, contractors are dangerously uninsured or underinsured. There is substantial potential liability for federal contractors and subcontractors if the company fails to properly insure employees and consultants. History and Purpose of the DBA The DBA, which was first enacted in 1941, a couple years after the outset of World War II, sought to provide compensation for disability or death of construction workers who were employed at U.S. defense bases overseas. Subsequent amendments and regulations expanded the act s coverage well beyond the original purpose of foreign base construction to include all overseas government agency public works contracts, and a vast array of other services under both federal contracts and assistance agreements. 2 The purpose of the act was to give a form of worker s compensation insurance to overseas workers who would not otherwise be entitled to such insurance for injuries or death that resulted while they were working overseas on federally-funded projects. The act incorporates certain provisions of the Longshore and Harbor Worker s Compensation Act 3 (LHWCA). The LHWCA was enacted in 1927 and gave uniformity of benefits to disabled employees and their dependents from injuries or death that occurred on the navigable waters of the United States, or in adjoining areas customarily used in loading, unloading, repairing, or building a vessel. The enacting regulations set forth in the Code of Federal Regulations (C.F.R.) 4 provide the rules for administration of the provided benefits under the act. 5 The LHWCA specifically incorporates the DBA in its coverage, including the following rules: Compensation rates, Filing times, Forms, Appeals, Rules of evidence and submission, Medical benefits, and Schedule for permanent loss. 22 Contract Management June 2010

4 Understanding the Defense Base Act: Defusing a Liability Time Bomb Who Needs DBA Coverage? DBA coverage is required for four categories of employees, namely those who: Work for private employers on U.S. military bases or on any lands used by the United States for military purposes outside of the United States, including those in U.S. territories and possessions; 6 Work on public works contracts with any U.S. government agency, including construction and service contracts in connection with national defense or with war activities outside the United States; Work on contracts approved and funded by the United States under the Foreign Assistance Act, which, among other things, provides for cash sale of military equipment, materials, and services to U.S. allies if the contract is performed outside of the United States; and Work for American employers providing welfare or similar services outside the United States for the benefit of the Armed Services (e.g., the United Service Organizations (USO)). DBA insurance is required for all employees engaged in such employment, regardless of nationality. This includes U.S. citizens and residents, host-country nationals (local hires), and third-country nationals (individuals hired from another country to work in the host country). The act covers federal contracts that fit the work descriptions above, but is not required under grants, cooperative agreements, or other assistance agreements. The U.S. Court of Appeals for the Second Circuit, in the case of University of Rochester v. Hartman, 7 held that the meaning of contract in the public work provisions of the DBA should be construed to exclude grants. However, some federal agencies, such as the U.S. Agency for International Development (USAID), allow DBA insurance coverage by prime grantees for their employees and require such coverage for all eligible vendor contracts. USAID states in its Automatic Directives System, Chapter 302, that although the DBA does not apply to grants and cooperative agreements, recipients who desire to purchase DBA coverage may negotiate rates at the discretion of the insurance carrier. In a March 11, 2010, memorandum to its contracting officers, USAID clarified that such coverage is an allowable cost and may be billed directly to the prime grantee award. USAID also requires DBA coverage for the employees of vendor contractors who are awarded contracts under prime USAID grants and cooperative agreements as follows: Contracts which require performance outside the United States shall contain a provision requiring Worker s Compensation Insurance. 8 Subcontractors under federal contracts are also required to obtain such coverage, and the DBA insurance provisions should be included by prime contractors in their subcontracts. If the subcontractor fails to obtain DBA coverage, the prime contractor is deemed the employer of the subcontractor s employees and is automatically liable for the compensation in the wake of any claims. 9 Thus, it is advisable for prime contractors (and USAID prime recipients) to ensure that their subcontractors and services vendors/contractors (under USAID grants) obtain DBA insurance coverage. In addition, consultant agreements are also considered subcontracts under Federal Acquisition Regulation (FAR) The prime contractor can either mandate that a consultant provide DBA coverage for himself or herself and require proof of coverage, or provide that coverage to the consultant under its own DBA policy agreement. Many international subcontractors are host-nation or third-nation companies who may not be familiar with the requirements of DBA insurance coverage. Therefore, prime contractors and prime recipients must educate subcontractors/vendors regarding the DBA and audit them periodically to see if they are in compliance with the requirements. Helping subcontractors obtain the insurance through the specified DBA brokers is highly recommended to avoid liability if the subcontractor fails to comply. What Benefits are Provided by the DBA? Benefits are payable by the employer or its insurer for injuries and deaths arising out of and in the course of employment. 11 The act also applies to injuries in the course of transportation provided by or at the expense of the U.S. employer to and from the overseas work location. 12 Further, the LHWCA extends coverage to assaults directed against an employee because of his [or her] employment, even if they take place outside the course of the employment. 13 Employees are also covered for war-risk hazard under the War Hazards Compensation Act. 14 DBA insurance carriers are not the ones who pay on the claims as they are reimbursed by the U.S. government for claims covered under the DBA. As such, insurance carriers bear no increased risk for covered contractor employees who work in an area of armed hostilities or conflicts. The DBA provides a wide range of benefits, including disability and medical benefits in the case of injuries, and death benefits to eligible survivors if the employee was killed in the course of employment. Compensation for total disability is two-thirds of the employee s average weekly earnings, up to a current maximum rate per week (currently $1, per week). Compensation is also paid for the partial loss of earnings. Death benefits are paid at the rate of one-half of the employee s average weekly earnings to a surviving spouse or one child, or two-thirds of average weekly earnings for two or more eligible survivors up to the current maximum rate per week. The DBA also incorporates the LHWCA s provision for payment of reasonable funeral expenses not exceeding $3,000. Permanent total disability and death benefits may be payable for life and are subject to annual cost of living adjustments. The LHWCA minimum benefits rate, however, does not apply to DBA claims. Contract Management June

Understanding the Defense Base Act: Defusing a Liability Time Bomb The injured employee is also entitled to medical treatment by a physician of his or her choice, as the injury may require.

5 Understanding the Defense Base Act: Defusing a Liability Time Bomb The injured employee is also entitled to medical treatment by a physician of his or her choice, as the injury may require. Claims involving aliens and non-u.s. residents can be resolved by commuting benefits paid for permanent disability and death. In such cases, a one-time lump sum payment may be issued by the employer/carrier representing half of the present value of future compensation as determined by the district director of the Office of Workers Compensation Program (OWCP) at the U.S. Department of Labor. Medical benefits may not be commuted. Death benefits may be paid only to the surviving spouse or child or children, or if no surviving spouse or child or children exist, to dependent parents of foreign workers. DBA Reporting Requirements The contractor/employer must report to the Department of Labor within 30 days any injury for which one or more work shifts is missed or death. 15 The LHWCA also requires that the employer or insurer immediately give the injured worker a form authorizing medical care at its expense by a physician of the injured worker s choice, and to institute prompt payments for any disability or death of which it is aware, without awaiting a demand or claim of any kind by the injured worker or survivors. 16 If the employer fails to report the injury or death, no time limitation runs on the employer s liability for the claim entitlement. In one case brought to the OWCP director, the employer had to pay a claim, interest, and attorney fees nearly 40 years after the injury occurred. 17 Why a Waiver of the DBA Requirement May Not Get You off the Hook The DBA does provide for waiver of its application when the agency head recommends waiver to the Secretary of Labor. In these cases, the secretary may waive the applicability of the [DBA] to any contract, subcontract, work location, or classification of employees. 18 If the waiver is granted, contractors do not have to provide DBA coverage for those employees who are: Not U.S. citizens; Permanent legal residents (i.e., green card holders); or Hired in the United States (i.e., people with a valid U.S. work visa, hired in the United States). However, in lieu of DBA coverage for such employees, the contractor must provide, before commencing performance under the contract, at least that workers compensation insurance or the equivalent as the laws of the country of which these employees are nationals may require 19 and continue to maintain it until performance is completed. 20 The contractor must also impose this requirement on its subcontractors. 21 If there is no workman s compensation system in place under the local laws of the waived countries, the waivers, even if granted, are void. 22 Thus, contractors bear the burden of determining whether the waived country has a legal system or local laws that require the comparable workman s compensation insurance, including war-risk hazards. Otherwise, the contractor may still face a risk of liability to its foreign employees or its subcontractor employees for injury or death while performing work under the prime contract. Contractor Liability for Failure to Obtain DBA Insurance Contractor and subcontractor liability for failure to obtain DBA insurance is twofold. First, the U.S. Department of Labor has the authority to assess fines and take criminal 24 Contract Management June 2010

Understanding the Defense Base Act: Defusing a Liability Time Bomb action. Second, there is the potential lawsuit brought by the injured employee or his or her family if the employee is killed.

7 Understanding the Defense Base Act: Defusing a Liability Time Bomb action. Second, there is the potential lawsuit brought by the injured employee or his or her family if the employee is killed. Under the LHWCA, any employer who does not secure the payment of compensation (in other words, obtain the required insurance) shall be guilty of a misdemeanor and, upon conviction thereof, shall be punished by a fine of not more than $10,000, or by imprisonment for not more than one year, or by both fine and imprisonment. 23 In addition, the president, secretary, and treasurer of the company shall also be severally liable to such fine or imprisonment for the corporation s failure to secure the payment of compensation. 24 If an employer fails to secure payment of compensation as required by the DBA, an injured employee, or his or her survivors in cases where death results from the injury, may elect to sue the employer for tort damages on account of such injury or death. The LHWCA provides that, in such actions, the defendant may not plead as a defense that the injury was caused by the negligence of a fellow servant, or that the employee assumed the risk of his employment, or that the injury was due to the contributory negligence of the employee. 25 The employee may also sue for compensation under the LHWCA. 26 In addition to the criminal liability and fines described above, a company and its president, secretary, and treasurer may also be severally personally liable, and jointly with the company, for any compensation or other benefit which may accrue under the LHWCA. 27 Obtaining DBA insurance provides an exclusive remedy to the employee or his or her family for recovery against the employer or one of its employees. 28 Therefore, the only prudent course for the prime contractor (and prime recipient) is to offer coverage and to either make sure subcontractors and vendors who provide applicable services offer coverage or obtain the coverage on their behalf. If the subcontractor fails to obtain coverage, the prime contractor (or USAID prime recipient) will be the guarantor of its subcontractors /vendors (and subsubcontractors under federal contracts) employees benefits. 29 If payment of compensation is secured for all covered employees by obtaining DBA coverage, the contractor will be covered under the exclusive remedy protection of the LHWCA. 30 The employee can still file a tort claim against the subcontractor employer who failed to obtain DBA insurance, as well as against third parties, but the prime contractor is protected. Looming Dangers for Contractors Working in Iraq and Afghanistan Although contractors and subcontractors are required to properly report injuries and deaths of employees to the Department of Labor s OWCP, there have been fewer reports than expected from Afghanistan and Iraq. 31 A study released by the U.S. Government Accountability Office in April 2005 found that cultural and language difficulties were the primary reasons for this underreporting. Foreign workers and subcontractors did not have an adequate understanding of their rights and responsibilities in reporting the claims promptly. 32 Thus, there may be a backlog of unreported claims from workers and subcontractors in both Iraq and Afghanistan. Because there is no time limit for the employee claims, the risk for contractors in not complying with the DBA reporting requirements opens contractors up to liability for years to come, especially if the contractor does not have an adequate reporting and compliance procedure in place. Reliance on the injured worker s ignorance and lack of access to information about their rights under the DBA is a shortsighted approach to compliance. Delayed claims also generate higher costs for employers. The potential future cost to the employer of such claims will be augmented by 10 percent for the delay in payment, by interest from the time the disability or death occurred, and by legal fees of the claimant and the employer in defending the claims. These costs come in addition to the administrative costs the employer will incur in tracking down employee records potentially years after the contract work is complete. 26 Contract Management June 2010

Understanding the Defense Base Act: Defusing a Liability Time Bomb Thanks to widespread access to information technology, even the most remote workers in Afghanistan and Iraq can be reached by law

9 Understanding the Defense Base Act: Defusing a Liability Time Bomb Thanks to widespread access to information technology, even the most remote workers in Afghanistan and Iraq can be reached by law firms and groups anxious to educate these workers and their families about their rights under the DBA. There are already scores of websites and blogs that give information about these rights. Moreover, the Department of Labor has proposed that contractors be required to report DBA coverage for all overseas employees that fall within the covered categories of the act. 33 If this type of reporting becomes required, it is likely that tougher enforcement will result, along with higher costs for noncompliance. Recommendations for Avoiding Liability Avoiding liability is a straightforward process if contractors, subcontractors, and vendors implement the following compliance procedures: In all overseas prime contracts, subcontracts, and vendor contracts under USAID grants, identify whether the work performed falls within one of the four categories requiring DBA insurance; If DBA insurance is required, follow the procedures for obtaining DBA insurance that are identified on the Department of Labor website: dlhwc/lsdba.htm; Include the DBA insurance requirement in all subcontracts, sub-subcontracts, and vendor agreements for work that falls under the four categories requiring DBA insurance; Train human resource and contracts administration employees on tracking and reporting employees that should be covered under a company s DBA policy and how best to inform employees of their rights under DBA insurance and how to file claims; and Conduct periodic compliance reviews to determine that all employees are covered under the DBA coverage, including the audit of covered subcontractors and vendors. CM About the Authors OLGA WALL is the director of Grants and Contracts for International Relief and Development (IRD), a global NGO specializing in relief, stabilization, and development in nearly 40 countries around the developing world. Prior to working at IRD, she managed multiple USAID contracts for 15 years in over 20 different countries. KRISTA PAGES, ESQ., is a senior contracts specialist at IRD. Prior to joining IRD in 2009, she practiced law for over 20 years, specializing in government contracts and construction. The information provided in this article represents solely the views of the authors and should not be attributed in any way to IRD. Send comments about this article to cm@ncmahq.org. To discuss this article with your peers online, go to and click on Join Discussion. Endnotes U.S.C (2000). See Josua T. Gillelan II; Defense Base Act Coverage, Insurance, and Compliance Issues ; ABA Publication, Contractors on the Battlefield: Exploration of Unique Liability and Human Relations Issues (August 2004) U.S.C (2000); see also 33 U.S.C. 902(2) (2000) C.F.R (2003). Information about the benefits is provided on the U.S. Department of Labor website: www. dol.gov/esa/owcp/dlhwc/lscontac.htm. 6. Public work, for purposes of the second category of coverage, is defined broadly, essentially including construction, maintenance, or repair of any fixed improvement, but also service contracts, so long as they are for the public use of the United States or its allies ; see 42 U.S.C. 1651(b)(1) F.2d 170 (1980). 8. See 22 C.F.R. 226, USAID s codification of OMB Circular A-110, Appendix A, Contracts Provisions ; 42 U.S.C. 1651, et seq.; see also USAID ADS 302 Additional Help Document Guidelines for DBA Coverage for Direct and Host Country Contracts U.S.C 904(a) and 905(a) (2000). 10. See also, FAR 201, Definitions ( Contracts any binding legal relationship to furnish services which are paid for by the buyer) U.S.C. 902(2) (2000). 42 U.S.C. 1651(a)(6) (2000). 33 U.S.C. 902(2) (2000). 42 U.S.C U.S.C 930(a) (2000). 33 U.S.C. 914(a) (b) (2000). 17. Simpson v. Director, OWCP, 459 U.S (1983). 18. FAR (d). 19. Ibid., at (a). 20. Ibid. 21. Ibid. 22. Gillelan, see note Ibid U.S.C. 938 (2000). 33 U.S.C. 905(a) (2000). 33 U.S.C. 933(a) (2000). 33 U.S.C. 938(a) (2000). 42 U.S.C. 1651(c) (2000). 33 U.S.C. 904(a). 33 U.S.C. 904 and 905(a). 31. Gillelan, see note GAO Report, Defense Base Act Insurance: Review Needed of Cost and Implementation Issues (April 29, 2005). 33. Ibid., at Contract Management June 2010

DEFENSE BASE ACT WORKERS COMPENSATION FOR EMPLOYEES OF U.S. GOVERNMENT CONTRACTORS WORKING OVERSEAS

DEFENSE BASE ACT WORKERS COMPENSATION FOR EMPLOYEES OF U.S. GOVERNMENT CONTRACTORS WORKING OVERSEAS Federal law requires all U.S. government contractors and subcontractors to secure workers compensation