Fair Pay and Safe Workplaces Executive Order Imposes New Terms for Federal Contractors

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1 Fair Pay and Safe Workplaces Executive Order Imposes New Terms for Federal Contractors Executive Order Requires Federal Contractors to Report Adverse Labor and Employment Law Decisions, Provide Detailed Wage Statements to Employees, and Forgo Using Pre-Dispute Arbitration Agreements for Employment Discrimination and Sexual Assault Claims SUMMARY On July 31, 2014, President Obama issued an executive order, entitled Fair Pay and Safe Workplaces (the Order ), that imposes new terms under which the federal government will do business with certain contractors. 1 For new contracts over prescribed dollar amounts, the Order requires contractors to (i) disclose adverse labor and employment law decisions; (ii) provide detailed wage statements to employees; and, most significantly, (iii) agree not to require their employees and independent contractors to submit to pre-dispute arbitration agreements related to employment discrimination and sexual assault claims. These requirements likely will not come into effect until the issuance of final regulations after public comment, which the Obama administration estimates may not take place until The portion of the President s Order concerning arbitration is in tension with the Federal Arbitration Act ( FAA ), which embodies a strong congressional endorsement of arbitration. As the President issued the Order unilaterally, not through adoption of legislation, we expect the Order to be challenged in court, with government contractors arguing that it improperly contravenes the FAA without congressional sanction. New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijing Melbourne Sydney

2 BACKGROUND The Order continues President Obama s effort to use executive orders to advance his policy agenda. On February 12, 2014, President Obama issued an executive order requiring all companies that receive new federal contracts to raise the minimum wage for their workforce. On July 21, 2014, President Obama issued an executive order forbidding companies that contract with the federal government from discriminating on the basis of sexual orientation and gender identity. The Department of Labor estimates that there are approximately 24,000 businesses with federal contracts, employing around 28 million workers. NEW REQUIREMENTS IMPOSED ON FEDERAL CONTRACTORS AND SUBCONTRACTORS A. BAN ON PRE-DISPUTE ARBITRATION AGREEMENTS FOR TITLE VII AND RELATED CLAIMS Section 6 of the Order, entitled Complaint and Dispute Transparency, requires that for all contracts where the estimated value of the supplies acquired and services required exceeds $1 million, contractors must 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 ( Covered Claims ) may only be made with the voluntary consent of the employee or independent contractor after the dispute arises. 3 other words, the Order provides that federal government contractors with new contracts of more than $1 million may no longer require their employees or independent contractors to submit to pre-dispute arbitration clauses to the extent those clauses concern Covered Claims. Contractors must incorporate similar requirements into their contracts with subcontractors of supplies or services in excess of $1 million. Section 6 of the Order exempts contractors and subcontractors that have negotiated collective bargaining agreements with their employees from this requirement with respect to those existing agreements. In addition, arbitration agreements that pre-date the contractor s or subcontractor s bidding on a contract covered by the Order are exempt from the requirement, except in two circumstances: (i) if the arbitration agreement permits the contractor or subcontractor to change the terms of the contract with the employee or independent contractor, the exemption would no longer apply and the contracting entity must agree in the solicitation that it will not impose pre-dispute arbitration provisions for Covered Claims; or (ii) when the contract containing the arbitration provision is renegotiated or replaced, the revised or replaced contract may not provide for pre-dispute arbitration of Covered Claims. The Order does not define what is meant by a contract where the contractor may change the terms. A reasonable interpretation is that only those contracts as to which the contractor may unilaterally change the terms would need to be revised to remove pre-dispute arbitration clauses for Covered Claims, but that other contracts need not be revised until they are renegotiated or replaced. This provision of the Order In -2-

3 likely will be subject to comment and clarification in connection with the adoption of implementing regulations after public notice and comment. The White House Fact Sheet states that Section 6 is intended to give employees a day in court : The Executive Order directs companies with federal contracts of $1 million or more not to require their employees to enter into predispute arbitration agreements for disputes arising out of Title VII of the Civil Rights Act or from torts related to sexual assault or harassment (except when valid contracts already exist). This builds on a policy already passed by Congress and successfully implemented at the Department of Defense, the largest federal contract agency, and will help improve contractors compliance with labor laws. The policy already passed by Congress refers to the Franken Amendment, passed in the Defense Appropriations Act for Fiscal Year That law prohibits the Defense Department from using appropriated funds for any contract of more than $1 million unless the contractor agrees not to enter into an employment agreement with a pre-dispute arbitration requirement for claims arising under Title VII or out of any tort related to sexual assault or harassment, and also prohibits contractors from taking any action to enforce such a provision in an existing agreement. 4 Though the White House says the Order builds on this Defense Department arbitration rule, the Defense Department narrower rule was enacted by Congress and signed into law, while the Order s much broader arbitration rule is imposed by Executive fiat. As such, the Order stands on more tenuous legal ground if challenged as contrary to the FAA or other federal law. B. LABOR AND EMPLOYMENT LAWS REPORTING REQUIREMENT The Order imposes substantial new reporting requirements on federal contractors. For any new contracts valued at more than $500,000, 5 contractors must include in their solicitations representations regarding whether there has been any administrative merits determination, arbitral award or decision, or civil judgment rendered against the contractor in the preceding three-year period for violations of a broad list of labor and employment laws and executive orders. 6 ( 2(a)(i).) If the contractor discloses any such violations, it is entitled under the Order to inform the relevant agency s contracting officer of its efforts to correct the violations or to improve its compliance with the labor laws prior to the contract being awarded. ( 2(a)(ii).) Contractors also must represent in their solicitations that they have incorporated in each of their subcontracts valued at greater than $500,000 the requirement that the subcontractor make analogous disclosures to the contractor; before awarding a subcontract, the contractor must agree to determine whether a subcontractor is a responsible source that has a satisfactory record of integrity and business ethics. ( 2(a)(iv)-(v).) The government s contracting officers are required to take into account these disclosures in determining whether a contractor has a satisfactory record of integrity and business ethics before awarding a contract. ( 2(a)(iii).) -3-

4 Once an award is granted, a contractor will have an ongoing obligation to update its labor law compliance disclosures every six months during the performance of the contract. ( 2(b)(i).) Its subcontractors must do the same and provide the updated information to the contractor. 7 ( 2(a)(iv)(A).) If the contractor reports violations during the performance of the contract, or if the government s contracting officer obtains similar information through other sources, the agency is permitted under the Order to take remedial measures up to and including contract termination or referral to the agency official in charge of suspension and debarment. ( 2(b)(ii).) The Order directs the Administrator of General Services to develop a website to be used by contractors to submit their reporting requirements. ( 4(d).) C. PAYCHECK TRANSPARENCY The third new requirement, imposed upon federal contractors with contracts valued at more than $500,000, is paycheck transparency : for all employees performing work under the contract for whom the contractor is required to maintain wage records under the Fair Labor Standards Act (or other laws set forth in the Order), the contractor must provide a document, each pay period, that contains information concerning hours worked, overtime hours, pay, and any additions or deductions made from pay. 8 Contractors must incorporate this obligation into their subcontracts. For employees who are exempt from receiving overtime, hours worked need not be provided. The Order provides that a contractor s compliance with a substantially similar state or local requirement will suffice; the Secretary of Labor is tasked with identifying such substantially similar laws, presumably in its forthcoming guidance. We believe it likely that the New York Wage Theft Prevention Act will be found to be substantially similar for these purposes. IMPLEMENTATION AND ENFORCEMENT OF THE ORDER Section 3 sets out an extensive regime for implementing and enforcing the Order s labor compliance reporting requirements. Each agency must designate a senior agency official as a Labor Compliance Advisor. The Labor Compliance Advisors will, among other responsibilities, (i) work in consultation with contracting officers to assess contractors disclosed labor law violations, and to assess the extent such disclosures indicate the serious, repeated, willful, or pervasive nature of the violations; (ii) in consultation with the Department of Labor or other relevant enforcement agencies, provide assistance regarding actions to be taken in response to reported violations, including whether to award a contract and what remedial actions to take with regard to an already awarded contract; (iii) provide assistance to agency officials with regard to complaints alleging contractors labor law violations; and (iv) promote greater awareness of labor law requirements. Each Labor Compliance Advisor must publish an annual report that summarizes his or her agency s actions taken to promote greater labor compliance, including the agency s response to serious, repeated, willful, or pervasive violations of the identified labor laws. In short, the Labor Compliance Advisors are to have a central role in the regime the Order establishes to monitor and sanction federal contractors in connection with their labor law compliance reporting. -4-

5 The Federal Acquisition Regulatory ( FAR ) Council is tasked with issuing any final regulations, in accordance with a notice-and-comment process, that are necessary and appropriate to carry out the Order, and, in particular, to effect Sections 5 and 6, the paycheck transparency and arbitration provisions. ( 7.) With regard to the labor law compliance reporting requirements, the FAR Council must, in its final regulations, identify considerations for determining whether serious, repeated, willful, or pervasive violations of the covered labor laws demonstrate a lack of integrity or business ethics on the part of the contractor. ( 4(a).) The Order provides guiding principles for the FAR Council with respect to these considerations; for example, in most cases a single violation of law may not necessarily give rise to a determination of lack of responsibility. ( 4(a)(i).) The Order s implementing regulations will be amendments to the Federal Acquisition Regulations. The Department of Labor is required under the Order to issue guidance to define what each of an administrative merits determination, arbitral award or decision, or civil judgment means with respect to contractors reporting requirements. ( 2(a)(i).) In addition, the Secretary of Labor must develop guidance, in consultation with the agencies primarily responsible for enforcing each of the labor laws subject to the reporting requirements, to help agencies determine how to assess whether reported violations are serious, repeated, willful, or pervasive. ( 4(b).) The Order elaborates the form those standards should take and their meaning where no statutory standards already exist; for example, for determining whether a violation is pervasive in nature, [the Secretary of Labor s standard must consider] the number of violations of a requirement or the aggregate number of violations of requirements in relation to the size of the entity. ( 4(b)(i)(B)(4).) QUESTIONS CONCERNING THE AUTHORITY OF THE PRESIDENT TO ISSUE THE ORDER As authority for its issuance, the Order cites 40 U.S.C. 121, which allows the President to issue policies and directives that he considers necessary to carry out the federal procurement subtitle of the U.S. Code. To that end, the Order notes that it seeks to increase efficiency and cost savings in the work performed by parties who contract with the Federal Government by ensuring that they understand and comply with labor laws. ( 1.) -5-

6 The effect of the arbitration provision of the Order is to limit severely the application of the FAA to contractors. The Supreme Court has repeatedly held that the FAA represents a strong congressional endorsement of arbitration and that the FAA requires enforcement of agreements to arbitrate claims, including federal statutory claims, unless there has been a congressional command to the contrary, see CompuCredit Corp. v. Greenwood, 132 S. Ct. 665, 669 (2012). Consistent with this established law, the Defense Department limitations on contractors ability to arbitrate claims were enacted by Congress. As such, we expect there to be substantial challenges to the President s action, which has significantly broader application than the Defense Department action yet lacks Congress s imprimatur. * * * Copyright Sullivan & Cromwell LLP

7 ENDNOTES The Order is available at The White House Office of the Press Secretary s corresponding Fact Sheet (the White House Fact Sheet ) states that the White House expects the Order to be implemented on new contracts in stages during The White House Fact Sheet is available at Section 6 exempts from the ban contractors and subcontractors whose contracts relate to the acquisition of commercial items or commercially available off-the-shelf items. ( 6(b).) Specifically, Department of Defense ( DoD ) regulation prohibits the Defense Department from using funds appropriated or otherwise made available by the Fiscal Year 2010 Defense Appropriations Act (Pub. L ) or subsequent DoD appropriations acts for any contract... in excess of $1 million, unless the contractor agrees not to... Enter into any agreement with any of its employees or independent contractors that requires, as a condition of employment, that the employee or independent contractor agree to resolve through arbitration (i) Any claim under title VII of the Civil Rights Act of 1964; or (ii) Any tort related to or arising out of sexual assault or harassment, including assault and battery, intentional infliction of emotional distress, false imprisonment, or negligent hiring, supervision, or retention ; or take any action to enforce any such provision of an existing agreement. The Order exempts subcontracts for commercially available off-the-shelf items from the reporting requirements. ( 2(a)(iv).) The labor laws and Executive Orders for which violations must be disclosed are: the Fair Labor Standards Act; the Occupational Safety and Health Act of 1970; the Migrant and Seasonable Agricultural Worker Protection Act; the National Labor Relations Act; 40 U.S.C. chapter 31, subchapter IV, also known as the David-Bacon Act; 41 U.S.C. chapter 67, also known as the Service Contract Act; Executive Order of September 24, 1965 (Equal Employment Opportunity); Section 503 of the Rehabilitation Act of 1973; 38 U.S.C. 3696, 3698, 4214, , also known as the Vietnam Era Veterans Readjustment Assistance Act of 1974; the Family and Medical Leave Act; title VII of the Civil Rights Act of 1964; the Americans with Disabilities Act of 1990; the Age Discrimination in Employment Act of 1967; Executive Order of February 12, 2014 (Establishing a Minimum Wage for Contractors); or equivalent State laws, as defined in guidance issued by the Department of Labor. The Order directs contractors to consider whether action is necessary in response to a subcontractor s report of labor law violations. ( 2(a)(iii).) It then directs contracting officers, Labor Compliance Advisors (see discussion infra) and the Department of Labor to make themselves available for consultation with contractors to assist in evaluating the information on labor compliance submitted by subcontractors. ( 2(a)(vi).) If the contractor treats certain individuals who perform work under the contract as independent contractors, it must provide those persons a document informing them of this status. -7-

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