AMERICAN BAR ASSOCIATION Government Contracts Subcommittee Report

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1 AMERICAN BAR ASSOCIATION LABOR AND EMPLOYMENT SECTION FAIR LABOR STANDARDS LEGISLATION COMMITTEE 2011 Government Contracts Subcommittee Report Terry R. Yellig, Chair Daniel B. Abrahams Gilbert J. Ginsburg Shlomo Katz

2 I. EXECUTIVE ORDERS THAT AFFECT GOVERNMENT CONTRACTING President Obama issued several Executive Orders in 2009 concerning employees of government contractors. A. DOL Issues Proposed Rules to Implement E.O , Nondisplacement of Qualified Workers under Service Contracts. On January 30, 2009, President Obama signed Executive Order No , entitled "The Non-Displacement of Qualified Workers under Service Contracts," 74 Fed. Reg. 6,103 (Feb. 4, 2009). The Executive Order establishes a general policy that service contracts and solicitations for such contracts shall include a clause that requires the contractor, and its subcontractors, under a government contract that succeeds a contract for performance of the same or similar services at the same location, to offer those employees employed under the predecessor contract whose employment will be terminated as a result of the award of the successor contract, a right of first refusal of employment under the contract in positions for which they are qualified. Executive Order No directs the Secretary of Labor, in consultation with the Federal Acquisition Regulatory Council ("FAR Council"), to issue implementing regulations, within 180 days after it was issued. The Executive Order also directs the FAR Council to issue regulations to provide for inclusion of the contract clause in Federal solicitations and contracts subject to the Order, within 180 days after it was issued. Finally, almost 14 months after the Executive Order was signed, DOL issued proposed rules to implement the Order. 75 Fed. Reg (Mar. 19,2010). Since both Executive Order No and Executive Order No , which was issued during the Clinton Administration, establish a Federal policy for successor contractors to offer employment in most cases to the employees on the predecessor

3 contract when the new contract award would otherwise displace those workers, the preamble of the proposed rules states that they are largely based on similar rules issued under the Clinton Order. However, DOL proposes to change the format of the regulation from questions and answers to the more common format of a descriptive section title. In addition, DOL proposes a number of minor modifications to the enforcement and administrative procedures contained in the rule to clarify the responsibilities of various Federal officials as compared to the prior rule. DOL received 38 comments before the closing date of May 18,2010, and it is currently reviewing those comments. A. DOL and FAR Council Issue Rules to Implement E.O , Notification of Employee Rights Under Federal Labor Laws. On January 30, 2009, President Obama also signed Executive Order No , entitled "Notification of Employee Rights under Federal Labor Laws," 74 Fed. Reg. 6,107 (Feb. 4, 2009). The Executive Order requires nonexempt Federal departments and agencies to include within their government contracts specific provisions requiring contractors and subcontractors with whom they do business to post notices informing their employees of their rights as employees under Federal labor laws. Under the Executive Order, unless a specified exception or exemption applies, Federal departments and agencies must include the required contract provisions in every government contract. The Executive Order directs the Secretary of Labor to issue regulations within 180 days of the date of the Order that prescribe the size, form, and content of the Notice that must be posted by a contractor under paragraph 1 of the contract clause described in section 2 of the Order. Pursuant to the President's mandate, DOL issued a final rule in May 2010 implementing the Executive Order with an 2

4 effective date of June 21, Fed. Reg (May 20, 2010). DOL's final rule establishes standards and procedures for the implementation and enforcement of Executive Order Subpart A of the rule sets out definitions, the prescribed requirements for the size, form and content of the employee notice, exceptions for certain types of contracts, and exemptions that may be applicable to contracting departments and agencies with respect to a particular contract or subcontract or class of contracts or subcontracts. Subpart B of the rule sets out standards and procedures related to complaint procedures, compliance evaluations, and enforcement of the rule. Subpart C sets out other standards and procedures related to certain ancillary matters. Also, pursuant to the mandate in Executive Order No , the FAR Council issued an interim rule on December 13, 2010 amending the Federal Acquisition Regulation (FAR) to implement the Executive Order. 75 Fed. Reg (Dec. 13,2010). The FAR Council's interim rule creates a new FAR subpart and contract clause (FAR ) entitled "Notification of Employee Rights under the National Labor Relations Act." The interim rule also revises the FAR clauses relating to commercial item acquisitions (FAR , "Contract Terms and Conditions Required to Implement Statutes or Executive Orders Commercial Items," and FAR , "Subcontracts for Commercial Items) to require that the new FAR clause be included in commercial item contracts. II. THE SERVICE CONTRACT ACT ("SCA") A. Increase in Health and Welfare ("H& W") Rates For SCA-covered contracts awarded on or after June 22, note that this is a change from the usual June 1 effective date -- the new per employee (socalled "low-level") H&W benefit rate is $3.50 per hour, $140 per week or $ per month. All Agency Memorandum ("AAM") No. 209, June 9, See 3

5 The average cost fringe benefit rate (socalled "high level") was also increased to $3.50 per hour. While the dollar amounts of the low- and high-level benefits are the same, the method of compliance remains different. Specifically, the low-level benefit applies on an employee-by-employee basis for hours paid for up to 40 hours per week, whereas compliance with the high-level benefit is determined based on the contractor's average fringe benefit cost for hours actually worked by all employees on the contract, including overtime, but not leave time. (Contractors should take note that the new benefit levels are not self-executing. Rather, they apply to a particular contract only if and when the contracting officer modifies the contract to require the new levels. Typically, this occurs when an option is exercised.) B. New "Price Adjustment Calculation Tool" ("PACT") on Wage Determinations Online Website During 2010, the Wage Determinations Online website ( -- a collaborative effort of the Office of Management and Budget, Department of Labor ("DOL"), Department of Defense, General Services Administration, Department of Energy ("DOE"), and Department of Commerce), unveiled PACT, an automated method of accurately calculating SCA price adjustments that is "specifically designed to streamline the price adjustment process and timeline." It consists of a format for contractors to submit their price adjustment proposals and a Government component that calculates and helps contract specialists to analyze the proposals for accuracy, allowability and consistency. According to the website, the essence of PACT is "an excel spreadsheet with specifically embedded formulas used to calculate the correct amount of SCA price adjustment under the principals of [Federal Acquisition Regulation ("FAR")] /44, 32 Fair Labor Standards Act and Service 4

6 Contract Act Price Adjustment" (the "FLSAJSCA Price Adjustment clause"). More information may be found at C. The Wage and Hour Division Issues an Updated Version of the SCA Chapter in Its Field Operations Handbook. DOL's Wage and Hour Division (WHD) posts on its website ( several chapters of its Field Operations Handbook ("FOH"), which is an operations manual that provides WHD investigators and staff with interpretations of statutory provisions, procedures for conducting investigations, and general administrative guidance. The FOH was developed by the WHD under the general authority to administer laws that the agency is charged with enforcing. The FOH reflects policies established through changes in legislation, regulations, court decisions, and the decisions and opinions of the WHD Administrator. However, the FOH is not used as a device for establishing interpretative policy. WHD updates its FOH to correspond to changes in the legislation, regulations, policies and procedures that it administers and enforces. In 2010, WHD issued updates to several chapters of its FOH, including Chapter 14 (SCA), which includes two new sections: FOH 14d09 that explains application of SCA to contracts for disaster relief; and FOH 14h that explains the SCA wage determination and wage conformance process. Although FOH 14h is a new section, there is nothing new in the process for determining prevailing wage rates and benefits under the SCA. 2. Energy Secretary Announces Contractor Pay Freeze Secretary of Energy Stephen Chu wrote in a "Dear Colleagues" on December 17,2010: President Obama proposed a two-year pay freeze for all civilian federal workers, which is predicted to save $2 billion for the remainder offy 2011 and $28 billion over the next five years. It's in 5

7 the same spirit of shared sacrifice that I am implementing a similar freeze on salary and bonus pool increases for site and facility management contractor employees, who run day-to-day operations at certain Department of Energy sites and facilities, including national laboratories, and do a great service for the country. Secretary Chu's announcement does not appear to address SCA requirements for periodic adjustments to wages and benefits, nor is it clear whether DOE contracting officers will now be denying price adjustments to which contractors are entitled under the FAR FLSAISCA Price Adjustment Clause. E. Judicial and Administrative Decisions 1. K-MAR Indus. Inc. v. United States, 91 Fed. CI. 20 (2010) The incumbent contractor protested the U.S. Army's award of a successor fixed-price service contract to the lowest bidder contending that the agency should not have given the low bidder's staffing plan a "technically acceptable" rating in violation of its own criteria and the Administrative Procedures Act, because it improperly classified six of the eight technical positions as exempt from the SCA. The court dismissed the incumbent contractor's case holding that in a procurement for a fixed-price contract, unlike a cost-type contract, the agency is not required to question the offer's compliance with the SCA unless there is an "indication on the face of an offer that the offeror does not intend to pay SCA mandated wage rates." The court held that there was no indication in the offeror's proposal that it did not intend to be bound by the SCA. The court explained that the offeror is required to compensate its employees in accordance with the SCA notwithstanding its belief that they are exempt. Thus, inasmuch as the offeror bears the risk of loss in a fixedprice contract if its offer turns out to be below cost due to incorrect labor classifications or wage rates, the court held that the Army did not violate its own evaluation criteria or the law when it evaluated the offeror's proposal. 6

8 2. Crassociates, Inc. v. United States and Spectrum Healthcare Resources, Inc., No C, 2010 U.S. Claims LEXIS 816 (Fed. Cl. Oct. 4,2010) Plaintiff, the incumbent contractor, and the contract winner were the only bidders for the contract to provide community health care services to military personnel and their dependents. Plaintiff filed numerous post-award bid protests challenging the award process and finally filed suit challenging the award. The RFP directed the contracting officer to use a "technical-cost Trade-off process to determine best value to the Government. In addition, the RFP incorporated the clause found in FAR , Evaluation of Compensation for Professional Employees, which required the Army to evaluate professional compensation to ensure that it was not "unrealistically low or not in a reasonable relationship to the various job categories, so as to attract and retain competent professional employees." The clause is designed to afford professional services employees protections mirroring those afforded other workers under the SCA. The court concluded that the range and depth of the errors committed during the procurement were such that prejudice was shown and that plaintiff had also shown that but for those errors, there was a substantial chance that plaintiff would have been awarded the contract. Specifically, given the nature of the services being rendered under the contract, the Army's failure to conduct the analysis required under 's professional services clause, standing alone, likely was sufficient to demonstrate prejudice of the type and magnitude for which relief was proper because that error affected not only the Anny's price evaluation but the final consideration of weaknesses and ratings that should have been associated with the technical evaluation of the compensation plans as well. It also held that 7

9 the Anny had erred in its technical evaluation in a manner that led to unequal treatment of the bidders and unfairly benefited the winner. 3. Shawview Cleaners LLC, B.C.A. (CCH) ~ 34,550 (ASBCA Sept. 15,2010) An SCA contractor sought reimbursement from the Army and Air Force Exchange Service ("AAFES") claiming that AAFES personnel fraudulently induced it to enter into a government contract for laundry, alterations and dry cleaning services by misrepresenting that the SCA wage determination in the contract was merely a guideline and not a mandatory contract requirement. The Armed Services Board of Contract Appeals ("ASBCA") rejected the contractor's claim holding that the contract clearly stated that the SCA requires payment of minimum prevailing locality wage rates on government service contracts and that even a contracting officer does not have the authority to wave requirements imposed by statute unless the statute so provides. 4. Fredy Bowers aka F & B Enters., Case No SCA-16 (DOL OALJ, July 12,2010) The undisputed facts established that the contractor violated the provisions of the SCA and its regulations in its contract for mail hauling services when it failed to pay its employees the proper hourly wage, fringe benefits, and holiday pay specified in the contract, failed to provide required notices and maintain accurate records, and that the contractor was subject to debarment from receiving further federal contracts for three years unless DOL recommended otherwise because of unusual circumstances. The DOL ALJ held that the contractor failed to establish unusual circumstances under the SCA regulations that would justify relief from debarment. The ALJ concluded that even though some factors weighed in favor of relieving the contractor from debarment, the contractor's long history of 8

10 performing government contracts belied his claims that he was unaware of his obligations. In addition, his initial outright refusal to correct non-compliance with his obligation to provide fringe benefits to his part-time and temporary employees rendered hollow his subsequent promises to cooperate and comply. 5. HHMT, Inc., Case No SCA-27 (DOL OALJ, Aug. 4, 2010) A WHD investigation established that the mail haul contractor violated the SeA by paying team drivers only for the hours they actually spent driving rather than for all hours worked. The ALJ found that the contractor and an individual shareholder who founded the company were liable for substantial back wages for performance of work on four separate mail hauling contracts and should be debarred from receiving federal contracts for three years inasmuch as no evidence was presented to rebut the presumption of debarment. The ALJ also held that the individual shareholder had de facto control of the company and, therefore, was the "party responsible" even though he is not an officer and, therefore, is personally subject to debarment. III. THE DAVIS-BACON ACT ("DBA") AND RELATED ACTS A. Applicability of the DBA to Work Funded by the American Recovery and Reinvestment Act ("ARRA" or "Recovery Act") 1. All Agency Memorandum No. 208 On May 5, 2010, DOL issued AAM No. 208 to provide general guidance to governmental and other entities concerning the applicability of the Davis-Bacon labor standards in the American Recovery and Reinvestment Act of 2009 ("ARRA") to projects financed with the proceeds of five specific tax-favored bonds listed in section 1601 of Division B of ARRA. AAM No. 208 also highlights the responsibilities of state and local governments, contractors, and 9

11 others for implementation of, and compliance with, the Davis-Bacon labor standards in ARRA in connection with projects financed with the proceeds from the sale of the tax-favored bonds. 2. DOL Letter to Department of Energy dated January 5, 2010 WHD advised the DOE in a guidance letter dated January 5, 2010 that the Davis-Bacon labor standards provisions in ARRA do not apply to individual homeowners who receive rebates, grants, loans and other benefits under DOE's State Energy Program ("SEP") program and similar programs for material and/or labor costs incurred in connection with qualifying energy efficiency and weatherization improvements to their homes, because they do not qualify as "recipients" or "subrecipients" under the regulations issued by the Office of Management and Budget ("OMB") in 2 C.F.R The Wage and Hour Division Issues an Updated Version of the DBA Chapter in Its Field Operations Handbook. WHD also updated the chapter in its FOH pertaining to the DBA, which is Chapter 15. The changes in Chapter 15 of the FOH include: FOH 15b04 Site of work - This section was updated in view of changes in the 2000 Final Rule. This section also covers revisions to the FAR that address the issue of secondary sites that may be considered to be within the regulatory definition of "site of the work" and advises contracting agencies to consult WHD when confronted with "site of the work" issues. FOH 15cOO(b)(6) Updated section that lists authorizing statutes under which DBRA does not apply. 10

12 FOH 15dOO Added new section on Davis-Bacon (DB) coverage under ARRA. FOH 15d04 Added new section on DB coverage on disaster relief contracts. FOH 15d07 Added new section that discusses application of DB to military housing privatization. FOH 15d09(b) Removed confusing example regarding application of DB in public utility installation. FOH 15e04 Added section addressing interaction of DB and statutes that establish Federal youth and student programs. FOH 15e15 Discusses DB and Reg. 541 provisions including situations and 15f06 involving individuals who have 20% ownership interest. FOH 15f02 New section that explains the categories of wage determinations. FOH 15f05 New section that explains the process of conducting full and limited area practice surveys. B. Judicial and Administrative Decisions 1. United States ex rei. Wall v. Circle C Construction, LLC, 700 F. Supp. 2d 926 (M.D. Tenn. 2010) DOL's exclusive jurisdiction over DBA enforcement does not preclude an action brought under the False Claims Act ("FCA") where the prime contractor failed to flow down DBA requirements to a subcontractor. The prime contractor's payment requests were false because the prime was not complying with the contract; thus, the court granted summary judgment to the Government under the FCA. 11

13 In addition, the Government was entitled to summary judgment on its claim of "unjust enrichment" since the contractor was paid money it would not have been paid had the Government known the contractor was not complying with the DBA. Notably, the $1.66 million judgment, which included treble damages, was almost as much as the value of the contract from which it arose, i.e., a $1.9 million contract to perform construction work on buildings at Fort Campbell in Kentucky and Tennessee. 2. Eldred v. Comforce Corp., No (LEKlDEP), 2010 U.S. Dist. LEXIS (N.D. N.Y. Mar. 2, 2010) Current and past employees of the defendant corporation were employed to install telecommunication equipment. They alleged that they were often assigned to jobsites, many of which were partially funded by state and/or federal funds, which required travel and overnight out-of-town stays and were not compensated in accordance with state and federal law, including the DBA. They asserted claims, among many others, for violation of the DBA and New York Labor Law, as well as unjust enrichment and breach of contract as third-party beneficiaries to the public contracts. The court rejected the DBA claim because there is no private right of action under the Act. As to the third-party beneficiary and unjust enrichment claims, the court held that use of state law remedies to recover wages on federally funded projects covered by the DBA and related acts is precluded. Grochowski v. Phoenix Constr., 318 F.3d 80, 86 (2d Cir. 2003). ("To allow a thirdparty private contract action aimed at enforcing wage schedules [in a federally funded project] would be inconsistent with the underlying purpose of the legislative scheme and would interfere with the implementation of that scheme to the same extent as would a cause of action directly under the statute.") (internal quotations omitted). On the other hand, the court allowed plaintiffs' third-party 12

14 beneficiary and unjust enrichment claims that related to state-funded public contracts, which arose no earlier than six years prior to the date on which the case was filed (statute of limitations applicable to New York Labor Law claims), to proceed. Sobczak v. A WL Indus., Inc., 540 F. Supp. 2d 354, 360 (E.D.N.Y. 2007) ("to the extent that plaintiffs' claims arise under state funded contracts, to which state prevailing wage standards apply, Grochowski has no application"). 3. Abundant Faith Ministry v. Illinois Dep't of Labor, No ,2010 U.S. Dist. LEXIS (C.D. Ill. Sept. 13,2010) A non-profit corporation, which was engaged in the construction of a federally-funded project that consisted of a planned unit development, independent living facility, and a supportive living facility, sought a declaration that the Illinois DOL has no authority to investigate its project for compliance with the Illinois prevailing wage act because the DBA applies. The court dismissed the corporation's claims because they were barred by the Eleventh Amendment, which bars federal courts from hearing claims for equitable relief to require state officials to comply with state law. The court explained that although federal courts have jurisdiction to grant prospective declaratory and injunctive relief to require state officials to comply with federal law there was no allegation in the complaint that the State was violating federal law since federal law allows state officials to regulate projects subject to the DBA. Frank Bros., Inc. v. Wisconsin Dept. of Transp., 409 F.3d 880, (7th Cir. 2005) (The DBA sets minimum wage rates for federally-funded projects, but states may require higher wage rates or impose other regulatory requirements that complement the DBA). 13

ARMED SERVICES BOARD OF CONTRACT APPEALS

ARMED SERVICES BOARD OF CONTRACT APPEALS Appeal of -- ) ) Thomas & Sons Building Contractors, Inc. ) ASBCA No. 51590 ) Under Contract No. N62472-90-C-0410 ) APPEARANCE FOR THE APPELLANT: Mr. James H. Thomas