On March 19, 2010, the U.S. Department of Labor ("DOL") published in the Federal Register a notice of proposed rulemaking to implement President Obama's January 30, 2009 Executive Order 13,495, "Nondisplacement of Qualified Workers Under Service Contracts." 75 Fed.Reg. 13381. In accordance with the Executive Order, companies taking over an incumbent U.S. government service contract must offer a right of first refusal to qualified employees that have been providing the same or similar services under the incumbent contract. This same procedure was in place during the Clinton administration but was dropped when President George W. Bush came into office. Comments on the proposed regulation were due by May 18, 2010.

The DOL's proposed regulation contains the following elements:

  • A mandatory clause will be included in covered service solicitations and contracts.
  • The Order applies to federal service contracts over $100,000, but the heads of contracting activities are authorized to exempt contracts, subcontracts or purchase orders if they find that applying the Executive Order would impair the government's ability to obtain services on an economical and efficient basis.
  • A successor contractor and its subcontractors must make an express offer of employment (in English or another language if a "significant portion" of workers are not fluent in English) to each employee of the incumbent contractor and must state the time within which the employee must accept such offer, which time period must be at least 10 days.
  • The agency contracting officer ("C.O.") must provide the predecessor contractor's list of employees to the successor contractor and, on request, to employees or their representatives.
  • A successor contractor or subcontractor cannot fill any employment openings under the contract prior to making good faith offers of employment, in positions for which the employees are qualified, to those employees employed under the predecessor contract whose employment will be terminated as a result of award of the contract or the expiration of the contract under which the employees were hired.
  • A successor contractor or subcontractor is allowed to determine the number of employees necessary for efficient performance of the contract and, for bona fide staffing or work assignment reasons, to elect to employ fewer employees than the predecessor contractor employed in performance of the work. Upon making that determination, the contractor must offer employment only to the number of eligible employees the successor believes necessary to meet its anticipated staffing pattern. If the successor contractor does not offer employment to all the predecessor contract employees, the obligation to offer employment would continue for three months after the successor contractor's first date of performance on the contract.
  • A successor contractor or subcontractor must maintain records related to its compliance with the Executive Order, including copies of any written offers of employment or contemporaneous written record of any oral offers of employment, including the date, location and attendance roster of any employee meeting(s) at which the offers were extended, a summary of each meeting, a copy of any written notice that may have been distributed, the names of the employees from the predecessor contract to whom an offer was made, any written record that forms the basis for any exclusion or exemption claimed under the regulations, the employee list provided to the contracting agency and the employee list received from the contracting agency.
  • Contracting agencies may conduct initial reviews of any complaints they receive about noncompliance, and former employees or employee representatives may also file complaints with the C.O. within 120 days of an alleged violation.
  • Complaints may also be filed directly with the DOL's Wage and Hour Division no later than 180 days after an alleged violation.
  • C.O.s must forward to the DOL any complaints that contractors have failed to comply with the Executive Order.
  • The DOL may prescribe appropriate remedies, including, but not limited to, debarment, and also may require the contractor to offer employment to employees from the predecessor contract, in positions for which they are qualified, and to pay lost wages to those employees.
  • If the DOL determines that monetary relief is due, the DOL can direct that the accrued payments on either the affected contract or any other contract the company has with the government be withheld in order to ensure payment.
  • The DOL's order will become final and will not be appealable in any administrative or judicial proceeding unless the contractor files a request for a hearing within 20 days or, where relevant facts are not in dispute, a petition for review is filed within 20 days with the Administrative Review Board.

Within the past year, we have encountered with increasing frequency situations where contracting agencies made their own determination that the Service Contract Act ("SCA") was not applicable to a particular solicitation and contract, even though the required work entailed the use of service employees. These situations have occurred primarily when the contract involves the services of professionals, such as persons employed in medical or IT-related positions. Apparently, the agencies concluded that the SCA was not applicable based on their belief that the service employees were exempt from the SCA's minimum wage and fringe benefit requirements pursuant to Part 541 of the DOL's SCA regulations. For the most part, however, contracting agencies do not have the information necessary to make that judgment call.

The SCA regulations at 29 C.F.R. Part 541 describe the criteria that must be satisfied in order for persons employed in an executive, professional or administrative capacity to qualify for exempt status. In addition to the specific duties and responsibilities requirements, exempt employees must be paid on a salary or fee basis and not on an hourly basis. An exception to this general rule is made at § 541.400 for "computer employees," such as systems analysts, computer programmers and software engineers, who may qualify for exempt status if they are paid an hourly rate of not less than $27.63. Generally speaking, contracting agencies do not know how a contractor's personnel will be paid and, thus, cannot determine whether all personnel to be furnished under a particular services contract will be exempt from the SCA's requirements. For example, a C.O. may assume that a licensed practical nurse qualifies as an exempt professional, but, in reality, many individuals employed in these positions are paid an hourly wage.

Whenever you receive a solicitation or proposed subcontract to provide services using service employees, you should ensure that the applicable SCA clauses and DOL wage determination ("WD") are incorporated. If they are not, you should inquire as to why the SCA clauses and WD are not included in the solicitation or proposed subcontract and, if you believe there exists any possibility that the SCA will apply to any employees that will work on the contract, you should request in writing that the applicable clauses and WDs be included or that the DOL be consulted regarding the applicability of the SCA to a particular requirement. Failure to comply with the SCA's minimum wage and fringe benefit requirements—even if it is the result of an agency's or prime contractor's failure or refusal to incorporate the SCA and WD in your contract/subcontract—may cause serious hassles and liability down the road. It only takes a complaint from one employee to the DOL that he or she is not being paid in accordance with the SCA to initiate a DOL investigation, which will involve the collection and submission of payroll records and other documentation to the DOL auditor as well as numerous calls and written communications with the auditor. The investigation may result in an order to pay retroactive wage underpayments to the affected employees, and, depending on the number of employees involved, the amount can be substantial. While you should be able to obtain reimbursement from the agency if the non-compliance was due to the agency's failure to incorporate the SCA clauses and WD in the contract, that process will inevitably take time and effort to complete.

The DOL has hired up to 30 additional auditors and is ramping up its investigations of contractor compliance with the SCA. Therefore, it behooves contractors to ensure that the SCA clauses and applicable WDs are incorporated in those contracts and subcontracts that they know or reasonably believe are subject to the SCA, and to pay their non-exempt employees at least the minimum SCA wages and fringe benefits. Even if the contractor concludes that most of its employees qualify for exempt status, which is the contractor's determination to make, the SCA clause would be self-deleting and would have no impact on the company's contractual obligations. In other words, it's better to be safe than sorry.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.