WHD Issues Final Rule Implementing Requirement that Service Contract Employees Be Given Right of First Refusal

The Department of Labor’s Wage and Hour Division (WHD) has issued its final rule (pdf) implementing Executive Order 13495, Nondisplacement of Qualified Workers Under Service Contracts, signed by President Obama on January 30, 2009. This Order requires that any federal service contracts covered by the Service Contract Act (SCA) above the simplified acquisition threshold (currently $150,000) and solicitations for such contracts include a clause requiring contractors and their subcontractors to offer existing employees the right of first refusal to take positions for which they are qualified under the new contract. The right of first refusal clause does not apply to managerial or supervisory employees. Any new contractor cannot advertise employment openings until the right of first refusal has been exercised by the existing employees. Unlike a similar Executive Order issued by former President Clinton, there are no exemptions for the U.S. Postal Service, NASA, military, and Veterans Administration. Contractors found in violation of the Order and its implementing regulations could be barred from future federal contracts for up to three years. The effective date of this rule will be published in the Federal Register once the Federal Acquisition Regulatory Council (FARC) issues its own regulations on this Executive Order.

The final rule adopts much of the language contained in the proposed rule, issued in March 2011. The following highlights some of the changes that were incorporated into the final rule:

Definitions

The WHD proposed to define “managerial or supervisory employee” to mean a person engaged in the performance of services under the contract who is employed in a bona fide executive, administrative, or professional capacity, as those terms are defined under the Fair Labor Standards Act (FLSA). Although the WHD received comments suggesting that the definition should be aligned with the one provided under the National Labor Relations Act (NLRA) and interpreted by National Labor Relations Board case law, the WHD retained its FLSA-established definition, which it contends “supports and clarifies the policy statement in the Executive Order, which affords the right to an offer of employment to those service employees who are not managerial or supervisory employees.”

The proposed rule defined “same or similar service,” in relevant part, to mean a service that is either identical to or has characteristics that are alike in substance and essential to another service. The final rule’s definition deviates from that of the proposed rule “to avoid inconsistency with the Executive Order.” According to the WHD, the earlier definition “could have resulted in the exclusion of some ‘similar’ services in contravention of the Order.” Therefore, the final definition of “same or similar service” is revised to mean “a service that is either identical to or has characteristics that are alike in substance to a service performed at the same location on a contract that is being replaced by the Federal Government or a contractor on a Federal service contract.”

Contract Exemptions

The final rule authorizes the head of a contracting department or agency to exempt any of its contracts from the current Order if the agency finds that the requirements “would not serve the purposes of the Order or would impair the federal government’s ability to procure services economically and efficiently.” The proposed rule stated that when an agency exercises its exemption authority, it is required to notify “affected workers in writing of the finding and decision no later than the award date” either in an individual notice given to each worker or through a posting at the location where the work is performed. The notification would need to include facts supporting the decision. Taking a number of comments into consideration, the WHD has decided to adopt this proposal with certain changes. First, the final rule includes language stating that the obligation to provide the notice should rest with the contractor, and not the contracting agency. Specifically, the final rule specifies that the “contracting agency shall ensure that the predecessor contractor notify affected workers and their collective bargaining representatives in writing of its determination no later than five business days after the solicitation date.”

Another section of the proposed rule provided that when exercising the authority to exempt contracts, the agency would be required to prepare a written analysis supporting its decision. In response to a number of comments about such an analysis, the final rule includes language addressing the framework and factors that should/should not be taken into consideration in conducting such an analysis, as well as a provision clarifying that the failure to properly make such a written analysis shall render the exemption inoperative.

Employee Notification

As for informing service employees of their rights under the Executive Order, the WHD agrees with several commenters that this obligation “should rest with the contractor, and not the contracting agency.” To that end, a provision in the final rule reflects that the “Contracting Officer will ensure that the predecessor contractor provide written notice to service employees of the predecessor contractor of their possible right to an offer of employment” and that “Contracting Officers may advise contractors to provide the notice set forth in Appendix B..” According to the WHD, such language is consistent with existing contractor notice obligations under the SCA. Such notice must be provided in languages other than English, if appropriate, and may be made electronically. To be effective, such electronic notice “must result in an electronic delivery receipt or some other reliable confirmation that the intended recipient received the notice. Any particular determination of the adequacy of a notification, regardless of the method used, must be fact-dependent and made on a case-by-case basis.”

Contractor Obligations

As for contractor obligations under the Executive Order, the final rule adopts without much change the language set forth in the proposal regarding a contractor’s general obligation to offer employment to existing service employees, the method of providing the job offer, exceptions to these requirements, permitted staffing reductions, obligations near the end of the contract, recordkeeping requirements, and obligations to cooperate with reviews and investigations. After considering comments to this section, the WHD has agreed to include language in the final rule stating that “a successor contractor may apply employment screening processes (i.e., drug tests, background checks, security clearance checks, and similar pre-employment screening mechanisms) only when such processes are provided for by the contracting agency, are conditions of the service contract, and (in addition to being otherwise consistent with applicable Federal and state law) are consistent with the Executive Order.” A successor contractor may not, however, impose its own hiring standards (such as college degree requirements for particular positions) in making determinations regarding whether an employee of a predecessor contactor is qualified.

The final rule also adopts the proposal’s timeframe stipulating that the successor contractor’s obligation would end when all of the predecessor contract employees have received a bona fide job offer or the 90-day obligation period expires. “Ninety days was selected as a reasonable period for continuing to impose an obligation to offer a right of first refusal in order to ensure that any necessary staffing adjustments during the start-up period would be covered while at the same time discouraging attempts to manipulate the starting workforce.”

As for the requirement that predecessor contractor furnish the Contracting Officer with a certified seniority list of employees before the contract ends, the final rule modifies the timeframe to require that this list be provided not less than 30 days before completion of the contract. If changes are made to the workforce after the list is provided, an updated list must be given to the Contracting Officer not less than 10 days before completion of the contract.

Hiring Exceptions

The Order sets forth a number of exceptions to the right of first refusal requirement. These exemptions and changes to the final rule include the following:

  • A contractor or subcontractor is not required to offer employment to any employee of the predecessor who will be retained by the predecessor contractor.
  • A successor contractor or subcontractor is not required to hire an employee who has worked for the successor contractor or subcontractor for fewer than 3 months immediately preceding the commencement of performance under the contract.
  • The contractor or subcontractor would not be required to offer employment to any employee of the predecessor contractor who is not a service employee. According to the WHD, this exception would typically apply to a person who is a managerial or supervisory employee on the predecessor contract.
  • A contractor or subcontractor would not be required to offer employment to any employee of the predecessor contractor whom the contractor or any of its subcontractors reasonably believes, based on the particular employee’s past performance, has failed to perform suitably on the job. As discussed in the final rule, “a successor contractor could demonstrate its reasonable belief that the employee in fact failed to perform suitably on the predecessor contract through evidence of disciplinary action taken for poor performance or evidence directly from the contracting agency that the particular employee did not perform suitably,” or from performance appraisal information. The predecessor contractor, however, is not required to provide performance information. The WHD notes that “information regarding the general performance of the predecessor contractor would not be sufficient for purposes of this exemption.” Moreover, the final rule requires a successor contractor to support its belief that an employee has exhibited unsuitable job performance “with written credible evidence provided by a knowledgeable source to enhance the reliability of such evidence. The final rule, however, does not require that such written evidence be contemporaneous or concern a workplace offense justifying termination because it is the Department’s conclusion that such requirements would be overly restrictive.”
  • A contractor or subcontractor “is not required to offer employment to any employee hired to work under a predecessor’s federal service contract and one or more nonfederal service contracts as part of a single job, provided that the employee was not deployed in a manner that was designed to avoid the purposes of this part.” A successor contractor can avail itself of this exception only if it is able to provide credible information satisfying this exception “provided by a knowledgeable source such as the predecessor contractor, the local supervisor, the employee, or the contracting agency.”

Finally, the final rule includes language allowing a current or former employee who believes the contractor is in violation of the Order to file a complaint directly with the WHD “within 120 days from the first date of contract performance.”

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.