DOL to Require Successor Employers to Offer Right of First Refusal to Predecessor Employees Under Service Contract Act

On December 14, 2023, the U.S. Department of Labor issued final regulations requiring the so-called “nondisplacement” of workers performing work on contracts for the federal government under the Service Contract Act (SCA). These regulations implement Executive Order 14055, “Nondisplacement of Qualified Workers Under Service Contracts,” President Biden signed on November 18, 2021. This final rule is effective as of February 12, 2024, and will apply to solicitations issued on or after the effective date of final regulations issued by the Federal Acquisition Regulatory (FAR) Council. These regulations largely, if not completely, track requirements issued during the Obama administration in 2009, which were later withdrawn by the Trump administration.

Under the final regulations, where a contractor obtains an SCA-covered contract previously performed by another contractor, it generally must provide the employees of that prior contractor the “right of first refusal” to perform work on the subsequent contract. The final regulations base this requirement on the proposition that “[u]sing a carryover workforce reduces disruption in the delivery of services during the period of transition, maintains physical and information security, and provided the Federal government with the benefits of an experienced and well-trained workforce…”

Upon the final rule’s becoming effective, federal agencies bidding contracts under the SCA must include a clause providing that the successful contractor and its subcontractors must generally make a “good faith” offer to service employees engaged by a prior contractor, where those employees’ employment would otherwise be terminated as a result of the expiration of the predecessor contract. A contractor or subcontractor generally may not offer employment under the contract or subcontract to any employee before having made an express offer of employment to employees of the prior contractor, who must be afforded at least 10 days in which to accept the offer of employment.

This requirement is subject to a number of limitations. First, the regulations require only a right of first refusal to “suitable” employment—that is, employment for which the employee is qualified. Second, the requirement extends only to those who fall within the definition of “employee” under the SCA—generally, only those non-exempt employees who are guaranteed minimum wage and overtime under the Fair Labor Standards Act (employees who are exempt from these FLSA requirements pursuant to the “white collar” exemption for executive, administrative, and professional employees are not covered under this definition). Finally, a successor contractor need not offer employment to a predecessor’s employees if the successor “reasonably believes, based on reliable evidence of the particular employee’s past performance,” that there would be just cause to discharge the employee.

In addition, the regulations make clear that an employee may be offered a position under different terms and conditions of employment (such as changes in benefits, pay, or other terms of employment), so long as the offer is “bona fide”—that is, not designed to discourage the employee from accepting the offer. The successor contractor also may determine the number of employees necessary for performance of the work under the contract, and may opt to employ fewer workers than its predecessor, although in those instances where all employees of the former contractor are not offered employment on the new contract, the requirement to extend a “right of first refusal” may continue for up to 90 days.

To ensure that offers are extended to those employees who are eligible, a contractor must, within 30 days before the completion of the contract, provide to the federal contracting officer a list of the names, mailing addresses, and, if known, phone numbers and email addresses of all service employees engaged under the contract. The final regulations likewise include a number of recordkeeping, notice, and record-retention requirements. In addition to the final rule itself, the Department has published Frequently Asked Questions regarding the regulations.

While many of these requirements will seem familiar to employers that have a long history of contracting under the SCA, both newer and seasoned contractors are advised to consult with counsel to ensure they are properly complying with the latest iteration of these requirements.

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.