Rights to Organize and Bargain Collectively

Back in 2009, the President issued Executive Order (EO) 13494 requiring a change to the FAR Cost Principle on Labor Relations (FAR 31.205-21). The EO makes costs of activities by contractors for the purpose of persuading employees (regardless of whether those employees work for the contractor or work for another company) to exercise the right to bargain collectively through representation of the employees' own choosing. The EO also provided that contracting officers must treat as allowable, any cost incurred in maintaining satisfactory relations between the contractor and its employees, including the costs of

• labor management committees,
• employee publications, and
• other related activities.

As a result of this EO, FAR 31.205-21 was revised effective December 2011 to implement these new prohibitions. We wrote about the changes at the time (see Labor Relations Costs - Revised Cost Principle). Briefly, the revised cost principle wants employers (Government contractors) to act neutral when employees decide whether to organize and bargain collectively. It then gives some examples of unallowable activities including (i) preparing and distributing materials, (ii) hiring or consulting legal counsel or consultants, (iii) meetings, and (iv) planning or conducting activities by managers, supervisors, or union representatives during work hours.

 We've seen a case recently where the auditors have inappropriately questioned costs related to labor relations and suspect there are other cases as well. The specific case dealt with legal costs related to labor relations and the auditor questioned it because it was one of the costs specifically called out. However, the auditor focused on the cost rather than the activity. Before considering cost, one needs to determine whether the activity is allowable, or not. The unallowable activity is one that is designed to persuade employees to exercise or not exercise their right to organize and bargain collectively. If that is the nature of the activity, the associated costs are unallowable. If the activity does not meet that definition, the costs are not unallowable based on this Cost Principle. 

Contractors need to evaluate the "activities" before addressing the associated costs. Auditors need to do the same.