Court Orders Injunction on New Overtime Threshold Rules

The U.S. District Court for the Eastern District of Texas issued a preliminary injunction last week preventing implementation of the Labor's (the Department of Labor) final rule increasing the executive, administrative, and professional exemption thresholds for overtime pay requirements.

The new regulations doubled the threshold from $455 per week ($23,660 per year) to $913 per week ($47,476 per year). It was set to take effect this week on December 1st.

The Court found that DOL had exceeded its delegated authority and ignored Congress's intent by raising the minimum salary threshold by replacing a "duties" test with a de-facto salary only test.

Contractors that have been preparing for the final rule need make any changes at this time. For contractors operating under the Service Contract Act (SCA), coverage will remain unchanged.

It is expected that DOL will file an appeal to stay the decision. We'll let you know if that happens.

The other uncertainty here is what the new Administration plans to do with this and other rules based on Executive Orders. It is possible that many will be overturned come January. Stay tuned.

You can read the full Court Memorandum Opinion and Order here.

Administration to Expand Labor Data-Collection Requirements

Last Friday, the President announced several new policies to "further advance equal pay for all workers and to further empower working families". The announcement contained four different initiatives including:

• The Equal Employment Opportunity Commission (EEOC) published a proposal to annually collect summary pay data by gender, race and ethnicity from businesses with 100 or more employees. This proposal would cover 63 million employees. This expands and replaces an earlier plan by the Department of Labor to collect similar information from federal contractors. See our earlier posting on that proposal: New Nondiscrimination and Affirmative Action Requirements for Contractors.
• Second, the President requested Congress to take up and pass the Paycheck Fairness Act that would give women additional tools to fight pay discrimination.
• Third, the Council of Economic Advisers is releasing a report that highlights that the U.S. gender wage gap is now 2.5 percent higher than the average for industrialized countries and points to progress made since 2000 by the United Kingdom to reduce their gap by almost nine percent and by other industrialized countries by around seven percent.
• Finally, the White House announced a summit coming in May to "create an opportunity to mark the progress made on behalf of women and girls domestically and internationally over the course of the last seven years and to discuss solutions to the challenges they still face.

Perhaps the most impactful one of these initiatives is the expansion of pay data collection. The EEOC is proposing revisions to its EEO-1 form to require all employers with 100 or more employees - and Federal contractors with a $100,000 contract - to submit additional summary data on wages paid to their employees including gender, race, and ethnicity.

What will the EEOC (and Labor Department) do with this data? They're going to mine the data and look for employers that are shortchanging workers based on gender, race, or ethnicity. In their words:

This new policy lays important groundwork for progress toward achieving equal pay, as it will encourage and facilitate greater voluntary compliance by employers with existing federal pay laws - such as by evaluating how they are currently paying their employees. It will also assist the EEoC, and in the case of contractors the Department of Labor's Office of Federal Contract Compliance Programs (OFCCP), in better focusing investigations on employers that are unlawfully shortchanging workers based on their gender, race, or ethnicity. 

Or, as one commentator put it, the expanded data will be used to "shame" non-Federal contractors and for law enforcement purposes on Federal contractors.

The effective date of the expanded reporting requirement is September 30, 2017. You can read more about these pending initiatives on the Whitehouse website.

Fair Pay and Safe Workplaces - Public Comments - Part 5

This week, we have been recapping several of the 918 public comments submitted in response to draft regulations implementing the President's Executive Order (EO) called Fair Pay and Safe Workplaces. The EO is intended to punish Government contractors (or some would say is intended to incentivize Government contractors to do better) who engage in repeated offenses of fourteen different labor laws currently on the books. Under the proposed regulations, offending contractors (and subcontractors) will be at a disadvantage compared to their competitors, when responding to solicitations for Government work.

If you have not been following this series, you may want to go back and read Parts 1 through 4:

• Part 1 - Comments from the Project on Government Oversight (POGO) - Endorse
• Part 2 - Comments from the Associated General Contractors of America (AGC) - Oppose
• Part 3 - Comments from the American Bar Association - Oppose
• Part 4 - Comments from the Leadership Conference on Civil and Human Rights - Endorse

So far, we've looked at comments submitted by a public service organization (POGO), one that represents a certain segments of contractors (AGC), one that represents attorneys specializing in contract law (ABA) and one that represents workers in general (Leadership Conference on Civil and Human Rights). Today we will recap a response from an existing Government contractor; Lithko Contracting. Many of the 918 public comments came from Government contractors. There was no particular reason for choosing Lithko's submission other than it seemed to have been written by someone that had given some thought to the practicalities of trying to implement the regulations.

Lithko is a nationwide specialty concrete contractor employing 1800 people. It has been in business for 33 years and, according to its narrative, has an excellent safety record and a great relationship with OSHA and other Governmental agencies. Lithko opposes the proposed rules.

Lithko's first objection concerns the requirement to report non-final agency and court actions. Lithko pointed out that companies commonly undergo agency investigations and receive violation notices or court complaints, but a subsequent hearing or legal proceeding reveals the alleged violation is unfounded or is much less serious than the original claim. If non-final agency or court actions are considered by contracting officers as part of the responsibility determination process, quality companies could lose a contract as a result of cases or investigations that are not yet fully adjudicated or are eventually dismissed.

Secondly, adding reporting requirements and certifying compliance of subcontractors will force companies to hire more staff  (and attorneys) at great cost which will eventually be passed on to the federal government and taxpayers.

Third, there will likely be an increase in the number of bid protests, litigation against frivolous complaints and investigations, and lawsuits disputing the subjective responsibility determination or assertions made by federal contracting officers and prime contractors. These will create delays.

Finally, added cost, red tape, increased risk, delays and needless uncertainty will have a severe impact on small businesses and will prevent many small businesses from competing for federal contracts because they do not have the resources to comply with this substantial regulatory burden.

Lithko is certainly correct about added cost. The Government acknowledges that. It probably has not thought through the relative impact of the added cost on small businesses.

Fair Pay and Safe Workplaces - Public Comments - Part 4

Today we present the fourth segment in our series on examining the public comments submitted in response to the regulations implementing the President's Fair Pay and Safe Workplaces Executive Order (EO). The idea behind the EO is that by requiring employer's workplace violations be taken into consideration when the Government awards federal contracts, it will no longer be acceptable to award contracts to companies that routinely violate workplace health and safety protections, engage in age, disability, race, and sex discrimination or withhold wages, and other labor violations.

If you're just coming in to this series, you may want to start with Parts 1, 2, and 3.

• Part 1 - Comments from the Project on Government Oversight (POGO) - Endorse
• Part 2 - Comments from the Associated General Contractors of America (AGC) - Oppose
• Part 3 - Comments from the American Bar Association - Oppose

Today, we will summarize comments presented by The Leadership Conference on Civil and Human Rights. The Leadership Conference is a coalition  of more than 200 national organizations promoting and protecting civil and human rights of all persons in the United States. The Conference strongly supports the proposed regulations, maintaining that implementation will improve the lives of millions of workers  - helping to ensure they have access to fair pay, benefits, and working conditions.

The Leadership Conference stated that under current regulations, contractors that violate workplace laws have little incentive to come into compliance and companies with the most egregious violations of these laws continue to receive federal contracts. It cites as support for this claim, a 2013 Senate report showing the government awarded $81 billion in federal contracts in a single year to companies with the most egregious violations of wage and workplace safety laws.

The Leadership Conference also made some recommendations to "enhance" the proposed regulations. For example, it proposes to extend the rules to all employees of a company, not just those working on Government contracts (Actually, the regulations apply to contractors, not employees. Violations affecting non-Government contract employees are to be reported as well as those affecting employees working on Government contracts.)

The Leadership Conference wants to add "physical assault" by any employee against any other employee of the company to the list of unlawful harassment. It seems to us that a lot of physical assaults occurring in the workplace are well beyond violations of labor laws. They also want to significantly narrow the definitions of willful violations, repeated violations, and pervasive violations; lowering the bar for reporting violations.

Like many other respondents, both for and against the regulations, the Leadership Conference believes that the information regarding violations be made publicly available. Publicizing violations will increase incentives for contractors to comply with labor laws.

Fair Pay and Safe Workplaces - Public Comments - Part 3

We are in the midst of recapping public comments to the proposed regulations implementing the President's Fair Pay and Safe Workplaces Executive Order (EO). Who could possibly be opposed to fair pay and safe workplaces? No one, really. But the EO and the accompanying regulations have very little to do with fair pay and safe workplaces. Fair pay and safe workplaces are already ensured by 14 different labor laws already on the books. The proposed regulations require contractors to disclose violations of those laws (including non-judicial settlements) that occurred withing the three years preceding the submission of a proposal for a Government contract. If you're just coming in to this series, you may want to start with Parts 1 and 2.

• Part 1 - Comments from the Project on Government Oversight (POGO) - Endorse
• Part 2 - Comments from the Associated General Contractors of America (AGC) - Oppose

Today, we will look at comments from the American Bar Association's Section of Public Contract Law (PCL).  The purpose of the PCL Section is to seek to improve the process of public contracting for needed supplies, services, and public works. While agreeing that contractors and subcontractors must comply with U.S. labor laws, the PCL believes that the proposed rules as drafted would be

• difficult to implement
• significantly disrupt procurements
• impose significant costs and burdens on offerors, contractors, and subcontractors and the Government. 

The PCL calls for the FAR Councils and the Department of Labor to withdraw the proposed guidance and regulations.

The Proposed Rule and Proposed Guidance effect a major modification to the current acquisition process. This major modification creates a complex compliance regime that is new both to the Government and to contractors. Implementation of systems both within the Government and at the contractor and subcontractor levels throughout the supply chain will take time and require a significant expenditure of money and resources. Moreover, the labor-law compliance review includes a new agency participant, the Agency Labor Compliance Adviser ("ACLA"); new reporting requirements; and new responsibility reviews that will have to operate within the already-existing procurement environment governed by a complicated and layered system of statutes and regulations.

Like the AGC, the PCL believes that the cost om implementing the EO have omitted some forseeable costs and impacts from their cost-benefit analysis. This is a polite way of saying that the Government's estimates are grossly understated. The Government estimates that 26 thousand contractors and subcontractors will be impacted and each of those will spend eight hours during the first year and zero hours each year thereafter. The PCL points out that basing an estimate on the use of a single contractor employee to understand all the complex requirements is neither reasonable no realistic. The PCL believes that compliance with the reporting obligations will be a multi-disciplinary effort that involves such functions as human resources, legal, ethics and compliance, information technology, program management, business development, contract management, and subcontract or supply-chain management.

Also, like the AGC, the PCL recommended that the FAR Council should consider the impact of the proposed rule on small businesses. Not only is the new requirements onerous but small business subcontractors might be negatively impacted because a prime contractor may have difficulty evaluating labor violations for small contractors.

Fair Pay and Safe Workplaces - Public Comments - Part 2

Yesterday we began a series on summarizing some of the public comments submitted in response to the proposed regulations that will require contractors to report three years worth of violations of 14 different labor laws when submitting proposals to the Government. This is a highly controversial and emotionally charged proposal. There were 918 comments submitted during the public comment period - a number rarely seen related to procurement regulations. Yesterday, we summarized positive comments submitted by POGO (Project on Government Oversight). Today we will look at a contrary position submitted by the AGC.

The Associated General Contractors of America (AGC) is an association in the contruction industry, representing both union and non-union prime and specialty construction companies. It represents more than 26 thousand firms engaged in the construction of the nation's commercial buildings, shopping centers, factories, warehouses, highways, bridges, tunnels, airports, waterworks facilities, waste treatment facilities, dams, water conservation projects, defense facilities, and more.

The AGC is firmly opposed to the proposed regulations, believing the President's EO (Executive Order) and accompanying regulations are "unfounded, unnecessary, unworkable and unlawful. If implemented, these executive actions would improve neither economy nor efficiency in government procurement." The AGC goes on to state:

If implemented, the EO and proposed rule would be destined to malfunction. They are unreasonable and inconsistent, and would be ineffective, excluding from service to the government not only bad-actor contractors but also a far greater number of well-intentioned, ethical contractors. The EO and proposed rule would needlessly create a new, complicated and unmanageable bureaucracy to address problems that a host of federal laws, regulations and bureaucracies already address. Furthermore, they would lead to crippling delays in federal contracting, encourage unnecessary litigation, and increase procurement costs to the government and taxpayers.

Other points made by AGC include:

• The FAR Council's Economic Analysis of the Proposed Rule is Fundamentally Flawed. The estimated cost of compliance is significantly understated. Actually similar points were also made by other commentators.
• The Executive Order and Proposed Rule are Unworkable. Prime contractors do not have sufficient time and information to perform responsibility determinations of all proposed subcontractors. Prime contractors fear liability from denying subcontractors potential subcontracts based on their labor law violations. What recourse does a subcontractor have against a prime? Who will cover the cost of termination after an irresponsibility determination? Disclosing sensitive information to potential competitors would increase the number of bid protests. The proposed rule would increase contractor litigation of suits that would have otherwise settled. The EO and proposed rule will prove difficult for small businesses and create a further barrier to entry into government contracting.

Fair Pay and Safe Workplaces - Public Comments to Proposed Rule

Last May, the FAR Councils issued a proposed rule to implement the President's Fair Pay and Safe Workplaces Executive Order (EO) from July 31, 2014. The new rules will require prospective contractors to report every time they submit proposals, whether they have had any violations of any of 14 federal labor statutes in the preceding three years. When we last reported on the proposed regulation (see Fair Pay and Safe Workplaces dated June 3, 2015), we made a prediction that there would be plenty of public comments to the proposed regulation. Sure enough, the second extension to the public comment period ended on August 26, 2015 and there were a total of 918 public comments submitted. We pity the folks that will now have to sort through, categorize, and respond to these comments - its going to be a herculean task. (If you care to peruse them yourself, you can find them on-line here)

Over the next few postings, we intend to find a few of the substantive comments submitted by contractor organizations, employee organizations, and watchdog groups to assess the level of support for the regulations. We will start with comments submitted by the Project on Government Oversight (POGO). POGO counts itself as a nonpartisan independent watchdog that champions good government reforms. The Organization investigates allegations of corruption, misconduct, and conflicts of interest in hopes of achieving a more effective, accountable, open, and ethical federal government. POGO is well-known and carries a lot of influence in DC.

POGO supports the proposed rule. "To determine whether companies have a satisfactory record of integrity and business ethics as the FAR requires ... it is necessary for contracting officers to have information about the condition of companies' workplaces and how their workers are treated." But POGO also made a number of recommendations to "strengthen" the rule. One of those recommendations would have contractors disclose "settled" cases. POGO states:

According to the proposed Department of Labor guidance, a private settlement in which the lawsuit is dismissed without any judgment being entered is not considered a "civil judgment" that triggers disclosure. This will substantially weaken the final rule, as legal actions against companies often settle without a formal judgment by a court or tribunal. Nearly half of the thousands of civil, criminal, and administrative instances in POGO's Federal Contract Misconduct Database were settled without a final judgment or finding of liability. Contractors, especially those with substantial financial and legal resources at their disposal, will evade disclosure by settling labor cases before a judgment is entered.

Other notable recommendations from POGO include:

• Make the information available to the public.
• Increase the disclosure period from three years to five years prior to proposal submission.

National Labor Relations Board Decision Will Affect Many Government Contractors

Yesterday, the National Labor Relations Board (NLRB) issued a decision that refined its standard for determining joint-employer status. According to the Board's press release, the revised standard is designed to better effectuate the purposes of the Act in the current economic landscape. With more than 2.8 mullion of the nation's workers employed through temporary agencies (as of August 2014) the Board held that its previous joint employer standard has failed to keep apce with changes in the workplace and economic circumstances.

In the decision, the Board applied the long-established principles to find that two or more entities are joint employers of a single workforce if (i) they are both employers with the meaning of the common law; and (2) they share or co-determine those matters governing the essential terms and conditions of employment. In evaluating whether an employer possesses sufficient control over employees to qualify as a joint employer, the Board wil consider whether an employer has exercised control over terms and conditions of employment indirectly through an intermediary, or whether it has reserved the authority to do so.

The specific decision involved Houston-based BFI (Browning-Ferris Industries) and a Phoenix-based staffing agency, Leadpoint Business Services it hired to staff a recycling facility in California. In its decision, The Board found that BFI was a joint employer with Leadpoint, the company that supplied employees to BFI to perform various functions for BFI, including cleaning and sorting of recycled products. In finding that BFI was a joint employer with Leadpoint, the Board relied on indirect and direct control that BFI possessed over essential terms and conditions of employment of the employees supplied by Leadpoint as well as BFI's reserved authority to control such terms and conditions.

So what does this really mean? It could affect the growing number of temporary workers and independent contractors who do not receive the same protections as full-time employees. Many companies have been using staffing agencies to supply temporary works or contract with other companies to complete tasks. Now, both companies are responsible as joint employers because they share or co-determine those matters government the essential terms and conditions of employment.

Unions are happy with this ruling. Not too many other people or organizations willing to comment are pleased.

Service Contracts and Incumbent Employees

This is an update to our posting of May 3, 2012 wherein we described the proposed regulations to implement Executive Order (EO) 13495, "Non-displacement of Qualified Workers Under Service Contracts", issued by the President back in January 2009. Those regulations were finalized and became effective on solicitations issued after January 18, 2013. The regulations require that workers on a federal service contract who would otherwise lose their jobs as a result of the completion or expiration of a contract be given the right of first refusal for employment with the successor contractor. The regulations apply to all service contracts (both prime contracts and subcontracts) above the simplified acquisition threshold (currently $150,000) that succeed contracts for the same or similar services at the same location.

Virginia thinks this new rule is a good one. She was 62 years old and described herself as an excellent worker with good appraisals and extremely reliable. She and everyone else over 60 years old were not offered their jobs by a successor contractor. Stan thinks its a bad rule. Stan says that this rule denies companies who have full responsibility for performance under the contract, their ability to select a worforce they believe is best suited to meeting the contract requirements.

According to the Department of Labor, the Federal Government's procurement interests in economy and efficiency are served when the successor contractor hires the predecessor's employees. A carryover work force reduces disruption to the delivery of services during the period of transition between contractors and provides the Federal Government the benefits of an experienced and trained work force that is familiar with the Federal Government's personnel, facilities, and requirements. The EO recognizes that successor contractors or subcontractors already often hire the majority of the predecessor's employees when a service contract expires and follow-on contract is awarded for the same or similar services at the same location. Sometimes, however, a successor contractor or subcontractor displaces the predecessor's employees and hires a new workforce.

Contracts under the $150,000 simplified acquisition threshold are exempt from this EO. So are contracts awarded for services produced or provided by persons who are blind or have severe disabilities. Agency can also exclude contracts and subcontracts if the head of a contracting department or agency finds that the application of any of its requirements would not serve the purposes of the EO or would impair the ability of the Federal Government to procure services on an economical and efficient basis (the so-called "union-busting" provision). Any such decision must be made no later than the contract solicitation date, and incumbent workers and their collective bargaining representatives are to be notified in writing of the agency determination no later than 5 business days after the solicitation date.

Service employees must be advised of their right of first refusal by either a poster or individual notice. DOL has a poster here. The predecessor contractor must provide the contracting officer a list of all service employees working under the contract (and subcontracts) within 30 days before the end of the contract. The contracting officer will furnish the list to the successor contractor. The successor contractor is required to offer the right of first refusal of employment to all qualified employees whose names appear on the predecessor's list except that the successor contractor may employ on the contract employees who worked for that contractor for at least three months immediately preceding commencement of the contract and who would otherwise face lay-off or discharge.

Successor contractors have the discretion to determine how many employees are needed for efficient performance of the contract. They may employ fewer employees than the predecessor contract. Also, offers made to employees of predecessor contractors must be "bona fide" offers. There is nothing in the regulation that requires successor contractors to match the pay or benefits of the predecessor contractors but contractors won't be permitted to "low-ball" employment offers simply to discourage incumbents from accepting positions (more on what constitutes "bona fide" offers of employment in 29 CFR 9.12).

Labor Utilization

Government contractors, particularly those with cost-type contracts, have a responsibility and obligation to ensure the efficient utilization of labor and facilities to accomplish their goals.

We've warned quite often that Government contractors should never presume that when an auditor enters their facilities, that he/she is limiting his/her purpose to the audit at hand. The good ones, and yes, most of them are very good, will be observing things and making casual seemingly innocuous inquiries. One of the things that they are trying to assess is whether there is idle capacity, idle facilities, or poor labor utilization that may result in increased costs charged to Government contracts. Any hint of these inefficiencies are then documented in "audit lead sheets" and contractors might find the auditors coming back to follow up on those leads. Large contractors are more susceptible to these reviews than small contractors based primarily on risk to the Government.

There is a particular type of review that auditors can perform when inefficiencies are noted - Labor Utilization Audit. The basic objectives of a labor utilization audit are;

• to evaluate the internal controls instituted to assure prudent utilization of staffing in the performance of Government contracts, 
• to determine whether the costs are commensurate with the benefits derived, and 
• to determine the reasonableness and efficiency of the labor utilization.

The auditor has an array of specific procedures he/she can deploy in meeting these objectives. Some of them include:

1. Ascertain whether the work performed by the contractor is required by the terms of the contract, properly authorized, and directed to the appropriate operational unit
2. Determine whether there are unwarranted variations between staffing budgets allocated by upper management and staffing budgets actually used by operating or middle management.
3. Determine whether the contractor maintains adequate control over the expenditure of the technical effort to assure maximum productivity, whether this control includes the evaluation of actual work assignments and target completion dates, and whether comparisons are made with staffing budgets and staffing tables approved by management.
4. Evaluate the contractor's personnel practices during start-up and phase out periods to determine whether the cost of excess personnel is charged to Government contracts in the build-up period and whether the Government contracts are unduly burdened with the retention of unnecessary personnel in the phase out period.
5. Evaluate the contractor's basis for assigning and phasing out technical personnel for both Government production and commercial operations. Audit emphasis should be accorded the phase out portion of the contract to determine the reasons for retaining certain classes of technical personnel to complete the contract. the auditor should also determine whether the contractor is assigning technical personnel in accordance with their skills. The use of highly trained personnel to perform routine work which could be performed by lower paid personnel is not economical. The use of less than qualified personnel to perform difficult work may result in higher costs to the Government because more time and greater supervision may be required. The type of contract should be a guide to the auditor in determining the extent of verification in these areas.
6. Examine the contractor's staffing and labor control practices to determine the effectiveness of controlling idle time. If unreasonable idle time is perceived or controls are judged to be inadequate, conduct a preliminary work sampling (probe).
7. Compare labor classifications charged to the contract with those proposed to ascertain whether the contractor is utilizing the type of personnel for which the Government has contracted.

There have been many cases over the years where challenges to a contractor's labor utilization practices have been sustained resulting in significant cost disallowances. Some of the procedures listed above could turn in to investigative referrals if an auditor determines (or suspects) that there has been intentional mischarging to Government contracts.

 

Bill Introduced to Limit Union Preferences

Last week, identical bills were introduced into the House and Senate (H.R. 436 and S. 109) which would ostensibly level the playing field for construction workers applying for federal contracts and those funded by federal dollars. According to the bill sponsors, Executive Order 13502 introduced in 2009 strengthened project labor agreements (PLAs) which favored union-based construction workers over non-union construction workers. The result has been a de-facto discrimination against non-union construction workers, costlier projects,and longer completion time.

A PLA is a job-specific collective bargaining agreement with multiple construction unions. When mandated by a government agency on a taxpayer-funded project, construction contracts are awarded only to companies that agree to recognize unions as the representatives of their employees on that job; use the union hiring hall to obtain workers at the expense of existing qualified employees; obtain apprentices through union apprenticeship programs; follow inefficient union work rules; and pay into union benefit and multi-employer pension plans.

Studies indicate government-mandated PLAs increase the cost of construction projects in numerous markets between 12 and 18 percent compared to similar non-PLA projects. That, to us, is not surprising, nor is it necessarily a bad thing.

Similar bills were introduced last year and did not make it out of committee. This time around, the House version has 55 sponsors while the Senate bill has eight.

Service Contractors Must Hire Incumbent Employees

There is a proposed rule published today that will require, under "service contracts", successor contractors to hire the incumbent employees. A service contract is any Government contract where the principal purpose is to furnish services through the use of service employees.

Specifically, the proposed rule states that

When a service contract succeeds a contract for performance of the same or similar services at the sale location, the successor contractor and its subcontractors are required to offer those employees (other than managerial and supervisory employees) that are employed under the predecessor contract, and 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. 

This proposed regulation is being formulated to implement an Executive order for non-displacement of qualified workers under service contracts (E.O. 13495 dated January 30, 2009).

There would be a few limited exceptions to this proposed rule and there is also a waiver authority when the application of it would "impair the ability of the Government to procure services on an economical and efficient basis or would not serve the purposes of the Executive Order.

Thirty days before the old contract ends, the old contractor must provide a listing of employees qualified to work on the successor contract. The contracting officer, in turn, must provide the listing to the new contractor. There is also a lot of verbiage concerning the rights of the incumbent employees and avenues of recourse if they feel they have inappropriately lost their jobs.

We didn't see anything in the proposed rule that requires a successor contractor to match the pay and benefit levels of the old contractor but other rules might apply (such as Service Contracting Act) in some circumstances.

Employee Rights under Federal Labor Laws

The FAR councils published a final rule that implements Executive Order (EO) 13496, Notification of Employee Rights Under Federal Laws. The EO requires contractors to display a notice for employees of their rights under Federal labor laws. The Department of Labor determined that the notice must also include employee rights under the National Labor Relations Act (NRLA). The NRLA encourages collective bargaining and protects the exercise by employees of their freedom to associate, to self organize and to designate representatives of their own choosing for the purpose of negotiating the terms and conditions of their employment.

The physical posting of the notice must be in conspicuous places in and about the plants and offices of contractors and subcontracts, in the languages employees speak, so that the notice is prominent and readily seen by employees who are covered by the National Labor Relations Act and engage in the activities related to the performance of the contract. Contractor's who use a website to communicate with employees are also encouraged (perhaps required, depending on how you interpret the regulations) to post notices there as well.

Posters may be downloaded from the Department of Labor's website. They are available in English, Spanish, Mandarin, Hmong, Laotian, and Vietnamese. Contractors are not required to use the DOL posters. They can create their own if they choose.

Audits of Direct Costs - Labor

The overall objective of audits of contractor annual incurred cost submissions is to render an opinion on the propriety of costs charged to flexibly priced (e.g. CPFF, CPIF, FPI, T&M, etc) Government contracts. The audit procedures include tests of both indirect and direct costs. Many contractors have the mistaken impression that auditors are only reviewing indirect rates during the incurred cost audit. This is understandable because so much of the standard incurred cost submission is focused on the development of indirect cost pools and their allocation bases. But, at the end of the audit, the auditor is expressing an opinion on both direct and indirect costs charged or allocated to contracts. Last Friday, we discussed the primary audit objectives for material costs. Today, we discuss the audit of direct labor costs which is usually, far more significant, in terms of dollars, than are material costs.

A significant part of the audit of labor costs occurs before the incurred cost submission is prepared and submitted. These are the Government's infamous floorchecks (or, observations of work areas). These are unannounced visits to contractor facilities to interview employees and compare timesheet entries with work actually being performed. Floorchecks are a major component of the audit of direct labor costs. Floorchecks are performed in “real-time”, that is, concurrent with the actual work being performed. The purpose of a floorcheck is to verify that contractors have policies and procedures to ensure the propriety of labor costs being charged to Government contracts. Deficiencies disclosed in a floorcheck are often the result of poor internal control systems or compliance issues. Deficiencies could lead to payment withholds, as discussed previously in this blog.

In addition to floorchecks, auditors will perform other procedures as part of the audit of the incurred cost submission. These procedures are developed after a risk assessment of the situation. Larger contractors warrant more attention than smaller ones. Likewise, contractors with a high percentage of flexibly priced contracts are a higher risk than ones with low percentages. Depending on the results of the risk assessment, the auditor might include some or all of the following areas for substantive testing:

• Evaluation of labor cost charging and allocation
• Evaluation of payroll preparation and payment
• Evaluation of compensation levels
• Evaluation of personnel policies and procedures
• Evaluation of overtime, extra-pay shifts, and multi-shirt work (often times, these are limited by contract terms)
• Evaluation of uncompensated overtime
• Evaluation of labor standard cost systems and sole proprietors’ and partners’ salaries
• Evaluation of quantitative and qualitative utilization of labor

Accounting for Purchased Labor

Government contractors must be very careful on how they account for the cost of purchased labor. Many contractors obtain engineers, technical writers, technicians, craftsmen and other personnel by subcontract (commonly called "purchased labor") to meet temporary or emergency requirements rather than hiring those skills outright. In most cases, this practice makes perfect business sense but if there is too much of it going on, government auditors may study the situation to determine whether any additional costs resulting from purchased labor is reasonable, necessary, and properly allocable to government contracts.

Once the reasonableness of purchased labor is established, it is necessary to properly account for it. The proper accounting treatment varies depending upon the circumstances under which the costs were incurred. For example, some contractors classify purchased labor as direct labor costs when the work is performed in the contractor’s facilities and under their supervision and otherwise meets the FAR definition of direct costs. These contractors cost such effort using the average labor rate incurred by their own employees for comparable work. Differences between the amounts derived and purchased labor prices are treated as overhead costs and are allocated accordingly. Other contractors classify purchased labor as subcontract costs.

Purchased labor most likely causes no fringe benefits and other employee-related costs to be incurred.  Such costs are generally paid by the entity providing personnel performing the effort.

FAR and CAS require that pooled costs shall be allocated to cost objectives in a reasonable proportion to the causal or beneficial relationship of the pooled costs to cost objectives. Purchased labor must share in an allocation of indirect expenses where there is a causal or beneficial relationship. In some cases, a separate allocation base for purchased labor may be necessary to allocate significant overhead costs to purchased labor such as supervision and occupancy costs, or to eliminate other costs not benefiting purchased labor such as fringe benefits costs.

Where the effort of purchased labor is performed in-house using the contractor's supervision and facilities, overhead exclusive of fringe benefits and other employee related costs, if material in amount, should be allocated to purchased labor. Conversely, where the effort of purchased labor is performed offsite under the supervision and control of an entity other than the contractor, none of the contractor's labor overhead costs may be allocable to purchased labor.

The determination on how best to allocate purchased labor costs on Government contracts must be supported by proper analysis and rationale. Government contractors must be prepared to demonstrate the propriety of the method they choose to use.

Employees vs. Independent Contractors

Today's post isn't specific to Government contracting but its a subject that we believe most contractors need to be reminded of from time to time (we are a CPA firm and sometimes we just cannot help ourselves). During adverse economic conditions, it is sometimes tempting for contractors to reclassify employees as independent contractors thereby saving employment related taxes, benefits, and other expenses. The Government has always been aware of the temptations and trends and considers it one of their "high risk" areas for audit and investigation. When employees are misclassified as independent contractors, it often results in failure of the workers and employers to correctly pay income taxes, Social Security, Medicare and unemployment insurance taxes. That means substantial lost revenue to the federal and state governments.


Now that the Governments are facing increased financial pressures themselves, Federal and State agencies are starting to scrutinize "independent contractor" status with new fervor. Take President Obama's fiscal year 2011 budget for example. It includes $25 million to the Department of Labor for a joint effort with the IRS to hire investigators to find workers that can be recategorized as employees. The Administration estimates that the $25 million per year investment will bring in $10 billion over the next 10 years - not a bad ROI (return on investment) if you trust those numbers.

Here are some other examples of increased scrutiny:

• Random Audits - Beginning in February 2010, the IRS launched a three-year program to randomly audit 6,000 employers. These examinations will delve into compliance with employment tax issues, including the misclassification of independent contractors, fringe benefits, reimbursed expenses and the compensation of owner-employees.
• Information Sharing - The IRS signed information-sharing agreements in 2008 with labor and workforce agencies in 29 states, to assist them in uncovering employment tax avoidance schemes" and ensure proper worker classification."

If you utilize independent contractors, there are several things that you can do to ensure those workers are properly classified.

• Have written, signed contracts with workers classified as independent contractors, spelling out the terms and conditions of the relationship.
• Once contracts are in place, give outside workers leeway over how they perform their duties. Resist the urge to supervise them the way you oversee employees.
• Send each independent contractor a Form 1099.
• Consistently treat workers performing similar tasks as either independent contractors or employees. Don't supply outside workers with services you give employees. Some companies run into trouble after they provide office space, computers, cars and other perks.
• Maintain good records - independent contractor's taxpayer ID number, business cards, a letterhead, and invoices.
• Do a self-audit of each worker's or each class of workers' status before a federal or state agency conducts one. If you are in doubt, you can always file Form SS-8 with the IRS giving them information about a relationship and asking for their determination (many companies don't like to do this for fear of attracting unwanted attention from the IRS)

Here are some of the factors the IRS considers in determining if a worker is an employee:

• Behavioral Control - An employee generally is told when, where, and how to work, as well as what order or sequence to follow.
• Tools - An employer usually gives tools, equipment and workspace to employees. In contrast, independent contractors often provide and invest their own money in equipment, tools and facilities.
• Assistants - Employees don't hire and pay others to help them do their jobs (although they may be told to hire assistants for the company). In contrast, contractors often hire, supervise, and pay their own assistants.
• Training - Employees are more likely to receive training from an organization than independent contractors.
• Other Customers - Independent contractors generally make services available to the public and are able to work for two or more businesses.
• Financial Control and Risk - An employer has the right to control the financial aspects of a job, such as the business expenses the employee incurs and how staff members are paid. On the other hand, a worker's opportunity to personally earn a profit and assume risk of loss may indicate a non-employee status.