Texas District Court Enjoins the Administration from Enforcing the Federal Government Contractor “Blacklisting” Provisions of the Federal Acquisition Regulatory Council’s New Final “Fair Pay and Safe Workplaces” Rule.

On August 25, 2016, the Obama Administration, through the Federal Acquisition Regulatory (FAR) Council and in conjunction with the U.S. Department of Labor, promulgated the final Fair Pay and Safe Workplaces regulation and parallel guidance from the Labor Department, which collectively federal contractors have unaffectionately dubbed the “Blacklisting Rule.”  The cornerstone provisions of the final rule establish expansive new reporting obligations for contractors bidding on executive branch contracts with an estimated value exceeding $500,000. These contractors, along with subcontractors whose portions of the overall contract meet the $500,000 threshold contract value, must disclose all confirmed and alleged violations issued under 14 labor laws, including alleged OSHA citations, within the three years prior to a prospective contractor’s bid submission, regardless of the status of the citation or whether the citation has yet been upheld in a judicial or administrative review process afforded employers.  To be clear, under the final rule, all OSHA citations must be reported, even minor paperwork citations characterized as “OTS” (“other-than-serious”).

The final rule change the manner in which the rule applies to subcontractors.  Unlike the proposed rule, the final rule requires covered subcontractors to disclose violations directly to the Department of Labor, which will conduct a “responsibility determination” and return it to the subcontractor, who in turn will then be required to deliver it to the prime contractor.  The final rule also pushed back the mandatory disclosure date for subcontractors to October 25, 2017, a year after the disclosure requirements were set to begin for prime contractors.

The disclosure requirements for all contractors apply equally to related state labor laws, which sweeps in all citations issued under the 27 federal OSHA-approved state OSH programs administered by state occupational safety and health agencies such as CAL/OSHA.  Whichever contractor is awarded a covered contract must also disclose any old and new OSHA or other alleged labor law violation (referred to in the regulation as “administrative merits determinations”) during regular, bi-annual reports throughout the life of the contract.

Rule Challenged and Preliminary Injunction Granted

Barely before contractors had time to read the regulation and attendant DOL guidance, however, and prior to its first effective date of October 25^th, a group of industry trade associations filed a legal challenge in a Texas federal district court to the rule and requested the court grant emergency relief by enjoining the government from enforcing its cornerstone self-disclosure — “blacklisting” — provisions.  On October 19^th, U.S. District Judge Marcia Crone of the U.S. District Court for the Eastern District of Texas accepted the arguments set forth by industry plaintiffs and granted a nationwide preliminary injunction, which blocks the government from enforcing the “blacklisting” portions of the rule until the overall challenge to the legality of the rule is concluded.

Judge Crone concluded that industry’s position that the disclosure requirement was unconstitutional is likely to prevail and that federal contractors would be irreparably harmed if the rule went into effect pending the final outcome of the legal challenge.  The Judge concluded on a preliminary basis that the executive branch has exceeded its authority, and also violated the free speech and due process rights of federal contractors by compelling them to report and defend against non-final agency allegations of labor law violations without first having a hearing at which to contest the allegations.  In her decision, Judge Crone noted that:

“contracting officers are required to consider the information provided by the offeror in determining ‘whether an offeror is a responsible source that has a satisfactory record of integrity and business ethics, . . . notwithstanding the fact that the violations’ that require reporting may not be final decisions or determinations, are not confined to performance of past government contracts, and/or have not been preceded by a hearing or been made subject to judicial review.”

In addition, the Judge concluded that the industry plaintiffs had “properly demonstrated” that their members would suffer “immediate and ongoing injury” had the rule been allowed to take effect.  Judge Crone also found that contractors would face significant burdens in implementing the compliance scheme necessary to comply with the rule as proposed.

Accordingly, the blacklisting portions of the rule are now stayed pending further action by the district court. This is a significant victory for government contractors, however, it is important to note that we are in only the first stages of the legal challenge to the rule. Although certainly a good sign of how the court views industry’s arguments that the rule violates contractors’ First Amendment and due process rights by forcing bidders to disclose mere allegations that have not been adjudicated, and that the rule constitutes an unprecedented overreach of executive authority into matters previously controlled by Congress, there are no guarantees at this stage of the litigation that the regulation will be permanently struck down. Judge Crone’s ruling could change after the full hearing on the rule, or it could be narrowed or reversed on appeal, or the government could even amend the rule to some sort of “blacklisting-light” regulation, so contractors may still ultimately be required to implement the rule’s requirements. Thus, contractors should not discard the preparations they have made for implementation of the rule.  Rather, continued preparation for compliance, with the expectation that the blacklisting rule will continue to exist in some form or another, is warranted.

Note that the current court injunction does not impact the rule’s pay transparency provisions, which requires federal contractors to provide wage statements and information to workers regarding their hours worked, overtime hours, pay, and any additions or deductions to their pay starting on January 1, 2017.

Implementation of the Blacklisting Rule

The Administration intends to use the new rule – if it is ultimately implemented – to deny or revoke federal contracts from those companies who it determines are not worthy of a contract award based on their self-disclosure of alleged violations of OSHA regulations and other labor laws. That message was brought home by Secretary of Labor Thomas Perez when the final rule was promulgated:

“Contracting with the government is a privilege, not an entitlement; and we want to make sure that the companies enjoying that privilege comply with our nation’s laws and the values that underpin them . . . There are too many low-road contractors who break those laws and continue to get federal contracts … These are cases where companies that failed to live up to our values continue to benefit from our money.”

In terms of preparation for future implementation of the Blacklisting Rule from the OSHA perspective, our OSHA group previously blogged about this rule when it was a proposed rule. However, with the final rule has come some clarity around how the rule will be implemented by contracting agencies and the Department of Labor.

The final regulation establishes a complex mechanism requiring a “responsibility determination” to be made to determine whether to issue or reject prime contractors’ bids, or in the case of an existing contract, to rescind the contract, and for all contractors to consider debarment proceedings.  DOL guidance issued with the final rule makes clear that the determination will be based on only those OSHA citations (or other alleged labor law violations) determined to be “serious, willful, repeated, or pervasive.” While this limitation may sound like a limitation, applied in the OSHA context, as we have previously reported, it provides cold comfort to responsible contractors. A review of recent OSHA enforcement data shows that the vast majority of citations issued — upwards of 85 percent — are initially characterized as serious, repeat, or willful (75% just as willful). This means that virtually all OSHA citations fall within the category of labor law violations that the regulation identifies as the type that most seriously threaten the contractor’s responsibility determination.

This “responsibility determination” will be made by the contracting officer (the government official at the agency where the bid is submitted) in conjunction with and based upon advice from a newly created position at each agency known as an Agency Labor Compliance Advisor (ALCA).  Another very significant provision of the final rule calls for the creation of “Labor Compliance Agreements” that are designed to allow a self-disclosing contractor to satisfy the government’s concerns about the contractor’s labor law responsibility. A skeptic’s view, however, is that these agreements are the mechanism the government will use to hold the self-disclosing contractor over the barrel, to wit, “if you want this Billion dollar contract, you had better enter into this Labor Compliance Agreement that, by the way, happens to include the enforcement agency’s desired abatement and other anti-competitive requirements.”

In essence, these Labor Compliance Agreements allow OSHA to circumvent an employer’s important right to stay abatement of a citation pending the outcome of a legal challenge to the citation, and will subject federal contractors to unique requirements OSHA has not been able to accomplish through rulemaking. There are no limits on the types of remedial actions that can be required in these agreements. OSHA can use them to force contractors to prematurely implement not only OSHA’s suggested abatement, but also a slew of other onerous requirements, such as an injury and illness prevention program (I2P2), ergonomics standards, heat stress programs, third party audits, heat illness and workplace violence policies, etc., none of which are required under OSHA regulations. Thus, if the stay of the rule is lifted, these new Labor Compliance Agreements will likely serve as mechanisms to allow OSHA to “back door” in requirements on federal contractors that OSHA has not had the political or scientific support to promulgate as mandatory standards.

Prior to the injunction issuing last week, the Department of Labor had been attempting to educate the regulated community on the new obligations of the rule. In September, DOL provided the attached overview of the federal contracting policies. Also last month, top Department of Labor official Lafe Solomon, DOL’s Senior Labor Compliance Advisor, indicated that President Obama’s 2014 Executive Order 13673 mandating the development of this regulation, specifies one of four recommended outcomes of a “responsibility determination” to be given to the contracting officer making a decision on a contractor:

1. The contractor’s labor record demonstrates a satisfactory record of integrity and business ethics (the contractor is good to go).
2. The contractor’s labor record is not clean, but does not warrant disqualification, so the contractor must negotiate a Labor Compliance Agreement before the contract award. This occurs where the ALCA thinks there are risks of future violations, so the ALCA can recommend a Labor Compliance Agreement be negotiated with the citing agency (e.g., OSHA). If the contractor needs an enhanced safety program or some other enhanced safety program, that would be brokered in the agreement before the contract is awarded.
3. The contractor’s labor record is not clean, but it is not so tainted as to hold up the contract aware pending an ALCA.  Here, the contracting agency and ALCA can solicit a commitment by the contractor prior to contract award that it will negotiate with the ALCA to enter into a post-award Labor Compliance Agreement.
4. The contractor’s record of integrity and business ethics, as reflected by the contractor’s lack of compliance with labor laws, is unsatisfactory.  Here, the contracting officer should refer the contractor for suspension or debarment.

We are closely watching the Texas legal challenge. Its outcome will have a significant effect on companies engaged in federal contracting at both the prime and subcontractor level, and if the stay is lifted, the rule will give OSHA an unprecedented seat at the table in federal contracting policy through the ALCAs and Labor Compliance Agreements. Stay tuned.