Bankruptcy Fails to Save Contractor from Multimillion Dollar SCA Back Wage Liability

September 20, 2017

By Nichole D. Atallah

Any contractor who has been subject to a Department of Labor (“DOL”) investigation knows what unease feels like, even if there is no reason to believe the company will be subject to liability. One of the first questions we get as we help companies maneuver the process is “what are the consequences if DOL does find something wrong?” For companies that quickly realize there might be a problem, this question is even more poignant. Last month FPMI Solutions, Inc. (“FMPI”), a Virginia company that provided human resource services to the federal government, found out the true reach of the DOL after an investigation revealed over $3 million in wage and benefit liability under the McNamara-O’Hara Service Contract Act (“SCA”). 

After FMPI filed bankruptcy in June 2016, its creditors seized over $850,000 in funds in their bank accounts, leading to FMPI’s failure to pay its other debts including meeting its payroll obligations. DOL intervened during the bankruptcy process to ensure federal contract dollars were withheld to pay employees who were not paid as a result of these failures. During this process FMPI was purchased by Apprio, a tech solutions contractor, and Apprio agreed to pay the liability. 

There are a couple of lessons to be learned from the FMPI case: 
  1. Make Payroll. Failing to make payroll can set in motion many undesirable and costly outcomes. In addition to federal law violations, there are likely to be state law violations which in some states may lead to an obligation to pay triple the complained of damages. When companies are struggling financially for whatever reason, it is critical to remember the downstream costs of any decision not to meet a critical payment obligation such as payroll and determine the best way to mitigate the risk. 
  2. Acquisition Opportunity Costs. For companies that might see an attractive opportunity to acquire a struggling company, it is important to carefully vet the target’s payroll practices and personnel policies. Acquisition costs are expensive to begin with which may make it hard to walk away as the deal approaches closing. It is important not to downplay the risk and expense of employment practices and to have a legal team in place that specializes in identifying these risks. While many of these risks can be mitigated during the negotiation process, if a DOL issue arises, your investment may be threatened. Thoroughly examining the target’s employment processes will not only mitigate this risk, but will serve as a guide to what work will need to be done following closing. 
  3. Understand DOL’s Reach. Unlike with private sector employers, DOL harnesses the power to order withholding of funds on government contracts when contractors fail to pay assessed back wage liability. In fact, in some circumstances DOL does not even wait to fully investigate the claims when a contract may be coming to an end, limiting the opportunity to withhold on a contract. Contractors should understand they are entitled to due process and can push back appropriately. To prevent withholding in the first place, it is important to retain counsel early in the process to assess liability and communicate effectively with DOL. In addition to withholding funds, DOL has the ability to recommend a federal contractor for suspension and debarment proceedings and advance cases to the office of the solicitor. Although some investigators may seem to be unreasonable, most DOL offices are willing to listen to legal defenses and will work with employers to close out the investigation short of such drastic measures. 
While any investigation can be unnerving, assessing your risk early and intelligently participating in the process is a critical tool to minimize DOL liability. 

About the Author: Nichole Atallah is a partner and heads the Labor & Employment Law Group. She may be reached at natallah@pilieromazza.com, or at (202) 857-1000.
 
Please fill following information to download presentation