On October 24, on the eve of its implementation, the U.S. District Court for the Eastern District of Texas issued a nationwide order halting the implementation of the bulk of Executive Order 13673, Fair Pay Safe Workplaces, which imposes new reporting requirements on government contractors regarding labor law violations and prohibits them from entering into pre-dispute arbitration agreements for matters arising under Title VII of the Civil Rights Act and for torts based on sexual assault or harassment. Under the Executive Order, contractors bidding on government contracts that exceed $500,000 are required to represent whether any administrative merits determination, arbitral award or decision, or civil judgment has been rendered against them within the past three years for violations of 14 labor laws and Executive Orders, including the Fair Labor Standards Act (“FLSA”), the Occupational Safety and Health Act of 1970 (“OSHA”), the National Labor Relations Act (“NLRA”), the Family and Medical Leave Act (the “FMLA”), Title VII; the Americans with Disabilities Act of 1990 (“ADA”), and the Age Discrimination in Employment Act of 1967 (“ADEA”). The Executive Order was set to go into effect on October 25, but given the injunction, it is expected that the government will temporarily suspend implementation and appeal the ruling. 

The FAR rule implementing the Executive Order and U.S. Department of Labor’s (“DOL”) Guidance (collectively, “New Rule”) requires offerors to report information about labor law violations on the Federal Awardee Performance and Integrity Information System (“FAPIIS”), including administrative merits determinations–non-final determinations made by an agency–regardless of the severity of the alleged violation, whether a government contract was involved, and whether a hearing has been held or an enforceable decision has been issued. Under the Executive Order, contracting officers are required to consider the information provided by offerors to determine whether they were “a responsible source that has a satisfactory record of integrity and business ethics.” The New Rule also requires offerors who report violations to demonstrate their efforts to mitigate them and/or to enter into labor compliance agreements, or else be subject to a range of penalties, including being denied a contract award, or being referred for suspension or debarment. 

Texas and national trade associations, whose members regularly bid on and are awarded government contracts, brought action to enjoin implementation of the New Rule. They argued that their members would be irreparably harmed by the New Rule in exercising their Due Process and First Amendment rights, and brought to the court’s attention many of the concerns that the public raised in the comment period to the proposed rules and guidance. In granting the plaintiffs’ motion for preliminary injunction, the court focused on a number of issues:|

1. The Executive Order is Preempted by Other Federal Laws and Abridges Due Process Rights. It held that the New Rule is preempted by other federal labor laws. The court held that in the NLRA, FLSA, OSHA, Title VII, ADEA and ADA, “Congress spelled out in precise detail what agency or court would be empowered to find a violation, how such a finding would be determined, and what the penalty or remedy would be. None of these laws provides for debarment or disqualification of contractors for violations of their provisions; none of them provides for such determinations to be made by unqualified, agency contracting officers or Agency Labor Compliance Advisors (“ALCA”), a position created by the new rules, and certainly none of these laws provides for such action to occur based on non-final, unadjudicated, ‘administrative merits determinations.’” The court noted that in instances in which Congress has allowed suspension or debarment for labor laws that apply to government contracts, the statutes require a final adjudication of the alleged violations, which are subject to judicial review, with full protections of the contractors’ due process rights.

By requiring contractors to publically disclose allegations of labor law violations, and then disqualifying them or require them to enter into “premature labor compliance agreements” based on nothing more than allegations, the New Rule departs from Congress’ instructions regarding how to address labor law violations. In addition, the court held that the New Rule conflicts with all 14 of the labor laws they invoke because they permit disqualification based on “administrative merits determinations,” which are merely allegations made by agency employees and not final agency findings of violations, and can be contested or settled without an admission of fault. The court held that the New Rule likely violated the plaintiffs’ due process rights because it compelled them to report and defend against non-final agency allegations without being entitled to a hearing at which they could contest the allegations.

2. The New Rule Infringes on First Amendment Rights. The court found that the New Rule appeared to infringe on the plaintiffs’ First Amendment rights because it “compelled speech” by requiring contractors to report any alleged violation of the labor laws, regardless of whether they occurred while performing government contracts or whether they had been adjudicated after a hearing or settled without a hearing. By compelling contractors to engage in public speech on matters that adversely affect their reputations, the New Rule infringed on contractors’ First Amendment rights. 

3. DOL Defined “Serious, Repeated, Willful, and Pervasive” Different from the Statutes.One of the major concerns contractors had with the New Rule concerned the definitions of “serious, repeated, willful, or pervasive violations” of the 14 labor laws, on which a responsibility determination would be based. The court noted that the DOL’s Guidance defined those terms in a manner that differs from the labor statutes. This is important because the New Rule specified that the contracting officer, with the advice of the ALCA, a position requiring no specialized skill or training, would be charged with interpreting these terms which could compromise a contract award. It was unclear to the court how contracting officers and ALCAs would be able to review disclosures related to labor laws–in which neither the contracting officers nor ALCAs are trained–within three days, and concluded that the new system is likely to lead to delays and arbitrary and inconsistent results in assessing contractor responsibility. 

4. The Federal Arbitration Act Overrides the New Rule. As for arbitration provisions, the court held that the Federal Arbitration Act required courts to enforce arbitration agreements according to their terms. There was no congressional command that overrode this requirement, and therefore it enjoined the portion of the New Rule that requires contractors to agree not to enter into any mandatory, pre-dispute arbitration agreements with their employees or independent contractors for matters arising under Title VII or for torts relating to sexual assault or harassment.

5. The Government Failed to Support the Stated Need for the New Rule. The court noted that the defendants had not supported the purported basis of the regulation–that government contractors who fail to comply with labor laws are also poor performing government contractors–because they had not demonstrated that there was a relationship between unresolved allegations of labor law violations and performance on government contracts, but rather had relied on studies that involved “the most severe findings of labor violations by agencies and courts.”  In addition, the court noted that the new regulations were expected to impose additional costs on government contractors, but the government had not been able to quantify the benefits that would result from the New Rule as required by the Procurement Act, and that in fact the opposite appeared to be the case.

6. The Pay Transparency Rules Will Still Be Effective January 1, 2017. The court declined to suspend implementation of the pay transparency portion of the New Rule, which requires contractors to provide wage statements with specified information to employees and to provide exempt employees and independent contractors with notice of their employment status with the company. Federal contractors should be prepared to provide appropriate wage statements and notices to employees and independent contractors prior to January 1, 2017. 

Although this decision is certainly a setback for the implementation of the New Rule, the New Rule is not dead. The Fifth Circuit has a long-standing reputation for being business friendly. A preliminary injunction simply hits the pause button on implementation until the case can be fully adjudicated. It is likely that the Obama administration will temporarily suspend implementation of the New Rule, but is considering its options to file an interlocutory appeal or amend the New Rule. While the injunction gives contractors some additional time to evaluate their track record of labor law compliance and, if need be, to come into compliance, the New Rule may well be implemented in some form and contractors should continue to prepare for that possibility.

About the Authors: Ambika Biggs and Nichole Atallah are attorneys with PilieroMazza. They may be reached at [email protected] and [email protected], respectively, or at 202.857.1000.  

Note: This article will be featured in the next edition of the Legal Advisor Newsletter.