Michael C. Greene Fisher & Phillips LLP
Imagine your company receives a letter asserting it should be paying its minimum wage employees nearly $3 more
per hour. For many employers the acronyms OFCCP, AAP, and E.O. 11246 mean very little when, in fact, they should be the equivalent of a warning siren. So what do these acronyms mean? What do they have to do with increased minimum wages? And why should employers read the fine print in contracts?Background of Executive Order 11246
In 1965 President Lyndon Johnson signed Executive Order 11246 (“E.O. 11246”) which requires some federal contractors to implement Affirmative Action Plans (“AAP”). The executive order also gave life to the Office of Federal Contract Compliance Programs (“OFCCP”), which is the federal agency charged with policing federal contractors and their compliance with E.O. 11246. Throughout its life, E.O. 11246 has been amended and augmented by other executive orders and various statues – like Section 503 of the Rehabilitation Act and the Vietnam Era Veterans’ Readjustment Act – to include comprehensive protections for women, minorities, veterans, disabled individuals, and, most recently, LGBT individuals. As part of maintaining AAPs, contractors must keep detailed employment records (hire, promotions, demotions, wages, transfers, training, etc.) of data about every applicant and employee, as well as about their outreach efforts to protected groups. Last year, President Obama issued E.O. 13658 to increase minimum wage employees’ pay from $7.25/hr to $10.10/hr for most contractors and subcontractors that receive federal money under the Davis-Bacon Act, the Service Contract Act, or in connection with federal property or lands. Suffice it to say, the time and financial obligations federal contractors commit themselves to are demanding and expensive.Why this Matters to All Employers
The OFCCP estimates there are approximately 200,000 employers with 50 or more employees that have more than $50,000 in federal contracts. When an employer crosses this threshold, it subjects itself to the demanding requirements above. Clearly, an employer that knowingly enters a contract with the federal government is aware of the obligations. What many employers may not be aware of is that acting as a supplier, provider, partner, or sister-company of a federal contractor, the employer may transform into a federal subcontractor that is subject to the demands of E.O. 11246.
It is this less direct relationship with the federal government that could create financial liabilities for employers, while simultaneously kicking the door wide open for thorough government investigations.Determining Subcontractor Status
OFCCP regulations require federal contractors to include bolded Equal Employment Opportunity (“EEO”) language in purchase orders and subcontracts. The regulation’s intent is to place subcontractors on notice that they may be subject to the same terms and conditions federal contractors are. And while the intent may be to provide notice, the practical pitfalls are numerous. For example, some contractors fail to include the mandatory EEO language in their contracts. At the other end of the spectrum, many employers (non-federal contractors) voluntarily include EEO language in contracts as safeguards against discrimination lawsuits and not to signal federal contractor status. Regardless of a federal contractor’s actions, it is ultimately an employer’s obligation to determine whether it is a federal subcontractor.Running the Subcontractor Maze
So what is an employer supposed to do? Employers should maintain an open line of communication with customers and be conscious of where its products or services land. They should also train employees handling purchase orders and subcontracts to look for EEO language. A single contract for as little as $10,000 is enough to establish subcontractor status.Simply being a supplier, however, does not automatically commit a subcontractor to federal regulations. The goods or services provided to the federal contractor must be an integral part of the contractor’s ability to execute its federal contract. For example: a contractor building a federally paid-for parking lot hires two subcontractors, one that supplies concrete and one that supplies potato chips for the snack truck. The concrete supplier is a federal subcontractor subject to E.O. 11246, while the chip supplier is not. Employers should be careful, however, because the determination is fact dependent. Taking the example above, the same chip supplier could easily be a federal subcontractor if it were distributing chips to the commissary on a military base.If an employer finds it is facing federal subcontractor status, then it must determine if it will accept the federal contract obligations. An employer must comply with the newly acquired federal obligations or forfeit its connection to the federal contracts. There is no middle ground.More Obligations on the Horizon
In addition to signing executive orders, President Obama also supported the creation of the Equal Pay Report. The proposed regulations will require federal contractors and subcontractors to submit detailed reports about the pay rates for all of their employees. The OFCCP has openly stated it intends to use these reports as a factor in determining which federal contractors and subcontractors it targets for audits. It is a logical assumption that subcontractors who do not submit Equal Pay Reports for comparison will have a greater chance of being audited than subcontractors that do.Employers… Read the Fine Print
Regardless of the final version of the Equal Pay Report regulations, contractors and subcontractors can still suffer drastic consequence if they are not prepared for an audit. If the OFCCP finds violations, a contractor or subcontractor could be debarred from winning federal contracts in the future. An employer could also be forced to pay salary corrections for employees the OFCCP determines were incorrectly compensated. The cost to correct the pay for any workforce – large or small and over the course of a year or longer – could quickly add up.The seemingly hidden potential of being a federal subcontractor is not a new threat to employers. Employer awareness, however, is more critical than ever in today’s political climate. The OFCCP, with the President’s encouragement, is more aggressively auditing employers with federal contracts than in recent history. The demands placed on contractors and subcontractors are increasingly demanding more time and money. Despite miles of red tape, the burdens of federal contract work can be softened if employers read the fine print before signing a contract. As long as employers are aware of their obligations and plan accordingly, they can be profitable all while complying with the numerous rules and regulations of the OFCCP.About the Author:Michael Greene is an associate attorney at Fisher & Phillips Attorneys At Law. His practice ranges from litigating discrimination lawsuits before state and federal courts and agencies to counseling clients on FMLA, FLSA, and wage and hour issues, Read more.