U.S. Government Contractor/Subcontractor Status: The Danger of Continued Complacency -

Federal government contracts impose significant compliance burdens upon both employers holding these contracts and their subcontractors. Until recently, most health care providers believed themselves shielded from "subcontractor" status. Just last year, however, the United States Department of Labor ("DOL") shattered this perception of safety.

In 2009, the DOL decided that a Pittsburgh hospital system was subject to affirmative action obligations even though it had no United States government contracts and no subcontracts with language tying it to affirmative action obligations. To make matters worse, 2010 finds the Office of Federal Contract Compliance Programs ("OFCCP"), which is the DOL subdivision in charge of enforcing government contract affirmative action obligations, flush with new funds, a new Director and bold new enforcement directives. Continued complacency about federal government contract affirmative action obligations is thus now all the more likely to expose non-compliant health care providers to prolonged and failed OFCCP audits, financial liability to employees deprived of their contractual protections, legal fees, administrative costs and potential debarment—all huge, unnecessary, and avoidable burdens in these tough economic times.

This article will explain how OFCCP v. UPMC Braddock, ARB No. 08-048 (May 29, 2009), which was predictably decided, radically changed the compliance landscape for healthcare providers and will share how health care employers can avoid its dire consequences in what promises, in 2010 and beyond, to be an increasingly aggressive regulatory environment.

I'm Not a U.S. Government Contractor, Am I?

With U.S. government dollars flowing into health care, health care providers should know whether they are or are not considered U.S. government contractors or subcontractors. If they are, and there are enough dollars involved, health care providers must maintain certain records and develop and administer affirmative action compliance programs aimed at ensuring equal opportunity in the workplace. OFCCP audits these affirmative action compliance programs and can impose significant costs and penalties on those who are non-compliant. On the other hand, health care providers who are not government contractors or subcontractors have no affirmative action program obligations, and the OFCCP has no jurisdiction over them. So, much rides on the question of whether a health care provider is or is not a U.S. government contractor or subcontractor.

Unfortunately, determining whether a health care provider is or is not a U.S. government contractor/subcontractor is not always easy to figure out. As the University of Pittsburgh Medical Center ("UPMC") hospitals recently found out, simply examining written contracts can produce the wrong answer. In this legal arena, and in the current regulatory environment, wrong answers can have very expensive consequences.

DOL's OFCCP v. UPMC Braddock Decision - How and Why?

The UPMC drama began when the OFCCP sent letters to three UPMC hospitals demanding to see evidence of their affirmative action compliance programs and seeking to schedule compliance reviews. None of the three UPMC hospitals had any such materials because none had ever believed or understood that they were U.S. government contractors. This rational belief was based on the fact that none of the UPMC hospitals either had any contract with the U.S. government itself or with anyone else that contained language tying them into any affirmative action obligations. In fact, the one contract that all three UPMC hospitals had with a U.S. government contractor, which was a contract with an HMO known as the UPMC Health Plan, contained express language which very clearly excluded the UPMC hospitals from the definition of a UPMC Health Plan "subcontractor." Secure in their belief that OFCCP had no jurisdiction over them, the three UPMC hospitals provided nothing to the OFCCP, asserting that they had no affirmative action obligations and that OFCCP was pursuing them in error.

Through what could only have been very expensive litigation, the UPMC hospitals learned the hard way the danger of relying upon rational beliefs to support a legal position on a question of employment law.

The DOL completely rejected the UPMC hospitals' claims that they could not be bound by provisions that were absent from their contracts. The DOL was equally unimpressed by the UPMC hospitals' assertions that they were entitled to rely upon the only contractual language that addressed the issue, which specifically excluded them from such obligations. Finally, the DOL found that the UPMC hospitals were not entitled to rely upon DOL's 2003 decision in OFCCP v. Bridgeport Hospital, ARB No. 00-034 (January 31, 2003), which has, since it was decided, been widely understood in the health care industry as insulating health care providers from the "subcontractor" status that can tie them into U.S. government contractor affirmative action obligations.

Perhaps the worst part of UPMC v. Braddock is that the decision is unlikely to be overturned. Notwithstanding the outrage and disbelief it has elicited from many in the industry, the decision is sound from a legal perspective. To anyone acquainted with how the DOL interprets the law, OFCCP v. UPMC Braddock was actually quite predictable. The UPMC hospitals went awry in two primary ways. First, they relied too heavily on the common sense idea that one must have signed a contract containing contractual obligations before one can be bound by it. Second, they relied too heavily on OFCCP v. Bridgeport Hospital, which much of the health care industry has incorrectly come to understand as providing a very broad exclusion from U.S. government contract obligations for those who provide medical treatment to government employees.

The UPMC hospitals' first misstep stemmed from their failure to appreciate how employment law can be notoriously counterintuitive. As the DOL noted in its decision, U.S. government contract affirmative action obligations extend, as a matter of law, automatically to any "subcontractor" of any primary U.S. government contractor. The UPMC hospitals had a contract with the UPMC Health Plan, an HMO, which in turn had a U.S. government contract with the United States Office of Personnel Management ("OPM") to supply medical services to federal government employees. This is all that was legally necessary to bind UPMC hospitals, as a "subcontractor" of UPMC Health Plan, to affirmative action obligations subject to OFCCP jurisdiction. Because of the legally automatic nature of the subcontractor obligation, the fact that it was nowhere revealed in the contract between the UPMC hospitals and UPMC health plan was legally meaningless. Moreover, the definition of "subcontractor" that was contained in the contract itself was not at all helpful because, as the DOL stated, it is a basic legal principle that "parties cannot, by contract, invalidate the equal opportunity provisions of the three laws" that establish U.S. government contractor obligations. Id. at 7. Thus, in failing to look beyond their own contracts with the UPMC Health Plan, UPMC hospitals set themselves up for a losing fight with the OFCCP.

The UPMC hospitals second misstep was in relying, as many health care providers have since 2003, on the misperception that OFCCP v. Bridgeport Hospital automatically insulated them from subcontractor status. In that case, Bridgeport Hospital had a contract with Blue Cross/Blue Shield of Connecticut, Inc. ("Blue Cross") to provide medical care to Blue Cross's policyholders. Blue Cross, in turn, also had a contract with OPM to provide health insurance to federal government employees. DOL found there that Bridgeport Hospital was not a subcontractor subject to OFCCP's jurisdiction. However, as DOL has now made clear, the Bridgeport Hospital decision was a limited one based on the legal principle that whether an entity is a "subcontractor" to a federal government contract depends on whether the entity has contracted "to provide a portion of the contractor's obligation." As DOL explained, the Blue Cross contract with OPM in Bridgeport Hospital was a contract to provide health insurance, because Bridgeport Hospital was not an insurer. As such, it was not considered a subcontractor that assumed any of Blue Cross' U.S. government contractor obligations. By contrast, UPMC Health Plan was an HMO that contracted with OPM to provide actual medical services, and UPMC hospitals provide such medical services. As such, UPMC Hospitals were considered subcontractors who assumed UPMC Health Plan's U.S. government contractor obligations. To the DOL, the distinction was that simple.

How to Avoid the UPMC Hospitals' Fate

The good news about OFCCP v. UPMC Braddock is that it serves as a useful wake-up call. The first key to avoiding problems with government contractor affirmative action obligations is knowing you have them in the first place. If you do, though they may initially seem burdensome, such obligations are not overly difficult to live up to once an affirmative action compliance program has been set up. It is simply a matter of getting it right at the outset, then paying regular attention and devoting the resources to ensure routine compliance. When done correctly, there is no reason why OFCCP oversight should ever be an ordeal, and proactive U.S. government contractors routinely have no trouble with the OFCCP. So how can health care providers avoid the fate of the UPMC hospitals? There are three easy steps:

Step One: Know Your Contractual Partners.

U.S. government contract affirmative action obligations only attach to those who are either doing business directly with the U.S. government or are "subcontractors" of U.S. government contractors. Clearly, health care providers should presumably be aware when they are contracting directly with the U.S. government itself. It can be a little trickier, however, to know when a contractual partner which is itself a private entity is also separately a U.S. government contractor who may pass along its government contractor obligations.

Taking a page from the unfortunate experience of the UPMC hospitals, it is critically important to ask "am I getting into, or am I in, a contract with a U.S. government contractor?" At the contracting stage, this is a simple matter of asking the question in due diligence. Beyond the contracting stage, it is a matter of analyzing the nature of existing contract obligations. For example, if a health care provider's contract with a non-governmental entity obligates the health care provider to sell goods or render services at a government-owned property and/or that are for the benefit of government employees, a U.S. government contract may well be involved. If the answer to the question "am I dealing with a U.S. government contractor" is "yes," further analysis is necessary.

Step Two: Know Whether the Relationship Makes or Will Make you a "Subcontractor."

If a health care provider determines that it is already in, or is contemplating entering, a contract with a party that is a U.S. government contractor, it is then necessary to determine whether the nature of the contract itself makes or will make the health care provider a "subcontractor" as a matter of law. Again, it does not matter how the parties define the term "subcontractor" or otherwise characterize the relationship. What matters is whether the health care provider is, by virtue of the contract, assuming any portion of the contractor's obligation to the U.S. government. If so, "subcontractor" status attaches, together with the associated affirmative action obligations and OFCCP jurisdiction. If not, nothing passes through.

A health care provider's ability to accurately assess whether any given contract with a U.S. government contractor renders or will render the health care provider a "subcontractor" naturally must begin with a clear understanding of what the contractor's obligation to the government entails. Had UPMC hospitals understood and perceived the difference between UPMC Health Plan's obligation to provide government employees with medical services as an HMO and Blue Cross' obligation to provide government employees with insurance benefits as an insurer, they presumably would never have made the mistake of believing themselves insulated by the DOL's Bridgeport Hospital decision. With the benefit of the distinctions now made in OFCCP v. UPMC Braddock, however, it is clear that a health care provider that has negotiated, or is in negotiations, with a U.S. government contractor must focus first on what the U.S. government contractor has agreed to provide to the government.

Once the health care provider has a clear and thorough understanding of the nature of the U.S. government contractor's obligation to the government, the next question is whether the health care provider's contract has anything to do with that obligation. If there is no relationship between what the health care provider must do for the contractor and what the contractor must do for the government, there is little danger of the DOL considering the health care provider a "subcontractor." If, however, the contract at issue even arguably involves the health care provider in performing, undertaking or assuming any portion of the contractor's obligation to the U.S. government, then "subcontractor" status, and corresponding affirmative action obligations and OFCCP jurisdiction, all likely attach to the health care provider.

Undoubtedly, this framework is easier to describe in the abstract than it is to apply to any given situation. But the OFCCP v. UPMC Braddock decision is a poignant demonstration of the perils of failing to appreciate and undertake the analysis. Moreover, grasping and applying the framework that the DOL has now clearly articulated in OFCCP v. UPMC Braddock may, in some cases, allow contracts to be structured, or restructured, in ways to avoid "subcontractor" status, not by ignoring or attempting to contract away the issue as UPMC hospitals did, but by more clearly contemplating and defining what the health care provider is obligated to do. In some cases, taking on a portion of the contractor's U.S. government contract obligations may be only incidental to the health care provider's actual or contemplated relationship with the contractor. Where this is true, health care providers may choose to carve such undertakings out of their contracts. Alternatively, health care providers may negotiate an additional price for such undertaking to defray the cost and trouble of the additional obligations "subcontractor" status will entail. A health care provider can do neither, however, unless it first understands whether it is dealing with a government contractor and what that contractor's obligations are to the government.

Step Three: If Covered, Establish and Properly Maintain an Affirmative Action Compliance Program.

Some health care providers want nothing to do with U.S. government contract obligations under any circumstances. They will make conscious business decisions to avoid them. Others, however, will find either that they are already entrenched in such relationships or that passing up such relationships means passing up lucrative sources of business, meaningful market share, or both. For those in this second category, taking on affirmative action compliance obligations and submitting to the OFCCP's jurisdiction may at first seem a daunting and harrowing challenge. In reality, however, for those willing to devote the resources to doing it properly, it can easily become routine, manageable and controllable from both a cost and a risk perspective.

U.S. government affirmative action obligations are intended to be an exercise in self-regulation. When properly established and faithfully administered, they need never become anything but. The basic intention is that each covered contractor must establish, consistent with regulations published by the OFCCP, an affirmative action compliance program aimed at attempting to achieve equal employment opportunity for women, minorities, individuals with disabilities and veterans. It is also contemplated that the contractor should, through its affirmative action program, regularly self-diagnose its own challenges in achieving equal opportunity goals, make both internal adjustments and external outreach efforts aimed at addressing these challenges, and keep certain required, detailed written records of the whole process. Although many mistakenly believe that affirmative action compliance programs involve quota systems, they do not. Rather, contractor compliance is measured by "good faith" efforts toward achievement of equal opportunity goals.

When affirmative action compliance programs are set up and administered as contemplated in OFCCP regulations, U.S. government contractor or subcontractor interactions with the OFCCP are generally routine and uneventful. The OFCCP has a three-step "audit" process to measure contractor compliance. However, it is only when the OFCCP detects certain "red flags" during the first step, known as the "desk audit," that it even proceeds to the second. These red flags clearly include, as in the UPMC hospitals matter, a contractor's failure to maintain an affirmative action compliance program. More often, however, they involve the contractor's failure to keep proper records under the regulations, failure to self-monitor or undertake appropriate measures to address statistical underutilization of women or minorities and/or failure to undertake appropriate outreach efforts to attract qualified women, minorities, disabled individuals and veterans.

Where a contractor has faithfully developed and applied its affirmative action program so that not one of the "red flags" is present, OFCCP quietly does its work, issues the contractor a clean bill of health and moves on. By contrast, where OFCCP finds its red flags, what often ensues is a costly administrative investigation involving onerous requests for enormous amounts of information, followed by determinations of non-compliance and notices of violation. In a worst case scenario, OFCCP finds large, class-like groups of people identified as "victims" of "systemic discrimination." These findings almost always lead to OFCCP making demands for enormous sums in "make whole remedies" for those it claims were victimized, from which either a tedious process of conciliation or costly litigation ensues. Then, the contractor is subject to increased oversight and remains in OFCCP's cross-hairs, sometimes for years to come. So, considering how relatively easy it is to do affirmative action compliance programs correctly and avoid the "red flags," it certainly pays to do so.

From Complacency to Compliance

Unfortunately, 2010 is likely the beginning of the end of health care employers' ability to complacently ignore their potential government contractor/subcontractor status. Both the Obama Administration's philosophical sympathy toward the mission of the OFCCP and the large infusions of federal dollars into the economy through TARP, the ARRA and other programs, have resulted in an enormous amount of new resources funneled into the OFCCP to support aggressive enforcement directives. As of 2010, the OFCCP is under new leadership and is actively hiring and training large numbers of new compliance personnel. Given DOL's pronouncements in OFCCP v. UPMC Braddock in 2009, it seems very likely that OFCCP enforcement efforts and personnel will be directed toward the health care industry in 2010 and beyond. Moreover, whatever version of health care reform is ultimately enacted is likely only to add fuel to what is already in motion at OFCCP and increase its focus on the health care industry.

All of this being said, the window period is now open for health care providers to end complacency, determine where they stand on U.S. government contractor or subcontractor status and, if applicable, implement and/or revisit their affirmative action compliance programs. Whatever anyone initially thought of the DOL's OFCCP v. UPMC Braddock decision, it provides useful guidance. And there is still time, though not much, to make lemonade before OFCCP comes knocking and discovers the lemons!

Jon Zimring and Cheryl Blackwell Bryson are partners in the Employment, Labor, Benefits and Immigration Practice Group in Duane Morris' Chicago office.

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United States: U.S. Government Contractor/Subcontractor Status: The Danger of Continued Complacency