United States: New Executive Order Limits Ability Of Federal Contractors And Subcontractors To Use Their Own Employees When Taking Over Service Contracts

The U.S. government spends billions of dollars annually on contracts covered by the McNamara-O'Hara Service Contract Act (the SCA). These SCA-covered contracts can range in scope from building maintenance to base operations to weapon system maintenance. In January 2009, President Obama issued Executive Order 13495 (the Order), which established a policy to protect incumbent workforces, and thus limiting the ability of employers to use their own staff when assuming federal service contracts or subcontracts.

Four years since the Order was issued, the Department of Labor (DOL) and the Federal Acquisition Regulatory Council have issued final regulations and a new Federal Acquisition Regulation (FAR) contract clause, implementing the Order. The Order, DOL's regulations and the new FAR clause now apply to every federal contract and solicitation subject to the SCA that is above the current simplified acquisition threshold of $150,000.

The stated purpose of the Order is to reduce disruption during the transition between contractors by maintaining an experienced and trained workforce that is familiar with the federal government's personnel, facilities, and requirements. However, the Order introduces significant complications for a successor contractor in managing its workforce and staffing the new contract.

Set out below is a Q&A covering some of the key features of the Order. For more information, please contact Vinson & Elkins lawyers Tom Wilson, David Johnson, or Martin Luff.

What contracts are covered by the Order?

The Order relates to federal contracts and subcontracts subject to the SCA and worth more than $150,000. The SCA covers contracts with the principal purpose of furnishing services to the federal government through the use of service employees. The definition of service employee includes any employee performing services on a covered contract other than an executive, administrative, or professional employee who meets certain exemption criteria.

Subcontracts subject to these requirements should include provisions that the "subcontractor will honor" key requirements of the new provision, FAR 52.222-17. Because prime contractors may incorporate into subcontracts this FAR requirement by reference, subcontractors on these projects must carefully review their contracts to ensure that they comply with all relevant requirements. 

Various types of service contracts are exempted from the Order, including construction contracts (i.e., those covered by the Davis-Bacon Act), contracts under Walsh-Healey Public Contracts Act, public utility service contracts, and certain contracts for transporting freight or personnel. 

In what circumstances will a new contractor be required to make offers of employment?

Offers must be made to qualified employees of the predecessor contractor if the same or similar services are to be performed at the same location. Employees must be given 10 days to accept offers and there must be no employment openings under the new contract until this right of first refusal has been provided.

Which employees must receive offers?

Only those employees who worked on the contract during the last 30 days of the existing contract and who would otherwise be laid off or terminated as a result of the transfer of the contract are entitled to receive offers. Therefore, if the predecessor contractor is able to reassign its employees, offers need not be made to those employees.

Managerial, supervisory, or non-service employees on the current contract are not entitled to an offer of employment.

Further, if a new contractor has reason to believe, based on "written credible information from a knowledgeable source," that an employee's job performance while working on the current contract has been unsuitable, that employee is not entitled to an offer of employment on the new contract.

Can the new contractor use its own employee to perform the services instead?

Yes. The new contractor may employ its current employee before offering employment to the existing contractor's employees, but only if the new contractor's current employee has worked for the new contractor for at least three months immediately preceding the first date of performance on the new contract, and would otherwise face layoff or termination if not employed under the new contract.

Can the new contractor reduce the size of the workforce and therefore make offers to only a portion of the workforce?

Yes. However, the new contractor must offer employment to any qualified displaced employees if any openings occur during the first 90 days of performance on the new contract.

What are the consequences of noncompliance?

The DOL has the ability to remedy noncompliance in a number of ways including: requiring the successor contractor to offer employment; withholding payments on the government contract to pay for resulting lost wages; suspending payments on the government contract; and instituting suspension or debarment proceedings.

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