United States: Federal Contractors Win Reprieve From Onerous Disclosure Requirements In Executive Order

Last Updated: November 2 2016
Article by Kenneth Rosenberg and Justin Schwam

In a victory for federal contractors, a U.S. District Court judge in Texas has temporarily blocked the enforcement of portions of the so-called "Fair Pay and Safe Workplaces" Executive Order 13673.

Specifically, the court put on hold the executive order's mandate that contractors publicly disclose non-final allegations of labor law violations and prohibition against certain pre-dispute employment arbitration agreements.

The court's preliminary injunction relieves contractors of having to comply immediately with the violations disclosure provision. However, federal contractors will still be bound by the order's "paycheck transparency" provision, which is set to take effect on January 1, 2017.

As discussed in our previous Alert, President Obama issued the order in the summer of 2014 to require federal contracting agencies to award federal contracts to contractors who have a history of responsibility and compliance with federal and state labor laws. The order applied to prospective federal contractors who enter into procurement contracts in excess of $500,000.

The order set forth three new obligations: 

  1. Disclosing and reporting to the contracting agency all "administrative merits determinations, civil judgments or arbitral awards or decisions rendered against it within the preceding three years" for violations of 14 federal labor laws and analogous state laws.[i]
  2. Providing to each employee who performs work under the contract, each pay period, a wage statement that contains information about their hours worked, overtime hours, pay, itemized additions or deductions from pay and whether or not they are considered independent contractors ("paycheck transparency").
  3. Prohibiting contractors with annual contracts valued at more than $1 million from requiring their employees to enter into new pre-dispute arbitration agreements (other than those in union contracts) to resolve disputes arising out of Title VII of the Civil Rights Act or from torts related to sexual assault or harassment.

The regulations implementing the disclosure requirements were set to phase in beginning October 25, 2016.[ii] Contractors would have been required to disclose labor law decisions rendered against them since October 25, 2015, and specific arbitration language would have been required in all applicable contracts offered after the effective date of the regulations. 

Fortunately, however, trade associations representing construction contractors and companies employing security officers filed a lawsuit in the United State District Court for the Eastern District of Texas to challenge the regulations and asked for an injunction to block the order from being enforced. Associated Builders and Contractors of Southeast Texas v. Rung, No. 1:16-cv-00425 (E.D. Tex.). 

In granting injunctive relief, the court honed in on the disclosure requirement and concluded that the plaintiffs were likely to succeed in their argument that the order is unconstitutional and otherwise flawed.

Requiring contractors to "publicly condemn" themselves by disclosing non-final administrative merits determinations, the court found, would appear to be unconstitutional compelled speech in violation of the First Amendment and a deprivation of due process contrary to the Fifth Amendment. The court also found that the new standards established in the regulations for contracting officials to apply when independently reviewing the contractors' disclosed labor law violations appeared to be preempted by the underlying labor laws themselves.

Because the rulemaking agencies had failed to adequately explain the need for, or benefit of, the new disclosure requirement, the court found that the rule was likely arbitrary and capricious under the Administrative Procedure Act. Finally, the court agreed with the plaintiffs that the prohibition against certain mandatory pre-dispute arbitration agreements appeared to violate the policy favoring arbitration established within the Federal Arbitration Act.

The effect of the injunction is that contractors are temporarily relieved from complying with the onerous disclosure obligations until the court issues a final determination on the merits or the injunction is dissolved on appeal. Additionally, the regulations could be modified in a manner that satisfies the majority of the infirmities identified by the court. For example, the rule could be narrowly tailored to require disclosure of labor law violations only after a final agency determination was issued against the contractor. Indeed, since the federal government has been attempting to impose the blacklisting requirements for many years it is unlikely it will abandon them entirely.

However, the court did not enjoin the implementation of the paycheck transparency regulations. Accordingly, contractors must take steps to ensure that they are ready to provide the required notice to employees or independent contractors on January 1, 2017. Specifically, federal contractors need to examine the wage statements/paystubs they currently distribute to their employees who perform work under covered contracts, to ensure that they set forth the hours worked, overtime hours, pay, itemized additions or deductions from pay and whether they are considered independent contractors. Although it is unlikely many covered contractors will have to change their wage statements as this information is typically provided to employees, it would be prudent for covered contractors to take the time to check now to avoid potential issues later. 

Consequently, while federal contractors can breathe a short sigh of relief as the blacklisting provisions and arbitration restrictions of the order have been temporarily enjoined, they should continue to vigilantly monitor this case and make contingency plans in the event the temporary injunction does not become permanent. Where a federal contractor is unsure of its obligations under the order, they should seek guidance from counsel experienced in government contracts/affirmative action matters.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Kenneth Rosenberg
Justin Schwam
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