United States: The Revival Of The Nondisplacement Rule For Service Contractors

Government contractors, take note: On July 15, 2022, the Department of Labor ("DOL") published a Notice of Proposed Rulemaking ("NPRM") to implement and enforce the Biden Administration's Executive Order 14055 ("EO 14055"), entitled "Nondisplacement of Qualified Workers Under Service Contracts." EO 14055 revives and expands the nondisplacement rule applicable to many service contracts originally implemented by President Obama in 2009, then rescinded by the Trump Administration in 2019.

Background - Executive Order 14055

EO 14055, signed by President Biden on November 18, 2021, applies to contracts covered by the Service Contract Act ("SCA"). Per the "nondisplacement rule," on prime contracts of over $2,500, the prime contractor and its subcontractors must offer qualified employees employed under the predecessor contract a "right of first refusal" to continue their employment under the successor contract. Key requirements of the nondisplacement rule include: (i) the offer of employment must be for positions for which the employees are "qualified"; (ii) successor contractors must give predecessor employees a minimum of ten (10) business days to accept a written offer of employment; and (iii) the predecessor contractor must provide a list of all SCA employees, working under the contract within the last month of the contract term, at least ten (10) business days prior to the end of the contract, and the list must contain anniversary dates of employment. The DOL has not yet stated a timeframe for when the rule might become final.

EO 14055 excludes Contracts under the simple acquisition threshold (currently $250,000.00), pursuant to 41 U.S.C. Section 403, and all employees hired to work under both a federal service contract and one or more nonfederal service contracts as part of a single job.

Takeaway

For federal contractors who must already contend with the fact that the Continuity of Services provision in the Federal Acquisition Regulations, 48 CFR § 52.237-3, can significantly limit the use and enforcement of a non-compete restrictions, EO 14055 now expands these limits. While Continuity of Services is to ensure that such work will "continue without interruption" when such services are considered vital to the government, EO 14055's nondisplacement rule similarly identifies a federal interest in the continuity of operations in covered service contracts. Here, a qualified employer cannot restrict its employees who are not only free to work for the successor employer, but they must be offered a right of first refusal to maintain their positions.

While advanced by a new EO in the federal marketplace, locally the Montgomery County's Displaced Service Workers Protection Act (which we covered here), imposes a similar obligation on companies that win service contracts within the County, which must provide continued employment to a predecessor contractor's service employees for a 90-day transition period. Additionally, under D.C.'s recently enacted Displaced Workers Right to Reinstatement and Retention Amendment Act of 2020, covered employers (successor contractors) must offer eligible employees reinstatement to the employee's previous position or to a substantially similar position if there is a change in the ownership, controlling interest or identity of their employer.

Given these developments, federal contractors and other, similar local employers should re-visit their use of non-compete restrictions with their employees, confirming whether they are consistent with recent developments and trends in the law, as well as the most effective means to protect their business interests.

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