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Three New Executive Orders Will Have A Significant Impact On Federal Contractors

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February 19, 2009

(1) Notification of Employee Rights Under Federal Labor Laws

The Executive Order titled "Notification of Employee Rights Under Federal Labor Laws" revokes Executive Order 13201 (Beck Notice Requirements), and imposes new obligations on federal contractors to inform employees of their rights under the National Labor Relations Act ("NLRA"). Previously, Executive Order 13201 required federal contractors to post notice advising employees of their right to "opt out" of paying that portion of any union dues used by unions for activity not related to the administration of the collective bargaining agreement.

Under the new "Notification of Employee Rights Under Federal Labor Laws" Executive Order, federal contractors are required to post a soon-to-be released notice advising employees of their rights to bargain collectively and to be protected in the exercise of their rights to engage in union activity. The Order also requires all prime government contractors to contractually require that all subcontractors provide the same notice requirement to the subcontractor's employees.

Section 3(b) of the new Executive Order provides that the Secretary of Labor is responsible for administration and enforcement of the Order, and directs that within 120 days of the effective date of the Order, the Secretary of Labor shall initiate rule making to prescribe the size, form, and content of the notice that contractors must post.

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On its face, this Executive Order may seem somewhat innocuous. However, the Order further provides that contractors "will comply with all provisions of the Secretary's notice and related rules, regulations and orders of the Secretary of Labor." The new posting requirements, and associated contract language mandating such posting, will restate the underlying principles of the NLRA. Consequently, any contractor alleged to have committed objectionable election misconduct, or to have engaged in conduct constituting an unfair labor practice under the NLRA, will be in violation of the Secretary's notice and rules and therefore subject to remedies imposed by the Secretary of Labor. These remedies include contract cancellation and debarment. Of course, the new Executive Order does provide standard due process before the Secretary can take such actions.

The "Notification of Employee Rights Under Federal Labor Laws" Executive Order applies to all companies defined as government contractors under applicable regulations. The Order further states: "This Order shall become effective immediately and shall apply to contracts resulting from solicitations issued on or after the effective date of the rules promulgated by the Secretary pursuant to Section 3(b) of this Order." What this means is that the Secretary of Labor is charged with commencing rule making immediately, but that the Order will only apply to "contracts resulting from solicitations issued on or after the effective date of the rule promulgated by the Secretary."

(2) Nondisplacement of Qualified Workers Under Service Contracts

The Executive Order entitled "Nondisplacement of Qualified Workers Under Service Contracts" revokes Executive Order 13204 (issued in 2001), and reimposes the obligation for successor service contract employers to hire their predecessor's employees.

Pursuant to the "Nondisplacement of Qualified Workers Under Service Contracts" Executive Order, employers assuming existing federal service contracts must give the predecessor's employees (other than supervisors or managers) a right of first refusal of employment. The time within which a predecessors employees are required decide whether to accept such an offer cannot be fewer than 10 days. "Service contract" or "contract" means "any contract or subcontract for services entered into by the federal government or its contractors that is covered by the Service Contract Act of 1965, as amended, 41 U.S.C. 351 et. seq. and its implementing regulations."

This Executive Order makes clear that a successor contractor: (i) can elect to employ fewer employees than the predecessor did, (ii) can employ any employee who has worked for the contractor for at least three months immediately preceding the commencement of the new contract and who would otherwise face layoff or discharge, (iii) is not required to offer a right of continued employment to any employees of the predecessor contractor who are not service employees within the meaning of the Service Contract Act, and (iv) is not required to offer a right of continued employment to any employees of the predecessor contractor "whom the contractor reasonably believes, based on the particular employee's past performance, has failed to perform suitably on the job." The Executive Order also contains a limited number of exclusions setting forth certain types of service contracts to which the Order does not apply. Successor federal service contractors must contractually require that subcontractors comply with the employee nondisplacement requirements, as well.

Pursuant to Section 6(b) of the Order, "The Secretary shall, in consultation with the Federal Acquisition Regulatory Council issue regulations, within 180 days of the date of this Order, to the extent permitted by law, to implement the requirements of this Order. The Federal Acquisition Regulatory Council shall issue, within 180 days of the date of this Order, to the extent permitted by law, regulations in the Federal Acquisition Regulation to provide for inclusion of the contract clause in federal solicitations and contracts subject to this Order." In turn, the Order "shall become effective immediately and shall apply to solicitations issued on or after the effective date of the action taken by the Federal Acquisition Regulatory Council under Section 6(b) of this Order."

The real impact of this new Executive Order is that any time a successor employer hires a majority of its workforce from a predecessor, then under the NLRA, the successor generally must recognize any union which represented the predecessors workforce. Following recognition, the successor must negotiate a new bargaining agreement with that union.

The Executive Order authorizes the Secretary of Labor to enforce this Order and to sanction contractors and subcontractors for violations. Sanctions include requiring employment and payment of lost wages, and contract debarment for up to 3 years.

(3) Economy in Government Contracting

The Executive Order entitled "Economy in Government Contracting" makes union avoidance costs "disallowed expenses." Pursuant to this Order, contractors may not seek reimbursement for any expense undertaken to persuade employees to join, or not to join, a union. Disallowed expenses include, but are not limited to, the cost of preparing materials, the hiring of legal counsel or consultants, holding meetings (including the cost of wages and salaries of those employees and supervisors in attendance), and management time expended in planning or conducting such activities.

Section 5 of the Order further provides that, "[w]ithin 150 days of the effective date of this Order, the Federal Acquisition Regulatory Council shall adopt such rules and regulations and issue such orders as are deemed necessary and appropriate to carry out this Order." The Order "shall become effective immediately and shall apply to contracts resulting from solicitations issued on or after the effective date of the action taken by the FAR Council under Section 5 of this Order."

The new Executive Order does not prevent federal contractors from holding informational meetings with employees to encourage them to remain union free, but it does require that federal contractors bear the entire cost of any such activities.

Potential Legal Challenges and Practice Pointers

These new Executive Orders seem to run contrary to judicial authority precluding state or federal officials from enacting laws or executive orders that either alter the balance of bargaining or economic power that the NLRA establishes, or that provide alternate remedies and procedures for enforcing remedies for certain NLRA violations. Thus, all three Orders appear to be subject to judicial challenge on grounds that they are preempted under the NLRA.

However, until the outcome of any legal challenges is known, federal contractors must make plans now to comply with these Executive Orders. In planning to comply with the Orders, federal contractors should consider the following points:

  1. Review government regulations defining the term "government contractor" to determine which contracts are subject to the new Executive Orders.
  2. Given the new Executive Order revoking the Beck posting requirement, review all employee postings and required contract clauses to ensure compliance with federal mandates.
  3. New accounting procedures will be needed to segregate not only costs for outside counsel and consultants, but also expenditures such as payroll costs for even short employee meetings, as well as paper and copying expenses for handouts and bulletin board postings relating to employer communication to employees concerning union activity.
  4. Contractors should scrutinize the procedures they use to seek expense reimbursement, as well as the language used to characterize those requests. Consideration should be given to including potential costs of communicating with employees about union activity in the upfront fees negotiated with a government agency in relation to new contracts.
  5. Be mindful of potential successorship obligations when negotiating government service contracts. Employers taking over government service contracts from predecessor contractors often desire to enhance profitability under the contract by reducing costs and increasing efficiencies. The requirement that a successor government contractor under a service contract offer continued employment to predecessor contractor employees probably will require that the successor contractor offer comparable pay, benefits, and other terms and conditions of employment. Since successor contractor workforces are likely to be comprised primarily of predecessor employees, successor employers must be mindful of their resulting obligation to recognize any union representing the predecessor's workforce, and to negotiate a new contract with that union.

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