Obama Executive Order Places New Burdens and Restrictions on Federal Contractors

In an unwelcome, mid-summer surprise for the business community, President Obama signed the Fair Pay and Safe Workplaces Executive Order on Thursday July 31, 2014 requiring federal contractors to report violations of federal and state labor and employment laws and prohibiting certain contractors from requiring that employees arbitrate disputes alleging violations of Title VII or claims for sexual assault or harassment.  The Executive Order also requires federal contractors to provide relevant information about hours worked and overtime on employee paychecks.

Summary of Executive Order

Declaring that “[c]ontractors that consistently adhere to labor laws are more likely to have workplace practices that enhance productivity and increase the likelihood of…satisfactory delivery of goods and services to the Federal Government,” the Executive Order will require companies seeking new federal contracts of $500,000 or more to disclose statutory violations—including “any administrative merits decision, arbitral award or decision, or civil judgment”–that occurred over the previous three years.   The covered laws include the Fair Labor Standards Act, Title VII and other federal employment discrimination laws, the National Labor Relations Act, the Family and Medical Leave Act, the Occupational Safety and Health Act, and any similar state laws.  Contracting officers are expected to consider the contractor’s record in deciding whether a contract should be awarded.  Contractors will also be required to obtain the same information on violations from proposed subcontractors.

In addition to the pre-contract reporting, companies that are awarded contracts will be required to provide the contracting agency with updated information on violations and obtain the same information from subcontractors every six months during the term of the contract.  Each contracting agency is required to appoint a senior agency official to be a Labor Compliance Advisor.  Among other things, the Labor Compliance Advisor will review the disclosures and assist in determining whether action should be taken against a prospective or current contractor.  Companies with serious, repeated, willful or pervasive violations may be suspended or barred from further contracts.

In a section entitled “Paycheck Transparency,” the Executive Order requires employers with contracts of $500,000 or more to provide all employees performing work under the contract, including subcontractors, with information accompanying their paycheck that shows the individual’s hours worked, overtime hours, pay and any additions to or deductions from pay.  Many contractors already provide this information in order to comply with state and local wage law requirements.

In a section entitled “Complaint and Dispute Transparency,” the Executive Order prohibits companies with federal contracts or subcontracts of $1 million or more from requiring employees to sign arbitration agreements for disputes alleging violations of Title VII (including sex, race, national origin and religious discrimination claims) or “any tort related to or arising out of sexual assault or harassment.”  A similar prohibition currently exists for federal defense contractors, pursuant to the Franken Amendment enacted in 2009.

Unlike the restrictions on arbitration placed on defense contractors, which were the result of federal legislation, the restrictions here are the result of executive action.  To the extent the Executive Order effectively amends the Federal Arbitration Act (“FAA”) to preclude mandatory pre-dispute arbitration of Title VII and sexual assault/harassment claims, it raises the question of whether the President has the authority to do.  It remains to be seen whether the Executive Order will be subject to legal challenge by employers and/or employer groups (presumably after final regulations are issued) and whether such a challenge will be successful.

The Executive Order carves out from the arbitration restrictions agreements to arbitrate contained in collective bargaining agreements.  It also excludes mandatory arbitration agreements entered into between a federal contractor and employee prior to the contractor bidding on a contract that is covered by the Executive Order, but then states an exception to this exclusion for such arbitration agreements where the employer “is permitted to change the terms of the contract with the employee” or “when the contract is renegotiated or replaced.”  This carve out suggests that federal contractors who are at-will employers or who have otherwise retained the right, in an employee handbook or elsewhere, to unilaterally amend an arbitration agreement, will not be able to continue to enforce these agreements once the Executive Order takes effect, even if the employer is subject to a pre-existing federal contract.  This, of course, raises the important question of when the Executive Order takes effect, discussed further below.

When Does the Executive Order Go Into Effect?

The Executive Order contains several provisions regarding its effective date.  The Executive Order directs the Federal Acquisition Regulation (“FAR”) Council working with the Department of Labor to issue implementing regulations regarding the violation reporting, paycheck and arbitration sections of the Executive Order and to do so “in a timely fashion after considering all public comments, as appropriate.”  The final section of the Executive Order states that “it shall become effectively immediately” but also provides that the Executive Order “shall apply to all solicitations for contracts as set forth in any final rule issued by the FAR Council.”  While not the most artful draftsmanship,  together these provisions suggest that contractors will not be subject to the Executive Order until new rules and regulations are issued, which could be sometime in 2015 or later, given the normal course of review and comment for proposed regulations.  What this also appears to mean is that contractors with mandatory pre-dispute arbitration agreements can continue to enforce those agreements as to Title VII and sexual assault/harassment claims until final rules and regulations on the arbitration restrictions are issued.

What This Means for Employers

Once effective, the Executive Order will place new administrative burdens on contractors to track and report violations of labor and employment laws and to collect this information from subcontractors.  Contractors with reportable labor or employment law violations can expect scrutiny of their record in the contracting process.  This may lead employers to settle certain disputes rather than risk an adverse decision.  Contractors (and subcontractors) with mandatory pre-dispute arbitration agreements should review their agreements to determine whether they will need to be revised to comply with the Executive Order once final regulations are issued.  In the meantime, employers and employer groups with an interest in this subject should keep an eye out for Notices of Proposed Rulemaking and consider submitting comments in connection with the rulemaking process.  We will report in future posts on any developments in this area.