Labor Laws and Federal Contracting Intersect: How Universal Health Systems Could Subject Federal Contractors to False Claims Act Liability

This post was drafted with contribution from Annie Prasad, law clerk.

The Supreme Court has made federal contracting more treacherous by extending the reach of False Claims Act (“FCA”) liability.  While the decision related to FCA liability for misrepresentations related to staffing levels, the case may provide a roadmap for federal officials looking to trigger FCA claims against contractors who are noncompliant with federal labor laws enforced by the Department of Labor.  Specifically, those at risk of debarment or cancellation of contracts due to noncompliance with Executive Order 11246 or the proposed Fair Pay and Safe Workplaces Executive Order may be at risk of more serious penalties.

On June 16, 2016, the Supreme Court issued its decision in Universal Health Services v. United States ex rel. Escobar, 579 U.S. ___ (2016).  At issue, was the reach of the implied false certification theory of liability under the FCA. Under the implied false certification theory, a defendant can be held liable for a false claim if he submits a claim while knowingly being noncompliant with a regulatory, statutory, or contractual requirement to receive government payment. However, in order to be actionable, the violation must be material to the government’s payment decision. The Court indicated that the materiality standard is “demanding,” and a misrepresentation or a minor violation would not suffice. However, the decision goes beyond the notion that the false claim must be a misrepresentation related to the work performed or improper billing.

The Court’s ruling has implications in the labor and employment context for federal contractors seeking to comply with Executive Orders 11246 (Equal Employment Opportunity) and 13673 (Fair Pay and Safe Workplaces). Federal contractors can face a wide variety of sanctions for noncompliance with either executive order, the most severe of which is debarment. The Office of Federal Contract Compliance Programs (“OFCCP”) considers violations and the appropriate sanctions on a fact-specific, case-by-case basis. There are a number of alternate, less severe sanctions that the OFCCP will consider before debarment, such as withholding payments or canceling a single contract. See e.g., OFCCP v. Disposable Safety Wear, 92-OFC-11 (Sept. 29, 1992) (considering alternate sanctions before ordering debarment).

Although federal contractors do not make claims in the traditional sense, there are a number of ways the FCA could be implicated. For example, a federal contractor could knowingly fail to disclose labor law violations in violation of the Fair Pay and Safe Workplaces executive order, and apply for government funding. A contractor could seek reinstatement after losing funding or being debarred without redressing the violations associated with the sanction. Less severe sanctions and their corresponding violations therefore pose an interesting challenge for defendant corporations who may be noncompliant with either of the executive orders and therefore potentially liable under the FCA and Universal Health Services’ implied certification liability. Due to the severity of debarment, a violation rising to that level could suffice as material. However, with the possibility of reinstatement, it is still unclear whether that can be said with certainty. Although the Court sought to clarify the materiality standard, the language is still ambiguous enough to invite litigation especially with middle ground sanctions like withholding payment or selective contract cancellation. It remains to be seen how courts will apply the Universal Health Services materiality test in the employment context, and it is another reason to be concerned about recent enforcement acts of the agency.