New Burdens for Federal Contractors

It is becoming more burdensome under the Obama administration for leasing companies to do business as federal government contractors. In addition to maintaining an Affirmative Action Plan with accompanying statistics, reports, and logs, contractors will now be required to post a notice informing employees of the right to organize a union under the National Labor Relations Act (“NLRA”) and be required to use the federal E-Verify system to authenticate the identity and employment eligibility of job applicants and employees.

New Notice Requirement

On Jan. 30, 2009, President Obama signed Executive Order No. 13496, which requires federal contractors to post notice of their employees' rights to organize and engage in union activities under the National Labor Relations Act. The administration issued the order because, in its opinion, “the attainment of industrial peace is most easily achieved and workers' productivity is enhanced when workers are well informed of their rights under Federal labor laws, including the National Labor Relations Act.”

As instructed by the Order, the Department of Labor recently proposed regulations providing the specifics of the new posting requirement. The proposed regulations include the full text of the required notice, which indicates, among other provisions, that: 1) employees have the right to organize, join, or assist a union; to bargain collectively and to take collective action; and to strike and picket, unless their union has agreed to a no-strike clause; and that 2) it is illegal for an employer to question employees about union activities; to discriminate against employees because of their union activities; to promise benefits to discourage union support; or to prohibit employees from wearing union hats, buttons, t-shirts, and pins in the workplace except under special circumstances. On the other hand, the notice also indicates that: 1) employees may choose not to do any of these activities, including joining or remaining a member of a union; and that 2) it is illegal for a union to discriminate or take other adverse action against employees based on whether they have joined or support the union. The Order requires contractors to post the notice in a conspicuous place where employees engage in activities relating to the performance of the contract, as well as all places where notices to employees are customarily placed or electronically posted.

Compliance and Enforcement

In order to facilitate compliance, the Order requires federal agencies to include in qualifying federal contracts a provision that establishes the posting requirement. The required provision, which is set forth in the proposed regulations, must also be inserted in any subcontract for the performance of work that is “necessary” for execution of the federal contract. What is “necessary” to the performance of the federal contract is not explained.

The notice requirement will be enforced by the Office of Federal Contract Compliance Programs (“OFCCP”), which would have the authority to conduct evaluations to ensure compliance and to accept and investigate written complaints of noncompliance. If a contractor fails to comply after intervention from the OFCCP, the proposed regulations provide an adjudication procedure that could result in the suspension or cancellation of the contract or the disqualification of the contractor from future contracts.

Exceptions/Exemptions

The notice requirement does not apply to collective bargaining agreements or purchases under the simplified acquisition threshold of $100,000. It should be noted, however, that the $100,000 threshold does not apply to subcontracts. Thus, any subcontractor performing work necessary to the performance of the federal contract is required to post the notice regardless of the value of the subcontract. The Order further allows the Secretary of Labor to grant exemptions if applying the notice requirement would not serve the purposes of the Order or would impair the ability of the federal government to procure goods or services on an economical or efficient basis. Also, employers not covered by the NLRA, such as the federal and state governments, or employers who exclusively employ workers that are not “employees” under the NLRA, such as agricultural laborers, need not comply with the posting requirement.

Beck Notice Is No Longer Required

In addition to establishing the new notice requirement, the Order revoked Executive Order No. 13201, signed by President George W. Bush in 2001, which required federal contractors to post a notice informing employees that they cannot be required to become members of a union. This notice, the so-called “ Beck notice” named after the U.S. Supreme Court decision Communications Workers of America v. Beck , 487 U.S. 735 (1988), also indicated that non-member employees who were required by a collective bargaining agreement to pay an “agency fee” could object to the use of their agency fees for purposes unrelated to collective bargaining, contract administration, and grievance adjustments. While the new proposed notice includes a provision describing employees' rights not to join in a union, it does not mention the rights established in the Beck decision that had to be posted pursuant to Executive Order 13201.

The new posting requirement will not apply to federal contractors until the final regulations become effective, and that date has not been set. While compliance with the posting requirement is not onerous, it should be taken seriously in light of the potential consequences of noncompliance ' losing federal government business. Further, the significance of the posting requirement is that it signals that the Obama administration will not hesitate to further burden businesses, especially federal contractors, for the sake of Labor interests. We suspect there is more to come, so stay tuned!

If you have any questions about this or any other requirement, contact your legal counsel or your government contracting agent. The proposed regulations are available at http://edocket.access.gpo.gov/2009/pdf/E9-17577.pdf.

E-Verify

The federal government now requires federal contractors to use a free, Internet-based system called “E-Verify” to electronically verify the identity and employment eligibility of employees working under federal contracts. This requirement, referred to as the Federal Contractor Rule (or “the Rule”), instructs federal agencies to include language in federal contracts requiring qualifying contractors to use the E-Verify system to confirm the identity and employment eligibility of: 1) all persons they hire during a contract term, and 2) all current employees who perform work under a federal contract. The purpose of the Rule is to ensure that the federal government does business only with entities that have a legal workforce. For a better understanding of this new requirement, consider the following questions and answers.

Does the Rule Apply to all Federal Contracts?

Not all federal contracts. The Rule requires federal contracts meeting the following criteria to include the E-Verify clause:

1. the contract must be awarded on or after Sept. 8, 2009;
2. the contract must have a period of performance that is more than 120 days;
3. the contract's value must exceed the simplified acquisition threshold of $100,000; and
4. at least some portion of the work under the contract must be performed in the United States.

How Do I Know If My Company Is Required to Use E-Verify?

Whether your company is required to use E-Verify should be clear. The Rule affects federal contractors who are awarded a qualifying contract on or after Sept. 8, 2009. Further, in order for the Rule to apply to your company, the federal contract into which you entered must contain the government's pre-established E-Verify clause. Your government contracting official, not the E-Verify program, determines whether your contract should include the E-Verify clause. So to determine whether your company is covered, simply search your contract for the E-Verify clause, and check with outside counsel or your government contracting official if you have questions.

What Kinds of Employees Need To Be Verified?

The Rule requires qualifying contractors to verify the employment authorization of two classes of employees: 1) existing employees currently assigned to a federal contract; and 2) all new hires. However, the Rule exempts certain employees from the verification requirement: 1) employees hired before Nov. 7, 1986 and continuing in employment since that time; 2) employees previously confirmed as authorized to work under E-Verify (so long as he/she is not a new hire); 3) employees who perform support work, such as general company administration or indirect overhead functions (so long as he/she is not a new hire); and 4) employees with an active confidential, secret, or top-secret security clearance.

It should be noted that all employers have the option of using E-Verify to confirm the eligibility of their entire workforce regardless of whether they are assigned to a federal contract. But if your company is not a federal contractor, or if your federal contract does not include the E-Verify clause, you may only use E-Verify to verify new hires.

My Company Has Just Been Awarded a Federal Contract With the E-Verify Clause ' How Long Do We Have to Verify Qualifying Employees?

If your company is not yet enrolled in E-Verify, the Rule requires your company to enroll as a federal contractor within 30 calendar days of the award date of a contract that contains the E-Verify clause. You must then begin verifying all newly hired employees within 90 calendar days of your enrollment. You must also initiate verification of all existing employees assigned to the qualifying contract within 90 calendar days of your enrollment. Finally, if you choose to verify your entire workforce, you must initiate verification of all existing employees within 180 calendar days of notifying the E-Verify program that you've elected to verify all employees. The Rule sets different deadlines for employers who enrolled in E-Verify before entering into a federal contract, so consult the Rule or outside counsel if your company has already enrolled.

What Is This Memorandum of Understanding?

Before enrolling in the E-Verify system, an employer is required to sign a Memorandum of Understanding (“MOU”) with the Department of Homeland Security (“DHS”) and the Social Security Administration, the departments that administer the system. By signing the MOU, an employer agrees, among other things: 1) to display the notices supplied by DHS in a prominent place that is clearly visible to prospective employees and all employees who are to be verified through the system; 2) not to use E-Verify procedures for pre-employment screening of job applicants or in support of any unlawful employment practice; and 3) to comply with all other current Form I-9 procedures. Unfortunately, executing the MOU is another necessary part of being a federal contractor today.

Are There Other Exceptions and Exemptions?

Certain entities that are awarded a federal contract with an E-Verify clause qualify for an exception to the rules described above. The Rule does not require the following entities to use E-Verify to verify the eligibility of new hires who do not work directly under a federal contract: 1) state and local governments; 2) institutions of higher education; 3) governments of federally recognized Native American tribes; and 4) sureties performing under a takeover agreement entered into with a federal agency under a performance bond. These entities, therefore, are required to use E-Verify only for new and existing employees who work directly under a covered contract.

Further, the Rule specifically exempts from the E-Verify requirement contracts for commercially available, off-the-shelf (“COTS”) products (including virtually all food products), items that would be COTS products but for minor modifications, and all services that are part of the purchase of COTS products. COTS products are commercial items that are sold in substantial quantities in the marketplace.

Finally, the Rule allows the applicable head of contracting activity to exempt contracts in “exceptional cases,” a term that is not defined in the Rule.

Special Cases

The federal contractor rule requires federal prime contractors to require their subcontractors to use E-Verify when: 1) the prime contract includes the E-Verify clause; 2) the subcontract is for services or construction (subcontractors who are suppliers are not subject to the federal contractor rule); 3) the subcontract has a value of more than $3,000; and 4) the subcontract includes work performed in the United States.

A prime contractor should provide general oversight to subcontractors to ensure that they meet the E-Verify requirement because it may be subject to fines and penalties if it knowingly continues to work with a subcontractor who is in violation of the E-Verify requirement. A prime contractor is not responsible for verifying the subcontractors' individual employees; however, the Rule provides that it should ensure that all covered subcontracts incorporate the appropriate E-Verify clause, Employment Eligibility Verification, and that all subcontractors use the E-Verify system.

Because self-employed individuals are generally not required to complete Forms I-9 on themselves, the Rule does not require them to use E-Verify. However, all employers, including sole proprietorships, are required to complete a Form I-9 for each employee they hire.

The Rule does not require employers to verify employees of its independent contractors, unless the independent contractor qualifies as a subcontractor, in which case the rules described above apply.

The Rule applies only to entities that sign a qualifying federal contract. However, whether certain subsidiaries and affiliates are considered a part of the contracting entity depends on the specific factual context.