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Are You a Covered Government Contractor? Part II: Coverage Through Intra-Corporate Relationships

The high cost of doing business with the federal government can increase dramatically if your company finds out too late that it is a federal contractor with affirmative action obligations. In Part I, published in the Year End 2004 issue of Preventive Strategies, we discussed how to determine whether an organization has affirmative action obligations resulting from a contractual relationship directly or indirectly to supply good or services to an agency of the federal government. In Part II, we discuss how intra-company relationships among parent, subsidiary, division or affiliate can spread coverage from one entity to another in a corporate family organizations.

The standards for determining whether holding a government contract extends coverage to related entities, such as "parent" companies, subsidiaries, affiliates or divisions, were set forth in two administrative agency rulings. The U.S. Department of Labor v. Interco Inc. set forth "separate and distinct" as the standard for determining whether an unincorporated division and its "parent" are sufficiently interrelated to create universal coverage.

A separate decision of the Comptroller General in Armstrong Cork established the five factors for ascertaining whether a federal contract held by a subsidiary will cause other divisions or subsidiaries, or a parent, to be federal contractors. Both tests focus upon the degree of control which the parent has over a subsidiary or a division. The five factors set forth in the Armstrong Cork decision are illustrated through a series of questions and answers. 

1. Common Ownership

Do the parent and the subsidiary have common ownership?  
__ Yes __ No

What percentage of the subsidiary's stock does the parent own? _______ %

2. Common Board Members, Directors or Officers

Do the parent and the subsidiary have any common directors on their boards of directors?  
__ Yes __ No 

Do the parent and the subsidiary have any common officers or employees?  
__ Yes __ No 

Did the parent hire the CEO of the subsidiary, and does the CEO report to anyone at the parent?   
__ Yes __ No

Do any employees of the subsidiary report directly to the employees of the parent?   
__ Yes __ No 

3. Interdependency of Operations

Do the parent and the subsidiary have separate legal staffs?   
__ Yes __ No 

Do the parent and the subsidiary have separate marketing and sales staffs?   
__ Yes __ No 

Would either the parent or the subsidiary be unable to function if the other ceased to exist?   
__ Yes __ No 

Is there a dependency of operations between the parent and the subsidiary in order to provide a product or service?   
__ Yes __ No 

Does the parent provide any servicing to the subsidiary in regard to the handling of accounts receivable, payroll, cash accounting, and sales shipments?   
__ Yes __ No 

Do the parent and the subsidiary maintain separate administration and payroll functions?   
__ Yes __ No

Do the parent and the subsidiary maintain joint purchase or supply agreements?   
__ Yes __ No 

Does the parent provide any marketing services for the subsidiary or vice versa?   
__ Yes __ No 

In advertising, is either the parent or the subsidiary referred to as part of the other?   
__ Yes __ No 

Is the product or service of either entity essential to the conduct or operations of the other?   
__ Yes __ No 

4. Uniform Labor Relations Policies Emanating from a Common Source

Does the parent have de facto control over the personnel practices of the subsidiary?   
__ Yes __ No 

For example:

Do the parent and the subsidiary share any policies, practices, and/or benefits?

Does the parent play any role in the recruitment, hiring, training, or termination of the subsidiary employees?

Do the subsidiary employees have corporate credit cards and, if so, in what company name are the cards issued? 
__ Yes __ No

Does the parent review and/or control labor practices in the subsidiary?   
__ Yes __ No 

For example:

Does the parent negotiate and/or take part in the negotiation of the collective bargaining agreements of the subsidiary?

Does the parent sign the collective bargaining agreements of the subsidiary?

5. Exercised Control

How frequently does the parent receive operating statements from the subsidiary? 

When the subsidiary submits operating statements, does the parent note problems in operations and require the subsidiary to take corrective action?   
__ Yes __ No 

Does the parent maintain dollar limitations on capital expenditures made by the subsidiary?   
__ Yes __ No 

Are purchases of real estate by the subsidiary subject to approval by the parent?   
__ Yes __ No 

Has there ever been an infusion of capital from the parent to the subsidiary or vice versa?   
__ Yes __ No 

What percentage of the parent's business is with the subsidiary and vice versa? _______ %

If you would like to discuss coverage or would like more information about our Affirmative Action Practice group, please contact our practice group leader, Matt Halpern.