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President Obama Issues Trio of Pro-Union Executive Orders; Significant Impact on Federal Contractors

Organized Labor "Welcomed Back" to White House

Date: 2.2.2009

In perhaps his strongest pro-labor message to date, President Barack Obama on January 30 signed three Executive Orders, which together would impact federal contractors significantly.  In his remarks accompanying the signing, President Obama expressed a clear intention to reverse Bush-administration policies regarding organized labor.  He emphasized that he does “not view the labor movement as part of the problem.  To me, it’s part of the solution.”

To underscore this sentiment, Vice President Joe Biden proclaimed to the 100-plus labor leaders in attendance at the signing:  “It’s good to see so many of our good friends in organized labor – welcome back to the White House!”

The three new Executive Orders reverse certain obligations of federal contractors put in place by President George W. Bush and impose new obligations and restrictions on contractors. 

The Executive Orders

Notification of Employee Rights under Federal Labor Laws

The Executive Order entitled, “Notification of Employee Rights under Federal Labor Laws,” revokes Executive Order 13201 (“Beck Notice Requirements”) and imposes new obligation to inform employees of their rights under the National Labor Relations Act (“NLRA”).

Shortly after taking office in 2001, President Bush signed Executive Order 13201, requiring all qualifying federal contractors to post a notice advising non-union employees of certain rights. Included were the right not to join a union and the right to "opt out" of paying that portion of dues used by unions for political contributions or other activity not related to administration of a collective bargaining agreement.  The latter right had been recognized three years earlier by the United States Supreme Court in the decision Communication Workers v. Beck.  The Office of Federal Contractor Compliance Programs (“OFCCP”) was charged with enforcement of the “Beck” notice requirements, which also required that Beck posting language be included in all qualifying contracts and subcontracts.    

President Obama issued on January 30 an Executive Order entitled, “Notification of Employee Rights under Federal Labor Laws,” repealing the Beck notice and contract requirements and invoking new notice requirements. Under the new contract and posting requirements, qualifying federal contractors are required to post a yet-to-be-released notice advising employees of their rights to bargain collectively and to be protected in the exercise of their right to association, self-organization and designation of representatives for purposes of negotiating terms and conditions of employment. 

The Executive Order also specifies four new contract clauses that must be included in all qualifying government contracts and resulting subcontracts.  Within 120 days, the Secretary of Labor will commence rulemaking to establish the required posting language.  Despite this delay, the contract provision requirements are effective immediately and apply to all contracts resulting from solicitations issued on or after the effective date. 

Also, importantly, the Executive Order requires that prime contractors include the new contract clauses in “every” subcontract and puts the burden on prime contractors to enforce these requirements on their subcontractors.  The Executive Order directs the Secretary of Labor to issue regulations providing details about how contractors are to enforce the obligations against their subcontractors. 

Penalties for Noncompliance.  Creating remedies in addition to those provided by the National Labor Relations Act for violations of employees’ statutory rights, the Executive Order requires that all qualifying contracts specify that contractors will comply with all provisions of the Secretary’s Notice, “and related rules, regulations and orders of the Secretary of Labor.”  Contractors who fail to comply with the notice obligations or related rules may have their contract cancelled and could be debarred from future federal contracts.  Because the new posting and contract language will restate the underlying principles of the NLRA, any contractor alleged to have committed objectionable National Labor Relations Board election misconduct or engaged in conduct constituting an unfair labor practice could be subject to remedies imposed by the Department of Labor, including cancellation and debarment.  With the nomination of Hilda Solis, a staunch union supporter, for Secretary of Labor, these penalty provisions could usher in a new era of aggressive debarment.

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 to remove the requirement that successive contractors offer a right of first refusal of employment to employees of the prior contractor) and imposes new obligations for successor service contract employers to hire their predecessors’ employees.

Under the successorship doctrine, an employer may be forced to bargain with a union that represented its predecessor’s employees, even though the union has not been certified as its own employees’ representative, if:  (1) the new employer draws a majority of its workforce from the bargaining unit which the union previously represented; (2) the new employer is engaged in the same general business as its predecessor; and (3) the bargaining unit has not been changed dramatically.  Whether an employer is deemed a “successor” often hinges on the employer’s decision whether to hire a large number of its predecessor’s workers or, for legitimate non-discriminatory reasons, staff its workforce with other employees.

Recognizing that government service contracts are frequently transferred, allegedly resulting in employee turnover and the possibility of loss in productivity and efficiency, President Obama has changed the rules for many non-union government contractors involved in government service contracts.  Under the new Executive Order, employers assuming government service contracts must offer their predecessor employers’ employees the right of first refusal in positions for which they are qualified.  The right of first refusal must extend for at least 10 days, only after which may a successor contractor announce position openings to a wider audience.

Because successorship for collective bargaining purposes is dictated largely by whether a majority of those employees hired by a new contractor worked for the previous unionized contractor, this Executive Order effectively forces non-union contractors assuming a federal service contract to hire their predecessors’ employees rather than to hire the best qualified employees based upon non-discriminatory reasons. If a majority of the new employer’s workforce is made up of the predecessor’s employees, it is likely that the new employer will be required to bargain with the union as a successor employer.

Penalties for Noncompliance.  The Secretary of Labor is responsible for enforcing these new successorship hiring standards.  Violations will be remedied by a procedure other than that proscribed under the NLRA and can result in a three-year debarment for the contractor, its responsible officers, and any firm in which the contractor has a substantial interest.  The debarment provisions grant the Secretary wide latitude to sidestep the NLRA.    

Economy in Government Contracting

The Executive Order entitled, “Economy in Government Contracting,” would make union avoidance costs disallowed expenses.

Government contracts increasingly are awarded on a cost-reimbursement basis.  Critics, including President Obama, argue that they give contractors no incentive to control costs.  Contractors, on the other hand, insist these contracts are appropriate when the total expenditure over the life of a contract is uncertain. 

A recent survey of 120 federal contractors conducted by management consultants Grant Thornton revealed that 45% of federal revenue for those contractors resulted from service contracts, up from 28% just three years ago.  Under the cost-reimbursement structure, government agencies pay vendors for costs incurred on a contract up to a ceiling.  Often, the contracts include bonus provisions for timely completion and conservative spending.  In contrast, private sector contracting is typically performed on a fixed-price or time-and-materials basis.

A contractor’s ability to achieve an acceptable profit margin on cost reimbursement contracts is determined largely by “costs” that can be reimbursed under the contract.  The question of “allowable” costs is the source of extensive regulation and endless billing disputes.  Numerous categories of “unallowable” costs have been created, including certain advertising costs, public relations costs, alcoholic beverages, bad debt, defense and prosecution of criminal and civil proceedings, entertainment costs, lobbying costs to improperly influence federal employees or officers, fines and penalties, membership costs in civil organizations and pre-contract costs. 

Through this Executive Order, President Obama has added a new category of unallowable costs.  Effective immediately and as to all contracts resulting from solicitations issued on or after the effective date, contractors may not seek reimbursement for any expense undertaken to persuade employees whether or not to join a union is collective bargaining.  Covered 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 salaries for attendees) and planning or conducting such persuasive activity.    

These new prohibitions introduce a significant hurdle for non-union contractors on cost reimbursement contracts seeking to remain union free.  New accounting procedures may be needed to segregate not only costs for outside counsel and consultants, but also expenditures such as payroll costs for a 10-minute meeting or the paper and copying expenses for a bulletin board poster. 

Penalties for Noncompliance.  While the Executive Order does not establish a new penalty structure, unwary contractors risk being denied reimbursement for substantial costs related to common employer activities — such as preparing and distributing material, holding meetings, hiring consultants or outside counsel — which now are deemed unallowable expenses.  Moreover, in many settings, such as defense contracting, seeking reimbursement of unallowable costs can result in a 200% liquidated damage penalty.

Possible Challenges Ahead

Because the United States Constitution establishes a balance of powers among three branches of government, Presidential executive orders are open to challenge on a variety of grounds, including NLRA preemption and the First Amendment.  Indeed, several prior executive orders dealing with labor-management relations have been challenged as unconstitutional.  President Bush’s executive order requiring Beck notices was challenged in UAW-Labor Employment and Training Corp. v. Chao by a group of labor unions, arguing in part that the executive order was preempted by the NLRA because it infringed upon employers’ free speech rights under section 8(c) of the NLRA.  The Court of Appeals for the D.C. Circuit noted as a threshold issue that “preemption applies to rules of the federal executive even when the government is acting as a purchaser of goods, as long as the government action is classified as regulatory rather than proprietary.”  Because the executive order at issue applied “across the board, rather than being tailored to any particular setting, the order is regulatory under prevailing principles,” the court held.  Consequently, executive orders like those signed by President Obama on January 30 may be challenged as preempted by the NLRA.  See also Chamber of Commerce v. Reich (executive order prohibiting federal contractors from contracting with employers that permanently replaced striking workers invalidated despite President’s authority to act under the Procurement Act).

NLRA preemption challenges to executive orders are dictated by two distinct preemption doctrines, Machinists and Garmon (named after the Supreme Court cases in which they were announced).  Garmon preemption invalidates acts other than those of Congress (in particular, local or state laws, as well as executive orders) that interfere with rights protected or prohibited by the NLRAMachinists preemption prohibits regulation of areas that Congress intended to be left unregulated.         

In Reich, the D.C. Circuit invalidated President Bill Clinton’s executive order which sought to dissuade (through governmental spending) employers from permanently replacing striking employees.  The court recognized that despite the possible fiscal reasonableness of the policy, such broad-based spending restrictions are tantamount to labor regulation, which in that instance impermissibly altered the relative bargaining power of management and organized labor.  The court concluded, “[n]o state or federal official or government entity can alter the delicate balance of bargaining and economic power that the NLRA establishes, whatever his or its purpose may be.”       

Turning to President Obama’s Executive Orders, the parallels to Reich and Chao quickly become apparent.  His Executive Order, “Notification of Employee Rights under Federal Labor Laws,” requiring employers to post anti-Beck notices, includes broad disbarment provisions.  These provisions appear to allow debarment when contractors fail to adhere to the provisions of the notice itself, such as the right to bargain collectively and to be protected in the exercise of the right of association, self-organization and designation of representatives.  To the extent the Executive Order provides alternate remedies and an alternate procedure for imposing remedies for certain NLRA violations, it is arguably preempted by the NLRA

Similarly, employers have a right under federal labor law not to hire a predecessor employer’s employees.  Requiring successor employers to make such hiring decisions significantly tips the balance of power in favor of organized labor.  

Finally, the Supreme Court has repeatedly held that broad spending restrictions that alter the balance of labor-management relations are preempted by the NLRA, despite a stated or actual fiscal purpose.  Establishing a category of unallowable costs for all federal cost reimbursement contracts specifically targeted at union avoidance expenses could be challenged under this rationale.  In fact, the United States Supreme Court has struck down a California law which prohibited employers participating in state reimbursement programs from using state funds to oppose union organizing.  U.S. Chamber of Commerce v. Brown. Jackson Lewis was proud to represent the prevailing plaintiffs’ group in that case. 

With these standards in mind, each of President Obama’s Executive Orders may be subject to challenge.  While Presidents have broad power to implement policy through executive orders in many areas, the balance of power between unions and employers created by the NLRA, and overseen by the National Labor Relations Board, may not be such an area.        

What Should Employers Do Now

Take Stock of Your Government Contractor Status: What You Don’t Know Can Hurt You

These new Executive Orders add significantly government contractor obligations. As a threshold matter, however, an employer first must determine whether it is a government contractor.  This may not be as easy as it seems.  An employer can be a “government contractor” under some laws but not others, even though the employer clearly holds government contracts. This is so because under certain laws, government contractor obligations “kick in” only after the employer reaches a certain size and derives a specified amount of revenue from its government contracts. 

Making “contractor status” even more complex, many government contractor obligations apply equally to “subcontractors” who have no direct dealings with the federal government, but who provide goods or services necessary to the performance of the prime contract.  In the past, the government’s enforcement focus was on prime contractors.  It had little specific information about subcontractors (with whom the government often had no direct dealings).  However, the federal government increasingly requires prime contractors to provide detailed information about subcontractors working on government projects, thus allowing the government to focus its enforcement efforts on subcontractors as well. 

Prudent employers should inventory their government contracts and subcontracts completely to determine which contracts are current and their dollar value.  Then they should consider consulting counsel familiar with government contractor obligations to determine which obligations apply to them and how they can best ensure compliance.

Inventory Your Employee Postings and Contracts to Ensure Compliance

With the new Executive Order revoking the Beck posting and contract obligations, it is a good time to review all employee postings and required contract clauses to ensure you are complying with your obligations.  Employers also should check on their compliance with general employment laws that may require postings and other obligations. 

Scrutinize Your Process for Requesting Cost Reimbursements under Government Contracts

As noted above, new Executive Order entitled, “Economy in Government Contracting,” will prohibit reimbursement under government contracts for “disallowable expenses” broadly related to educating employees about union representation.  The Executive Order, however, expressly states that it “does not restrict the manner in which recipients of Federal funds may expend those funds.”  Contractors should scrutinize the procedures they use to seek reimbursement for activities under contracts, and the language they use to characterize those activities.

Under the new Executive Order, how disbursement requests are framed – and whether to build the costs for such activities into the upfront fees negotiated with the government agency – may determine whether they will be covered.

Be Mindful of Potential Successorship Obligations When Negotiating Government Contracts

Employers taking over from a predecessor employer on a government contracts frequently aim to enhance profitability under the contract by reducing costs and increasing efficiencies.  Labor costs, often, are a significant area where cost efficiencies can be realized. 

The Executive Order entitled, “Nondisplacement of Qualified Workers under Service Contracts,” however, substantially restricts a successor employer’s ability to affect labor costs by imposing a “right of first refusal” hiring requirement for many of the incumbent employees who worked under the government contract for the predecessor contractor.  While the successor employer has the right to negotiate new contract terms, this right of first refusal in hiring for (often unionized) employees may increase the likelihood that the successor will need to deal with the same union its predecessor dealt with.

Employers should consider carefully the restrictions and attendant costs imposed by this new Executive Order.

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As noted, the regulations to implement these Executive Orders are not yet published.  We will provide further updates as warranted.  This is a general summary of the Executive Orders and their implications.  Jackson Lewis attorneys are available to answer your inquiries about these and other workplace laws.

 

Related Links:

Executive Order: Economy in Government Contracting

Executive Order: Nondisplacement of Qualified Workers under Service Contracts

Executive Order: Notification of Employee Rights under Federal Labor Laws