As we wrote back in November 2021, the Biden Administration issued Executive Order 14055 reinstating most of the concepts from the Obama Administration era nondisplacement Executive Order 13495. Two months after Biden’s imposed deadline of May 2022, the U.S. Department of Labor finally published proposed regulations on July 15, 2022.

Generally speaking, EO 14055 and the proposed Nondisplacement regulations require successor contractors to make offers of employment to all predecessor contractor Service Contract Act covered employees who worked on the predecessor contract. Predecessor contractors are required to prepare and submit a list of their Service Contract Act covered employees to the contracting officer at least 30 days prior to contract termination. The contracting officer then provides a copy of that list to the successor contractor who then is required to make bona fide job offers to the predecessor’s service employees who worked on the prior contract. The rollout of these new regulations is of the utmost importance to any federal contractor or subcontractor with employees subject to the Service Contract Act.

As indicated in the Executive Order, the proposed regulations create a presumption that the Nondisplacement regulations will apply to all contracts subject to the Service Contract Act and that federal agencies must prepare and publish detailed analyses justifying any deviation or exception from the regulations. Also, the proposed regulations create a strong preference that the successor contract will be performed in the same locality or localities as the predecessor contract. If a federal agency decides not to include a location preference or requirement, the agency is required to notify “affected workers and their collective bargaining representatives, if any, in writing of the agency’s determination and the right of interested parties to request reconsideration.”

Among the notable points from the new proposed Nondisplacement regulations for contractors and subcontractors are:

  • They only apply to “contracts for services covered by the Service Contract Act” and also exceed the simplified acquisition threshold.
  • The size of the prime contract determines whether the new regulations apply to subcontracts. For instance, if the prime contract exceeds the simplified acquisition threshold, then all subcontracts are subject to the regulations.
  • Contractors and subcontractors must make bonafide offers of employment to predecessor contractor service employees before a successor contractor may fill any job vacancies on the successor contract. While a successor contractor is not required to place employees into the exact same position they held under the prior contract, the job offers must be for positions for which each employee is qualified.
  • The Nondisplacement contract clause, to the extent applicable, must be applied retroactively in all RFPs and contracts. If retroactively applied, the proposed regulations mandate contractors still comply with bona fide offer requirements, even if the successor contractor already hired employees to work on the follow-on contract.
  • Contractors are required to make bonafide offers of employment to all predecessor contractor employees except for those employees where there is “reliable evidence of the particular employee’s past performance, that there would be just cause to discharge the employee if employed by the successor contractor or any subcontractor.” On top of that, the proposed regulations create a presumption that there is no “just cause to discharge” which the contract can overcome “upon reliable evidence provided by a knowledgeable source, such as the predecessor contractor and its subcontractors, the local supervisor, the employee, or the contracting agency.”
  • Contractor requirement to make bonafide offers of employment to predecessor contractor employees continues until the earlier of (a) all predecessor employees have received a bona fide job offer or (b) “90 calendar days after the successor contractor’s first date of performance on the contract.”

As between contractors and subcontractors, if the prime contractor terminates a subcontractor’s performance and then takes the subcontractor’s function in-house, the proposed regulations mandate that the prime contractor make bona fide job offers to the former subcontractor’s employees. As written, this provision could frustrate pre-existing no-poaching or other restrictive covenants between primes and subcontractors.

Among the remedies/penalties contractors and subcontractors face from the proposed regulations are:

  • Hiring affected employees and pay backpay (along with daily compounded interest computed at the rate set at 26 U.S.C. 6621);
  • Withholding of contract funds by federal agencies and direct such withheld funds be paid directly to affected employees;
  • Withholding final payment to any predecessor contractor that fails to timely provide the required list of employees to the contracting officer; and
  • Debarment for willful violations of the EO or the proposed regulations for up to 3 years.

Finally, the proposed regulations include a new anti-retaliation provision that authorizes the Department of Labor to order relief to affected employees such as “employment, reinstatement, promotion and the payment of lost wages, including interest.”

Combined, all of the foregoing create a maze of technical and legal requirements which may have unintended and potentially disastrous consequences on federal contractors and subcontractors.  We’ll have more on this topic once final rules are issued later this year or early next.

In the meantime, anyone interested in filing comments on the proposed regulations should do so on or before August 15, 2022, using the following website.