Several months ago, we summarized the issuance and implications of Executive Order 13673, known as the “Fair Play and Safe Workplaces” order. In short, the order requires federal contractors to:

  • Report labor law “violations” of itself or any of its subcontractors (where the estimated value of the subcontract exceeds $500,000) under various federal employment and labor laws;
  • Restrict the use of binding, pre-dispute arbitration provisions in non-collectively bargained employment contracts; and
  • Establish “paycheck transparency” through the issuance of wage statements to all individuals performing work under a covered contract.

As many commenters – including us – have pointed out, the order and its accompanying revisions to the FAR place a new, heavy compliance burden on contractors in the form of tracking labor law proceedings, enhanced vetting of potential subcontractors, and generating new documentation to meet the paycheck transparency mandates. The disclosures and certifications made by contractors pursuant to the order would be used by the government in determining whether a contractor was responsible within the meaning of FAR Part 9.1, and therefore qualified to receive awards.

On October 24, 2016 a federal judge in Texas, the Hon. Marcia A. Crone of the U.S. District Court for the Eastern District of Texas, added her voice to the chorus of those concerned by the order’s apparent overreach; Judge Crone issued an injunction halting, nationwide, the implementation of most of the provisions of the Order.

The injunction was issued following a lawsuit filed by the Associated Builders and Contractors of Southeast Texas, which challenged the legality of the Order and asked the Court to prevent the government from implementing its provisions.

The injunction prevents the government from enforcing two of the three new requirements: the reporting requirement for labor violations, and the restriction on the use of arbitration provisions. The Court declined to enjoin the implementation of the paycheck transparency regulations, which are still scheduled to go into effect on January 1, 2017.

The Court spent the bulk of its opinion analyzing the labor violation reporting requirements, finding that portion of the order to be legally deficient in four distinct ways:

  • The Court determined that the reporting requirements probably exceed the authority of the FAR Council and Department of Labor – the two entities charged with turning the order into a regulatory requirement binding on contractors. In particular, the court found that the new reporting requirements imposed a punishment on contractors for violating federal labor laws that went beyond what Congress identified as the intended enforcement mechanism in the laws themselves.
  • The Court also found that the reporting requirements likely violate the First Amendment insofar as they force contractors to disclose information, in the form of allegations of labor law infractions, “regardless of whether such alleged violations occurred while performing government contracts, and without regard to whether such violations have been finally adjudicated after a hearing or settled without a hearing, or even occurred at all.” Such “compelled speech” as it is called when the government directs an individual or corporate entity to disclose information, is only permissible where it is “narrowly tailored to achieve any compelling government interest,” and the Court was unable to find a government interest compelling enough to justify the reporting requirement.
  • Additionally, the Court held that the reporting requirements run afoul of government contractor’s due process rights. The plaintiff argued, and the Court agreed, that a government contractor who reports a violation may suffer an immediate injury to its business or reputation – an injury that “cannot be undone.” The reporting regulations require contractors to report even non-final and pending labor infractions, opening the door to a situation where a contractor’s reputation is irrevocably harmed before it has a chance to adequately contest an alleged labor law violation.
  • Finally, the Court objected to the reporting requirements on the grounds that the regulatory implementation of these requirements constitute arbitrary and capricious agency action, in violation of the Administrative Procedure Act. In so holding, the Court determined that “the complex, cumbersome, and costly requirements of the Executive Order and Rule” would “hamper efficiency without quantifiable benefits.”

In addition to enjoining the implementation of the reporting requirements, the Court also ruled that the provisions of the Order restricting a government contractor’s ability to commit its employees to arbitration were contrary to the Federal Arbitration Act (“FAA”), a law which generally requires courts to enforce arbitration agreements as written. Because the FAA is law, and has been since 1925, the Court found that executive action alone cannot override Congress’ clear intent that arbitration clauses are presumed valid.

It is important to note that this a fluid situation – the preliminary injunction is in place only until the court is able to reach a decision on the merits, so the status quo could change at any moment. In addition, the government has not said whether or not it will seek to appeal the ruling, although internal government acquisition guidance published after the decision indicates that the government is planning to comply with the injunction as litigation continues.

Key Takeaway for Government Contractors:

For the time being, the government is prevented from implementing the labor violation reporting requirements and restriction on pre-dispute arbitration clauses set forth in the Fair Play and Safe Workplaces Executive Order. Practically speaking, this means that the government cannot put the following FAR clauses in solicitations or awards until the injunction is lifted:

The Federal Contracting team at Cohen Seglias recognizes the tremendous impact that shifting government regulations have on the business of government contracting, and is committed to shining a light on important developments in the law.

Edward T. DeLisle is Co-Chair of the Federal Contracting Group. Ed frequently advises contractors on federal contracting matters including bid protests, claims and appeals, procurement issues, small business issues and dispute resolution.

Carl J. Vernetti is an Associate in the Federal Contracting Group and focuses his practice on federal procurement issues. He has broad experience with matters concerning prime and subcontractors looking to do business with the government.