A High Bar

A high compliance bar is set for federal contractors. Is your company really up to it?

By Alissa A. Horvitz and Joshua S. Roffman Apr 1, 2010

0410cover.gifPicture a client who keeps spending seemingly limitless amounts of money in bad economic times as well as good, and who is relatively immune from the fiscal ups and downs that hound most businesses. This client happens to be a big player—the biggest employer in the country. It offers ventures no one else can, ventures that could allow your business to seize on opportunities to polish its brand and stand out from competitors.

A dream come true?

Now give this client a face—Uncle Sam’s. The federal government continues to spend billions. Leaders of many companies who have not previously sought this more stable revenue stream are thinking that now might be a good time to get on the General Services Administration Schedule, bid for government contracts or become subcontractors.

When sales representatives are pitching the revenue side of the new business, who’s brave enough to pitch the expense side? The business naysayers, of course: HR and legal professionals.

It’s not easy being perceived as an obstacle. Yet in this critical area of compliance, HR and legal staff members need to ensure that executives have an accurate framework for employment compliance costs so their decision whether to become a government contractor is well-informed.

Compliance Costs

The costs associated with complying with these regulatory obligations depend on the size of the company; the volume of hiring; the amount of applicant, promotion, and termination activity; the complexity of the hiring processes; and the sophistication of the human resource information systems and applicant tracking systems.

Generally, compliance costs will be greater for companies with more employees, more hiring activity and more complex processes, and for those with less-sophisticated applicant tracking systems and processes. Smaller companies with limited hiring, applicant, promotion and termination activity will have lower compliance costs.

In our experience, companies estimating first-year compliance costs as federal contractors need to take into account:

  • Training payroll on any prevailing wage rate issues.
  • Reconfiguring information systems to track additional fields necessary for Office of Federal Contract Compliance Programs (OFCCP) compliance reporting.
  • Reviewing application forms to ensure that contractors are soliciting the race and gender of Internet applicants.
  • Implementing and disseminating new policies, such as those that comply with the Drug-Free Workplace Act and the chief executive officer’s annual reaffirmation of commitment to nondiscrimination and affirmative action.
  • Potentially developing—or buying and tailoring—an applicant tracking system.
  • Preparing annual affirmative action plans—including the fairly detailed analyses required for plans for women and minorities—for each facility with 50 or more employees.
  • Training HR, recruiters and hiring managers on recordkeeping obligations imposed by being a contractor subject to OFCCP regulations.
  • For contracts with certain agencies such as the Department of Defense, putting in place mechanisms to track subcontracts awarded to enterprises owned by women, minorities, veterans and people with disabilities.
  • Developing a mechanism to ensure that all jobs filled externally are posted with the state or local unemployment office or with the appropriate employment delivery service system.
  • Reviewing purchase orders and vendor agreements to ensure the existence of proper flow-down language.
  • Posting notices, expected to be final later this year, to inform employees regarding their rights under the National Labor Relations Act.

It adds up. Moreover, the administrative support necessary to track the layers of paperwork likely means more employees in HR.

The upfront compliance costs should be measured against the potential cost of not investing in the infrastructure to achieve compliance. The OFCCP has had success in recovering back-pay remedies from government contractors during random compliance audits. These remedies per company frequently exceed $100,000. When remedies exceed this amount, the OFCCP will issue a press release announcing that it has settled a claim of employment discrimination against the contractor. A huge proportion of these remedies were obtained in cases where the company’s hiring rate for women or minorities was disproportionately lower than the hiring rate for men and non-minorities, respectively, and, in most of those situations, where the employer lacked the systems or processes to explain the disparities.

The recruiters at most of these companies failed to track sufficiently detailed information to identify true applicants under the OFCCP’s Internet applicant definition and were unable to track each step of their hiring processes as required under the Uniform Guidelines on Employee Selection Procedures (UGESP).

Although data tracking and the training associated with it are probably the greatest employment costs of being a government contractor, there are other costs. The costs to prepare written affirmative action plans and associated data analyses can range from $1,500 per affirmative action plan to more than $10,000 for an affirmative action plan for a large facility. Companies with service and supply contracts need to prepare separate affirmative action plans for each establishment with 50 or more employees.

If companies use employment tests, they should ensure that the tests have been validated following the specific approach outlined in the UGESP. There is a cost associated with validation. But not doing so leaves the company open to an OFCCP assertion that the test is invalid and—if there is a disparity in the passing rate by gender, race or ethnicity—that the test is discriminatory. The OFCCP is formulaic in assessing test validity: If the test has not been validated in strict conformance with the UGESP, the OFCCP will assert that the test is invalid.

There is also a cost associated with an OFCCP compliance review. It can be significant, especially if red flags in data suggest adverse impact in hiring, promotions, terminations or compensation.

Government contractors also are expected to engage in outreach efforts if they have placement goals in their affirmative action plans for women and minorities and if the company is required to maintain affirmative action plans for individuals with disabilities and covered veterans. Companies required to prepare affirmative action plans for covered veterans must post all jobs with state or local employment agencies or use an employment service delivery system, typically for a fee, that will post the jobs on the company’s behalf.

Finally, companies subject to a federal contract with an E-Verify clause requirement will incur costs associated with running all new hires and, at a minimum, all existing employees assigned to these contracts, through the E-Verify system.

Weigh these costs against the profits expected from government work. If the company expects massive amounts of work from the government, this will not be a difficult decision. If a company is expecting a one-time $50,000 or $100,000 contract, the costs and burdens of compliance may outweigh the benefit.

Hidden Obligations

The federal government does not make it easy for new companies to know what they are signing on to. For example, companies’ equal employment opportunity and affirmative action obligations for women and minorities do not need to appear in a contract or subcontract. Those obligations exist by regulation whether or not any contractual language informs the company of its obligations.

As a case in point, HR professionals cannot rely on contractual representations by agencies other than the U.S. Department of Labor that their companies may be excused from compliance with laws that the Labor Department enforces (OFCCP v. UPMC Braddock, ARB Case No. 08-048, on appeal to the U.S. District Court for the District of Columbia, UPMC Braddock v. Solis, No. 1-09-CV-01210 (D.D.C.)). Even if you think you’re off the hook, you might not be.

Even obligations that need to be included in a contract, such as veterans and individuals with disabilities obligations, often get buried in contract documents or incorporated obliquely with cross-referenced Internet links and sublinks. HR professionals and lawyers need to review contracts and incorporated documents and Internet links for cross-references to Executive Order 11246, the Vietnam Era Veterans’ Readjustment Assistance Act of 1974, the Jobs for Veterans Act of 2002, the Rehabilitation Act of 1973, 41 CFR Part 60, or the various Federal Acquisition Regulation (FAR) sections dealing with labor and employment law obligations, most of which are found in FAR 52.222.

Also look for these references in contracts with other companies. If the language is passed down from another company, the potential subcontractor needs to determine if it is providing work in excess of applicable dollar thresholds "necessary to the performance" of the prime contractor’s direct federal contract.

Finally, monitor contracts for the new E-Verify obligations applicable to government contractors and subcontractors. This will be most easily identified by reference to "Employment Eligibility Verification," or FAR 52.222-54.

Additional Costs

The government has ways to add layers of enforcement bureaucracy onto existing layers without you knowing about it.

For example, several pharmaceutical companies with existing National Institutes of Health (NIH) agreements to supply vaccines suddenly found themselves "agreeing" to sell additional doses of vaccines to the NIH, but now the purchases were being funded with American Recovery and Reinvestment Act funds. The OFCCP implemented a new directive giving itself additional authority to re-audit companies on a faster timetable than companies that did not receive recovery monies.

Instead of completing its review of company data at the desk audit phase, OFCCP officials decided that any company receiving these funds will get a mandatory on-site visit involving additional document review as well as manager and employee interviews.

Moreover, companies receiving recovery funds have quarterly reporting obligations, including the obligation to identify subcontractors and vendors receiving $25,000 or more in recovery fund subcontracts. The public reporting obligation requires these recipients to disclose compensation of top officials, including for officials at nonpublic companies.

The sales team probably didn’t read the fine print on those obligations, or route the document to HR or legal, before signing. All they saw was the ability to sell more product to the government.

Power of the Purse

There are some substantial benefits to government contracts.

But so often we hear government regulators exclaim in frustration, "How is it that the company can manage millions of dollars in government contracts, and it just can’t seem to track applicant flow?"

Whether tracking applicants or externally posting job vacancies at the unemployment office, the message to government contractors is the same: There are compliance costs of doing business with the federal government, so either decide to comply and comply fully or don’t do business with the government.

The authors are attorneys at Littler Mendelson PC in Washington, D.C.

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