Client Alert

On January 30, 2009, President Obama signed Executive Order No. 13495, "Nondisplacement of Qualified Workers Under Service Contracts." This order essentially requires a successor to an existing service contract to give all the incumbent organization's employees working on the existing service contract first right of refusal for employment by the new awardee organization in order to continue performing the service contract work. Failure to comply with an order from the enforcing agency, the Department of Labor, or a willful violation can result in debarment from further government contracts for three years.

Implementing Regulations And History

The executive order requires the Federal Acquisition Regulatory Council to issue implementing regulations within 180 days. Because the executive order goes so far as to include the specific language in the clause to be incorporated in all service contracts, the time to actual implementation should be brief.

This executive order has an interesting history. On October 20, 1994, President Clinton signed Executive Order 12933, "Nondisplacement of Qualified Workers Under Certain Contracts." President Clinton's E.O. 12933 applied only to service contracts for the maintenance of public buildings. It was narrowed further by excluding large categories, such as building on military installations, buildings in foreign countries, power projects, NASA buildings, and VA hospitals. Otherwise E.O. 12933 is very similar to the new E.O. 13495. Implementing regulations were published on May 7, 1997 at 29 CFR Part 9. It appears only one case was decided and dismissed by the Department of Labor Administrative Review Board because the work was being performed on a military installation before February 17, 2001, when President George W. Bush, by E.O. 13204, revoked President Clinton's E.O. 12933 and all implementing and enforcing regulations.

So fifteen years later, is it simply a matter of dÉjà vu all over again? Not at all. In 2000, the first year data is available on www.usaspending.gov, contracts for maintenance, repair, and alteration of all real property -- which encompasses a broader scope than only public building maintenance services contracts covered by the Clinton Executive Order comprised $7.5 billion of a total procurement budget of $208 billion or only 3.6% of procurement dollars. In contrast, E.O. 13495 covers ALL services contracts, which in FY 08 comprised 37% of all procurement spending, or $170 billion. So while the mechanism may be nearly the same, the impact of this executive order will be astounding.

Practical Effect

For decades, federal agencies were frustrated by the civil service rules that make it extraordinarily difficult to replace workers determined to be ineffective. The use of service contractors gave those federal agencies more control over the quality of personnel performing the work. E.O. 13495 appears to be intended to frustrate that practice. To be clear, E.O. 13495 does not require the new contract awardee to offer a first right of refusal to employees that it "reasonably believes, based on the particular employee's past performance, has failed to perform suitably on the job." To reduce the risk of being found in violation, however, contractors will now need to even more carefully document the problems in the performance of their employees in the same way required by the civil service rules, to demonstrate a basis for its "reasonable belief" before refusing an incumbent a position on the new contract.

The prime contractor must flow down the clause implementing E.O. 13495 to its subcontractors. The E.O. does assist a prime contractor that is threatened with or finds itself the defendant in litigation brought by a subcontractor attempting not to comply by permitting the prime contractor to request the United States government to enter into the litigation on its behalf.

E.O. 13495 applies to all prime contractors and subcontractors to which the Service Contract Act of 1965 applies except for contracts under $100,000 and other limited exclusions. Ten days before contract performance is complete, the losing contractor must provide a list of names of all prime and subcontractor employees and their anniversary dates of employment to the Contracting Officer, who will in turn, present this list to the gaining contractor. Interestingly, no wage, salary, or benefit information is required to be provided. This places the burden on the gaining contractor to contact all the incumbent's employees individually and request documents showing this financial information. This information may or may not be consistent with the wages, salaries, and benefits contained in the gaining contractor's proposal and soon-to-be-performed contract.

Time to Panic

In those last ten days of the incumbent's contract term, the winning contractor will need to work furiously to contact the incumbent's employees, determine if they will exercise their rights of refusal, negotiate wages, salaries, and benefits with the incumbent's employees, and then fill the slots where the incumbent's employees decide not to exercise their rights of refusal. This process must also be carefully documented in order to protect the gaining contractor from allegations it violated the Nondisplacement rule.

Concluding Thoughts

This change will in effect give union-like job protection to a vast number of federal government service contract employees. Service contracting companies will lose a tremendous amount of flexibility to be more efficient. Some questions that time may answer:

• Is the Executive Order in conflict with state law in many at-will employment states?
• How will the Department of Labor handle situations where employees complain they are being offered lower wages, salaries, and benefits for the same work they performed in prior contracts? (The gaining contractor based it proposal price on the lower wages, salaries, and benefits.)
• How similar must a successor contract be to be considered a "follow-on" contract to which E.O. 13495 applies?
• What are the obligations of the successor organization if the follow-on contract has only 2/3 the slots of the predecessor contract because of management or technology efficiencies?
• Was E.O. 13495 really intended to cover professional services, such as legal and medical services and other exempt labor categories, as well as non-exempt labor categories of services?