Don't Jump the Shark! Getting Reimbursed for Labor Settlements

                  Should you settle your labor disputes, or should you fight? Can you pass the cost of the settlement on to the Government? Whether a contractor should settle a labor dispute involves many such considerations. But if you are just talking about the bottom line cost, certainly whether the Government will reimburse you for the settlement costs is a fundamental factor. And most cost reimbursement contractors think labor costs, so long as allocable, allowable, reasonable and not otherwise contractually barred, can be recovered from the Government. But that isn’t always true.

Let’s play blame the Government

               When a contractor faces unanticipated costs, not factored into its bid price, the first thought often is how to recover the cost of those expenditures. Naturally, the Government is often the target of those “claims”, since it has the deepest pocket imaginable. And often the extra labor costs are partially or fully the fault or responsibility of the Government. Indeed, it is the Government who imposes the equal employment opportunity, affirmative action, Executive Order, wage and hour, fringe benefit, collective bargaining, and other labor and employment duties on contractors. Why shouldn’t the Government bear the cost? The conundrum posed, however, is that these labor requirements are reflected in the solicitation documents, so a competent contractor can anticipate these labor costs and price them or at least the risk thereof fully into its bid or proposal.

                  Of course, the reality of Government procurement is that the lowest-priced acceptable proposal or bid may be the one that shortcuts the law, omits labor costs, evades compliance, or otherwise fail to anticipate the government’s interpretation or implementation of a labor requirement. Sometimes this is intentional (albeit wrong), because some contractors believe they will not be successful in getting the contract award if they price all the risks into their proposals. I once had a client look me in the eye, when I told him he needed to include certain costs in his proposal or risk a DOL investigation and then say to me: “That is a problem only the winner will have.” By that statement he meant his first job was to get the work, then he would worry about compliance and risk.  Accordingly, it is not surprising that the conventional wisdom has it that the low bidder on any government contract is the one who made the most mistakes in their bid pricing, and that such bidders view the award of the contract as a starting point to collect more money from the Government.

               But, sometimes the extra cost is the Government’s fault....

Resolving a wage and hour investigation

               The classic government contractor labor problem involves a US Department of Labor (“DOL” ) wage and hour investigation. Once the DOL shows up on your doorstep, the chances are they are going to find something. Few if any contractors are completely compliant, at least from DOL’s vantage point. Thus, the DOL investigator is going to demand payment of back wages for any problems he or she discovers. The classic instinct of a responsible contractor is to preempt that event, fix the error, and on its own initiative take immediate corrective action, rather than wait to be cited by the DOL investigator. And, anyway, if it is a cost-reimbursement contract, won’t the Government will have to cover the cost? Why bother to fight?

               Contrary to logic, efforts to self-audit and correct may not be the wisest action, even under cost reimbursement contracts. For an example why, see FAR § 31.205-6(h), which says:

"(h) Backpay. Backpay is a retroactive adjustment of prior years’ salaries or wages. Backpay is unallowable except as follows:

               (1) Payments to employees resulting from underpaid work actually performed are allowable, if required by a negotiated settlement, order, or court decree.

               (2) Payments to union employees for the difference in their past and current wage rates for working without a contract or labor agreement during labor management negotiation are allowable.

               (3) Payments to nonunion employees based upon results of union agreement negotiation are allowable only if—

                              (i) A formal agreement or understanding exists between management and the employees concerning these payments; or

                              (ii) An established policy or practice exists and is followed by the contractor so consistently as to imply, in effect, an agreement to make such payments." [Emphasis added].

FAR 31.205-6(h) thus apparently excludes from treatment as an allowable cost certain retroactive back pay tendered as part of a voluntary re-classification actions, like conversion to nonexempt status, or payment of a higher wage classification rate, regardless of whether that back pay was for hours actually worked under a government contract. The only explicit exception to this exclusion is where the additional compensation is paid in the same year in which the work was performed.

               In short, the timing of the payment of back wages may have an impact on whether the employer can recoup any of that back pay under its government contract. Retroactive pay in the same year will be allowable if it otherwise meets the tests for allowability, allocability and reasonableness. According to the FAR, however, employers should hold off paying back wages for prior years until they are required to do so by a negotiated settlement, order or decree in order for those wages in prior years to be considered allowable costs. This is one reason why contractors are best served by a formal settlement with DOL and the use of official documents such as the DOL WH-56 back wage forms. That provides a contractor with proof of a negotiated settlement.