“[W]hen the hardship [of the retroactive effect] is felt to be too great or to be unnecessary, retrospective operation is withheld .... It may be hard to square such a ruling with abstract dogmas and definitions. When so much else that a court does, is done with retroactive force, why draw the line here? The answer is, I think, that the line is drawn here, because the injustice and oppression of a refusal to draw it would be so great as to be intolerable.”    

— Chief Judge Benjamin Cardozo, THE NATURE OF THE JUDICIAL PROCESS, at 146-47 (1921).  

If underpayment of wages or fringe benefits pursuant to the Service Contract Act (“SCA”) or the Davis-Bacon Act (“DBA”) is found, must the US. Department of Labor (“DOL”) always demand back wages from the employer? The literal answer in the rules and legal authorities is “no,” albeit the reality is that most DOL wage and hour investigators are trained to seek back wages going back at least two years regardless of the circumstances. 

Back wages for a fully performed contract, particularly when the SCA or DBA “original sin” rests with the US Government is not supposed to be automatic. Under the SCA, for example , the FAR specifically provides that upon discovery of solicitation errors, the Administrator of the Wage and Hour Division “may require retroactive application of the wage determination.”  FAR 22.1015 (emphasis added).  See also 29 C.F.R. 4.5(c) (using the same language).  It is notable that both regulations use the permissive “may” language, rather than mandatory “shall” language.  This gives DOL the discretion not to make compliance retroactive, which we understand sometimes is applied  to investigations focused situations where the contract performance has been completed.  

For just one example of this rule in action, see IN THE MATTER OF: RAYTHEON AEROSPACE DISPUTE CONCERNING WAGE DETERMINATIONS FOR RAYTHEON AEROSPACE EMPLOYEES WORKING FOR THE UNITED STATES AIR FORCE ON CONTRACT F34601-94-0950 AT SCOTT AFB, IL, AND OTHER U.S. AIR FORCE …, ARB Case No.03-01703-019, 2004 WL 1166284 (May 21, 2004) at *8-11, where the DOL Administrative Review Board (“ARB”) clearly said: 

Thus, the plain language of this regulation requires a contracting agency to prospectively apply the Act within 30 days of notification by the Administrator that the agency erroneously concluded the SCA did not apply to a service contract. However, retroactive application is not required by this regulation; it merely provides that the Administrator may require retroactive application. Furthermore, the regulation does not provide specific criteria constraining the Administrator’s decision regarding retroactive application.  

Id. at *9 (Emphasis added). Of course, in that case, the ARB nonetheless allowed a two year look back obligation to be imposed.   

But the point is it isn’t automatic. Indeed, here is what DOL said long ago in the SCA regulatory preamble about this precise situation: 

The Department of Defense (DOD) objected to the requirement that a contract agency either include the Service Contract Act provisions in a contract or cancel or terminate a contract, when DOL finds that the agency erroneously did not apply the Act to that contract. DOD believes that DOL should make allowances for good faith disagreements; it also contends that the court cases cited in this subsection do not indicate that DOL has the authority to require cancellation or termination of the contract.

The General Services Administration (GSA) opposed § 4.5(c)(2) on the ground that the potential for disruption of a contract far outweighs the “benefits” derived from the retroactive inclusion of the Service Contract Act in some situations. GSA argues that if the contract has been substantially performed, the decision whether to amend the contract should be left up to the contracting officer based upon the particular facts in the case, or at least, DOL should take this into consideration.

The Council of Defense and Space Industry Associations and the National Council of Technical Service Industries stated that the procedures in this section do not adequately protect the contractor by failing to require the contracting agency to reimburse the contractor for unanticipated costs.

The AFL-CIO, IATSE, the Center to Protect Workers’ Rights, and the International Brotherhood of Electrical Workers all commented in favor of this section, stating that it would help insure the retroactive application of wage determinations to contracts where the agency has omitted the SCA requirements and would prevent employees from losing the protections of the Act.

In the case of a substantially completed contract, the Department of Labor has and will consider whether a contracting agency made a good faith decision not to include the required provisions of the Act in a particular contract and the possible disruptions to a procurement in deciding on remedies in each individual case. Accordingly, we do not believe that any changes in the regulation are justified.

46 Federal Register 4320, 4323 (Jan. 16, 1981) (Emphasis added). Thus, DOL has identified  a two-factor test.

First, if the SCA clauses or wage determination is omitted, DOL is supposed to look  at the good faith behind the agency decision not to include them in the contract. The agency may have a subjective and even mistaken yet good faith belief about the coverage of the SCA or possible exemptions due under the SCA. Just because DOL disagrees with the contracting agency doesn’t mean back wages are required. There is a certain amount of interagency comity here and in some circumstances back wages are not warranted.

And secondly, DOL is supposed to consider the possible disruptions  to the procurement of ordering back wages. For example, if the back wages are retroactively required, they may adversely impact the agency’s ability to fund future work, by busting the public treasury due to the procurement error. This may impose an unfair burden on the taxpayers as well as the beneficiaries of the government services. And the burdens of the investigation, finding now dispersed workers, and the administrative costs of paying the back wages also may disrupt the contractor in performance of other work. Under the Davis-Bacon Act, DOL is supposed to consider the “pubic interest” and the particular circumstances of the case. Cf., Application of the Davis -Bacon Act to the CityCenterDC Project, ARB no. 11-074 et seq. (ARB April 30, 2013) (only prospective application and no back wages due under Davis-Bacon Act; but reversed on other grounds and subsequently found to not be covered by the Act on appeal).   

In short, contrary to the usual assumptions that DOL is going to look back at least two years, sometimes it is perfectly appropriate for DOL to forgo back wages and just seek prospective corrective action.