Service Contract Act Violations--Debarment is a Real Risk
Can you get debarred and lose your federal contracts for a Service Contract Act violation? In a word, yes. However, proactive contractors can minimize the consequences of an otherwise honest mistake—the commission of which is not uncommon.
In an earlier installment, we discussed some of the practical aspects of responding to a Department of Labor (“DOL”) investigation. There, we urged contractors to strike the proper balance between being cooperative with an investigator while simultaneously making sure that the he or she doesn’t tag you with a violation that you didn’t commit or order the payment of back wages that exceed what actually is due. Here, we focus on why striking the right balance is so critical.
The Service Contract Act (“SCA”) authorizes a variety of sanctions for violations. Naturally, if the employees were underpaid or did not receive adequate health and welfare (“H&W”) benefits or cash equivalent payments, the employer has to pay the workers any amounts owed. The SCA, however, empowers DOL to withhold contract funds and place them in a deposit account to fund the reimbursement of underpaid employees once the back pay obligations are determined. See 41 U.S.C. § 6705(b). If those funds are inadequate, DOL can sue for the difference. Further, a Contracting Officer may terminate the contract and hold the contractor liable for the excess costs of procuring the services from a substitute contractor.
Perhaps the most dreaded sanction for an SCA violation is a three-year debarment from future government contracts. As written, “the Comptroller General shall distribute to each [federal agency] a list containing the names of persons or firms that a Federal agency or the Secretary has found to have violated” the SCA. 41 U.S.C. § 6706(a). A “contract may not be awarded to a person or firm named on the list . . . or to an entity in which the person or firm has a substantial interest, until 3 years shall have elapsed from the date of publication of the list.” 41 U.S.C. § 6706(b). This default sanction isn’t necessarily as automatic as it might seem because DOL can relieve a contractor from the sanction of debarment if it finds there were “unusual circumstances” surrounding the violation. Id.; see also 29 C.F.R. § 4.188(a).
In practice, “unusual circumstances” are not all that unusual for contractors that aren’t recalcitrant scofflaws. At the end of the day, DOL investigators have considerable discretion in recommending whether DOL should afford the contractor relief from debarment. Their discretion comes from regulations promulgated by the agency that guide its determination of “when there are unusual circumstances within the meaning of the Act.” See 29 C.F.R. § 4.188(b)(3)(i).
These regulations candidly feel like a pendulum. On one side, DOL says that relief “from debarment the debarment sanction cannot be in order” where there is evidence of:
violations of “the Service Contract Act provisions of the contract that are willful, deliberate or of [an] aggravated nature”;
culpable neglect in which the contractor failed to ascertain whether its practices are in violation;
a contractor’s “culpable disregard of whether [it was] in violation or not”;
falsification of records or other “culpable failure to comply with recordkeeping requirements”
a “history of similar violations, where a contractor has repeatedly violated the provisions of the Act, or where previous violations were serious in nature”;
29 C.F.R. § 4.188(b)(3)(i).
On the other hand, DOL can consider the following circumstances to support a finding of unusual circumstances:
“A good compliance history”;
“Cooperation in [an] investigation”;
“Repayment of monies due”; and
“Sufficient assurances of future compliance.”
29 C.F.R. § 4.188(b)(3)(ii). However, DOL characterizes the absence of the bad behaviors and the presence of positive traits as “prerequisites” to relief. The regulation sets forth additional factors that “must still be considered”:
“whether the contractor has previously been investigated for violations of the Act”;
“whether the contractor has committed recordkeeping violations which impeded the investigation”;
“whether liability was dependent upon resolution of a bona fide legal issue of doubtful certainty”;
“the contractor's efforts to ensure compliance”
“the nature, extent, and seriousness of any past or present violations, including the impact of violations on unpaid employees” and
“whether the sums due were promptly paid.”
Id.
Thanks to a Freedom of Information Act request, we recently reviewed an investigator’s report, which assessed a contractor on an established list of the factors that largely track these criteria. These include:
Refusal to comply with the Act;
Refusal to pay all Back Wages;
A significant number of Back Wage violations where there exists no reasonable excuse for the violations;
History of labor standard violations (monetary and recordkeeping);
Falsification or concealment of records or other evidence necessary to determine compliance;
Obviously deliberate violation such as ignoring the WD rate and fringe benefits;
Clear or intentional employee misclassification;
Failure to keep adequate and accurate records of hours worked, rates of pay, etc.;
Did the employer exhibit good faith in resolution of compliance problems;
Was there culpable neglect or disregard on part of the firm and its officials/managers regarding compliance of the firm’s practices with the Act;
Was there a bona fide legal question or questions surrounding the violations?;
In the case of minor, inadvertent violations (less than $500) in a first investigation, where all the Back Wages are paid, debarment consideration is not necessary; and
Where there is evidence that the firm was relying on erroneous advice from an official DOL [sic], debarment is not warranted.
Investigators document their files considering these criteria one-by-one. While we can offer no definitive assessment of when DOL will or will not provide relief from debarment, we can say that “good eggs” probably will be given a break; rotten eggs won’t. How can you tell the difference? We would suggest that you know a rotten egg when you smell it.
Our bottom-line advice is that service contractors must, must, must take the SCA seriously. Take stock today. Are your records in good shape? Does your company carefully review wage determinations and classify personnel for estimating purposes when you submit proposals? Do you pay attention to the issuance of new wage determinations? Do you provide fringe benefits or cash equivalents that satisfy the H&W requirements?
The list goes on, but you should get the point. Learn the SCA’s requirements and get in compliance now. And if one day DOL launches an investigation of your company, don’t ignore or try to stiff-arm them. Cooperate with them. Provide records quickly. Take corrective action as soon as possible if it’s warranted. While it may seem self-serving, we urge you to seek experienced counsel to support your effort to comply with the law and continue doing business with the Government for years to come.