What Happened Here? DOL finds “Widespread Violations” of Government Contract Labor and Contract Violations

The Wage and Hour Division (“WHD”) of the US Department of Labor (“DOL”) announced last week that it recovered “$1.5 million dollars of back wages and damages for more than 400 workers” working for employers that had “federally funded” contracts. These arose out of an investigation of contractors working on the earthquake recovery program in progress at the Naval Air Weapons Station China Lake in California.

Although the release only identifies 30 contractors, DOL claims 35 contractors had violated some combination of the Service Contract Act (“SCA”), Davis-Bacon Act (“DBA”), the Fair Labor Standards Act (“FLSA”), and/or the Contract Work Hours and Safety Standards Act (“CWHSSA”). Our firm has decades of experience with these laws and we can count on the fingers of one hand (maybe even one finger) in which there was a situation like this.

So, what happened here?

The press release offers little about why there was such a breakdown of compliance on one project. Hence, I can only speculate through the lens of my experience and by reading between the lines about what DOL recovered.

Looking at the latter, the vast majority of the monies recovered was for back wages. Only three of the contractors were required to pay liquidated damages and civil monetary damages totaling about $36,000; a fourth contractor owed liquidated damages of $21.73. Liquidated damages and civil monetary damages typically are imposed on bad actors or negligent employers who make mistakes in the absence of good faith reliance on compliance resources including, for example, DOL guidance.

So, was this an example of a “widespread” pattern where contractors “shortchanged” workers because they failed “to pay workers all the required wages and fringe benefits they’ve earned”? Language such as this suggests that these contractors were a cabal of ne’er do well evildoers. But the low amount of liquidated damages and civil monetary penalties tells me that this was a glitch, not a conspiracy.

I seriously doubt that this situation occurred because these contractors woke up every day looking for ways to cheat their employees. More likely, there was a breakdown that led to a collective, but comparatively innocent, set of mistakes that require correction, but not castigation.

In recent years, I have delivered a presentation entitled “Shared Responsibilities” in which I explain how compliance with the SCA and DBA is a collective endeavor in which the DOL, contracting agencies, prime contractors, and subcontractors all have obligations many of which flow from the top down. Contractor compliance depends substantially on the terms of the contract. That’s where the downward duties are crucial. The DOL issues wage determinations applicable to localities throughout the country. Contracting agencies are required to ascertain the correct wage determination that is to be incorporated into the contract pursuant to the SCA, DBA or other applicable law. In the vast majority of cases, they also are required to incorporate the Government’s paid sick leave and contractor minimum wage contract clauses.

Assuming the contracting agency has properly fulfilled its duty to adopt the applicable clauses and wage determinations, the compliance task shifts to the prime contractor. Obviously, it is required to comply with SCA/DBA and related obligations owed to its own covered employees. However, the prime contractor also owes a duty to ensure that those clauses and WDs are flowed downstream to its subcontractors, and the subcontractors then bear the duty of flowing these items down to their lower tier subs.

Given the complex interplay of contract pricing and prevailing wage and fringe benefit obligations, we often advise our clients that they should be wary of being more generous than is required. That’s because almost no good deed goes unpunished under these laws and regulations.

For example, under the SCA contract provisions, a fixed-price contractor is required to warrant that it has not included any escalation of SCA wages and benefits in its proposed pricing for option periods for which SCA price adjustments are allowed. See FAR 52.222-43 (the FLSA/SCA price adjustment clause). When later SCA wage determinations lead to increased costs for prevailing wages and benefits, a price adjustment only is allowed for the “actual” increase of costs occasioned by the new WD so long as (among other conditions) the contractor did not include anticipated increases in its proposal. See id.

Thus, there is almost no incentive for federal contractors to pay workers above the bare minimum requirements that are incorporated into the contract by the contracting agency. That’s ironic because the underlying intent of these laws is to boost pay for federal contract workers.

When I read DOL’s press release, I immediately sensed there was a breakdown on the downward chain of shared responsibilities that led to this “widespread” problem. Assuming DOL’s investigation was correct, these workers weren’t paid the right amounts under the wage determinations that should have been but weren’t necessarily incorporated into the prime contract and/or weren’t flowed down to the subcontractors. Of course, that needs to be fixed and DOL rightly should ensure workers are paid what they are legally entitled to. However, all too often I have seen DOL press releases that demonize contractors when mistakes arose because the contracting agency or prime contractor failed to put the correct wage determination into a contract or subcontract.

This particular press release doesn’t convey the underlying cause of this multi-contractor compliance breakdown—the scale of which actually is extremely rare. I sure would like to know what happened here.