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DOL’s Proposed Rule on the Right of First Refusal in Service Contracts

By December 1, 2023No Comments
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On July 14, 2022, the Department of Labor (DOL) issued a proposed rule that would require contractors and subcontractors performing covered service contracts to offer, in good faith, service employees employed under the predecessor contract the right of first refusal of employment under the successor contract. The proposed rule implements President Biden’s November 18, 2021 Executive Order 14055, Nondisplacement of Qualified Workers Under Service Contracts (the order). In sum, the order establishes a general policy for the federal government that “service contracts which succeed contracts for the same or similar services, and solicitations for such contracts, shall include a non-displacement clause.”

A similar regulation was issued during the Obama era but was later rescinded during the Trump administration.

The order explains that it is in the federal government’s interest that efficiency and economy are best served “when the successor contractor or subcontractor hires the predecessor’s employees, thus avoiding displacement of these employees.” An “employee” means an individual engaged in the performance of a Service Contract Act (SCA) covered contract—individuals “employed in a bona fide executive, administrative, or professional capacity” are not considered “employees” for purposes of the rule. The order notes:

[A] carryover workforce minimizes disruption in the delivery of services during a period of transition between contractors, maintains physical and information security, and provides the Federal Government the benefit of an experienced and well-trained workforce that is familiar with the Federal Government’s personnel, facilities, and requirements.

Under the DOL’s proposed rule, a contractor and its subcontractors must determine the number of employees needed for efficient performance of the work. This number may be more or less than the number utilized on the predecessor contract. Following this determination, the proposed rule would prohibit a contractor and any subcontractors from making an offer of employment to any employee before making an express offer of employment to employees on the predecessor contract. The offer of employment must afford the employee at least 10 business days to accept the offer of employment. Nevertheless, the contractor and its subcontractors will not be required to offer the right of first refusal to any employee of the predecessor contractor who is not a service employee under the SCA or to an employee whom the contractor reasonably believes, based on reliable evidence, that there would be just cause to discharge.

The proposed rule would also require that a contractor provide the contracting officer with a “certified list of the names of all service employees working under the contract and its subcontracts during the last month of contract performance” at least 10 business days prior to the completion of the contract, or its work on the contract.  The contracting officer would then provide the list to the successor contractor.

Not surprisingly, there are exemptions under the proposed rule. For example, an agency’s senior official may exempt a contract from the requirements if adherence to the requirements “would not advance the Federal Government’s interests in achieving economy and efficiency.” An agency must publish a list of exceptions that it has granted on a centralized public website. Agencies must also ensure that the incumbent contractor notifies, in writing, its employees of any exception to the requirements granted by the agency.

Successor contractors that violate the rule may face sanctions such as having to hire each affected employee in a position for which the employee is qualified and paying lost wages. A violation may also expose the contractor to debarment from federal contracting for a period of up to three years.

The DOL estimates that the number of business concerns potentially affected by the proposed rule could be 119,700 firms—that is, firms actively holding SCA-covered contracts. However, among the broader population of businesses, which includes those bidding on SCA contracts but without active contracts, or those considering bidding in the future on covered contracts, the number of entities impacted may be 449,200 firms.

Comments on the proposed rule are due no later than August 15, 2022.

If you have any comments or would like to discuss this proposed rule, our Government Contracting Group is available to assist you on this or any other government contracting matters.

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