Helping individuals, companies, and organizations understand key legal and practical considerations for promoting compliance and making better business decisions in these types of federal, state, and local government contracting matters MORE

Government Contracts & Investigations Co-Chair Susan Warshaw Ebner recently discussed the impact of the new Department of Defense (DOD) rule that will apply to government contractors in an article by Law360. The interim rule, which was published on September 29 and goes into effect on November 30, 2020, requires that contractors at all tiers be assessed and certified as compliant with the Cybersecurity Maturity Model Certification (CMMC) level identified in the DoD procurement in order to be awarded and perform that contract.

Under the interim rule, the CMMC level required for award of that prime contract may not be the same level required for lower-tier supply chain contractors. The interim rule does not lay out how the required CMMC levels will be determined for these supply chain contractors. The rule also does not lay out how contractor challenges to CMMC assessments and certifications will be handled.

The DOD intends to improve cybersecurity across its supply chain, but may not have fully taken into account the costs to contractors, said Susan. She explained that though the CMMC framework suggests that smaller businesses are likely to have fewer implementation costs, where a small business has contracts involving particularly sensitive data or critical activities, DOD may require that the contractor possess a higher level of CMMC and may incur greater costs.

Susan also went on to note that the DOD, in calculating the impact of this rulemaking, does not appear to be taking into account the cost to contractors to become compliant with the existing requirements. Under current standards, contractors are deemed compliant as long as they have a plan in place to hit the existing standard in the future. Susan is concerned that the costs to contractors at all tiers to fully implement these requirements “are going to be significant.”

On September 22, 2020, President Donald Trump issued an executive order on Combatting Race and Sex Stereotyping that the president purports is necessary to combat the “destructive ideology” that is “rooted in the pernicious and false belief that America is an irredeemably racist and sexist country; that some people, simply on account of their race or sex, are oppressors; and that racial and sexual identities are more important than our common status as human beings and Americans.”

There are two immediate action items for government contractors and subcontractors under the executive order:

  1. Within 60 days—by November 21, 2020—covered contractors must include in government contracts, new language that limits the content of diversity and inclusion trainings and requires a notice be posted in the workplace and sent to each labor union regarding this executive order, unless the contractor is exempt by section 204 of Executive Order 11246.
  2. Review planned trainings on equal employment opportunity, anti-harassment/anti-discrimination, and diversity and inclusion to confirm whether, as drafted, they may run afoul of the executive order.

Anti-harassment, anti-discrimination and diversity and inclusion training are not prohibited by the executive order and employers are still required to comply with their obligations under Title VII, Executive Order 11246, and analogous state and local laws. We strongly recommend that government contractors continue trainings to promote compliance with their legal obligations. However, President Trump has charged OFCCP to establish a hotline and investigate complaints alleging that a government contractor is providing trainings in violation of this executive order. OFCCP is also required to publish within 30 days in the Federal Register a request for information regarding the government contractor’s training, workshops or similar programming provided to employees. We therefore recommend reviewing any planned trainings with legal counsel to minimize the risk of standard trainings being deemed to run afoul of the new executive order.

While the violators of the executive order may be subject to contract suspension or termination and the contractor may be subject to suspension or debarment, we anticipate the executive order being challenged based on potential inconsistencies with equal employment opportunity, anti-discrimination/harassment, affirmative action and even free speech laws. Even if not challenged immediately, the executive order may be rolled back entirely after the presidential election. As a result, while we again recommend a review of trainings planned for the near future, we do not recommend immediately ceasing or making fundamental changes to existing diversity and inclusion trainings.

We are monitoring the situation and will provide updates on new developments.

It’s September 24, 2020, and the 2020 fiscal year ends at the stroke of midnight on September 30th. Back in July, the House and Senate had passed their respective versions of the National Defense Authorization Act (NDAA) for FY 2021. Prognosticators were betting that we could have an appropriation bill signed into law before the end of the fiscal year. However, here we are and it looks like a formal NDAA for FY 2021 is not likely to be passed by Congress until after the election.

So where does that leave us? On September 22, the House introduced a Continuing Appropriations Act, 2021 and Other Extensions Act. This continuing resolution (CR) would provide appropriations to covered agencies through December 11, 2020. The bill has now been forwarded to the Senate. If it passes both houses of Congress it will then be sent to the President for signing into law. There then will be a continuation of funding to prevent a government shutdown that would otherwise take place for the agencies that have not had an appropriation bill passed for FY 2021.

If passed – and my betting money is on this occurring (especially since it’s an election year), although there may be some tinkering before it is finalized since there are six more days until the end of the fiscal year – the Department of Defense and other affected agencies will continue receiving funding at the FY 2020 levels. This means that there will be no new starts to programs, but only continuations of existing authorities, programs and activities under the following appropriations acts for FY 2020:

  1. The Agriculture, Rural Development, Food and Drug Administration, and Related Agencies Appropriations Act, 2020 (division B of Public Law 116–94), except sections 791 and 792.
  2. The Commerce, Justice, Science, and Related Agencies Appropriations Act, 2020 (division B of Public Law 116–93), except the last proviso under the heading “Department of Commerce—Bureau of the Census—Periodic Censuses and Programs.”
  3. The Department of Defense Appropriations Act, 2020 (division A of Public Law 116–93), except title X.
  4. The Energy and Water Development and Related Agencies Appropriations Act, 2020 (division C of Public Law 116–94).
  5. The Financial Services and General Government Appropriations Act, 2020 (division C of Public Law 116–93).
  6. The Department of Homeland Security Appropriations Act, 2020 (division D of Public Law 116–93) (except for amounts in title II of division D of Public Law 116–93 that were designated by the Congress as being for an emergency requirement pursuant to section 251(b)(2)(A)(i) of the Balanced Budget and Emergency Deficit Control Act of 1985), and title I of division I of Public Law 116–94.
  7. The Department of the Interior, Environment, and Related Agencies Appropriations Act, 2020 (division D of Public Law 116–94).
  8. The Departments of Labor, Health and Human Services, and Education, and Related Agencies Appropriations Act, 2020 (division A of Public Law 116–94).
  9. The Legislative Branch Appropriations Act, 2020 (division E of Public Law 116–94), and section 7 of Public Law 116–94.
  10. The Military Construction, Veterans Affairs, and Related Agencies Appropriations Act, 2020 (division F of Public Law 116–94), except title V.
  11. The Department of State, Foreign Operations, and Related Programs Appropriations Act, 2020 (division G of Public Law 116–94).
  12. The Transportation, Housing and Urban Development, and Related Agencies Appropriations Act, 2020 (division H of Public Law 116–94)

CR at Section 101. The CR would provide that “No appropriation or funds made available or authority granted pursuant to section 101 for the Department of Defense shall be used for: (1) the new production of items not funded for production in fiscal year 2020 or prior years; (2) the increase in production rates above those sustained with fiscal year 2020 funds; or (3) The initiation, resumption, or continuation of any project, activity, operation, or organization … for which appropriations, funds, or other authority were not available during fiscal year 2020.” CR at Section 102. “[O]nly the most limited funding action of that permitted in the Act shall be taken in order to provide for the continuation of projects and activities.” CR at Section 110.

The CR does have a few exceptions – it would permit DoD to enter into a new contract for the procurement of up to two Columbia class submarines. Provisions under Title III Section B of the CARES Act would continue to fund prioritized reviews of drug applications, incentives, and manufacturer reporting requirements in response to drug shortages. Money would be allocated to the Patient Protection and Affordable Care Act, Medicare, and immigration. Money also is appropriated to fund “Presidential Transition Administrative Support” and Presidential records transition activities.

Funding is at the heart of being able to continue to operate the government. We will be watching this process closely. If you have questions about this blog, contact the author or your Stinson counsel.

On September 8, 2020, Judge Gregory Woods in the United States District Court for the Southern District of New York struck down the majority of the U.S. Department of Labor’s (DOL) “joint-employer” rule concerning what it takes to be considered a joint employer under the Fair Labor Standards Act (FLSA). The decision has a significant impact on both government contractors and other employers who have “vertical” employment relationships by making them more susceptible to lawsuits from a subcontractor’s employees.

The DOL developed a “joint-employer” rule, issued in January 2020 and effective in March 2020, which imposed a four factor balancing test to decide whether a worker can hold two or more linked businesses liable for the same FLSA violation. The DOL Rule focused on control and looked to whether a potential joint employer: (1) hires or fires the employee; (2) supervises and controls the employee’s work schedule or conditions to a substantial degree; (3) determines the employee’s rate and method of payment; and (4) maintains the employee’s employment records. The practical effect of the DOL Rule was that it narrowed the scenarios in which multiple employers could be liable to the same employee.

New York and 17 other states sued to block the DOL Rule, based in part on concerns that workers would be subject to wage theft in violation of the FLSA. Judge Woods concurred, holding that the DOL Rule conflicted with the FLSA’s plain text with regard to what it means to “employ” a worker. The FLSA provides that to “employ” a worker is to “suffer or permit” them to work. The DOL Rule, conversely, was predicated on the definition of employer as “any person acting directly or indirectly in the interest of an employer in relation to an employee” and effectively provided that the broader definition of “employ” is irrelevant for joint employers. Judge Woods stated that these definitions are interrelated and the DOL cannot square its rule with the FLSA’s “suffer or permit” language. By conflicting with a statute, the DOL Rule violated the Administrative Procedure Act and, accordingly, Judge Woods struck down all portions of the DOL Rule that were contrary to the FLSA.

Importantly, Judge Woods vacated the portion of the DOL Rule that applied to “vertical” employment relationships, where workers for an intermediary company are contracted to another company. This will have a notable impact in the government contracts context, where such an employment relationship is common. For example, a prime contractor who has a contract to sell specialized military training equipment might subcontract with a company to provide on-site technical support to build the equipment. Under the DOL Rule, the prime contractor would only be liable as a joint employer for claims made by the subcontractor’s workers if the prime contractor exercised control over those workers. Following Judge Woods’ opinion, the prime contractor may be liable as a joint employer even if it does not exercise control over the subcontractor’s workers so long as it “suffer[s] or permit[s]” them to work.

Judge Woods did not vacate the portion of the DOL Rule applying to “horizontal” relationships, where a worker is employed by two “sufficiently associated” businesses. In general, a horizontal relationship occurs when one employer employs an employee for one set of hours in a workweek and another employer employs the same employee for a separate set of hours in the same workweek. Such “horizontal” relationships where the two businesses both employ or share control over a single employee are still subject to the DOL Rule.

Government contractors who may be engaged in “vertical” subcontractor relationships should exercise caution with regard to their policies and agreements with subcontractors. Government contractors who altered their policies and agreements with subcontractors in response to the DOL Rule should be especially careful, as this SDNY decision likely opens them up to increased liability.

Leo Tolstoy famously began his 1877 novel Anna Karenina with the observation, “All happy families are alike; each unhappy family is unhappy in its own way.” Much the same could be said of government contractors that find themselves in hot water relating to false claims. Two recent settlements by government contractors remind us that there is more than one way to end up facing U.S. Department of Justice (DOJ) allegations that you have defrauded the Government.

One such path to false claims involves charging the Government the contract price for goods or services that do not meet the contract requirements. On September 11, 2020, United States Attorney Josh J. Minkler announced a civil settlement with Dave O’Mara Contractor, Inc. (DOCI), an asphalt contractor based in Southern Indiana, as well as certain DOCI affiliates and shareholders. The settlement agreement resolves allegations that DOCI knowingly made misrepresentations to Indiana Department of Transportation (INDOT) in connection with paving projects funded in part by the Federal Highway Administration. Specifically, the Government alleges that DOCI represented that its hot asphalt mixture met INDOT’s minimum requirements for the amount of binder or “glue” that would hold the mix together when, in fact, DOCI’s asphalt frequently failed to meet those requirements and were, therefore, more likely to prematurely deteriorate.

As Andrea M. Kropf, Regional Special Agent-In-Charge, United States Department of Transportation Office of Inspector General explained, “It is important to ensure that taxpayers get what they pay for so that the quality of products used in highway transportation projects is not compromised.” The settlement contains no determination of liability, but it provides that DOCI will pay and/or guaranty payments totaling over $4.25 million over the next four years.

Another road to false claims entails the use of federal grant money for work not related to the grant. Several days after the DOCI settlement was announced, the DOJ announced that The Scripps Research Institute (TSRI) has agreed to pay the U.S. $10 million to settle a whistleblower suit alleging it used grants from the National Institutes of Health (NIH) to pay for unrelated work by its researchers. More particularly, the settlement resolves allegations that between 2008 and 2016, TSRI did not have a system in place for its faculty to properly account for time spent on activities that cannot be charged directly to NIH-funded projects or are unrelated to the research activities of the NIH-funded project. Consequently, the U.S. contended that TSRI improperly charged time spent by faculty on developing, preparing, and writing new grant applications directly to existing NIH-funded projects, rather than allocating such charges as indirect costs. The U.S. also alleged that TSRI improperly charged NIH-funded projects for time spent by its faculty on other activities unrelated to the funded projects, such as teaching, TSRI committee work, and other administrative tasks. TSRI, which averages about $250 million in research grants each year, more than 85% of which comes from the federal government, did not admit any wrongdoing in the settlement.

The DOJ takes its commitment to protect the finite financial resources of NIH (and other agencies) very seriously, particularly given the importance of scientific advances. In this regard, U.S. Attorney Robert K. Hur stated, “Federal grant recipients must use the grant funds they receive on tasks that specifically relate to the funded project. Those that improperly charge the government for costs unrelated to the project must be held accountable.”

The allegations were originally brought in a lawsuit filed under the qui tam, or whistleblower, provisions of the False Claims Act by Thomas Burris, Ph.D, a former TSRI employee who will receive a $1.75 million cut of the settlement.

Tolstoy was right, of course: unhappy families are unhappy for a multitude of reasons, just as contactors facing false claims allegations end up in that position due to a wide variety of circumstances. But he was also correct that happiness comes from a singular set of conditions. In the case of government contractors, the best chance of achieving the requisite conditions—and concomitant “happiness”—is to develop and effectively implement a comprehensive business ethics and conduct compliance program. Without such a program, contractors are much more likely to stumble onto one of the many roads that can lead to decidedly unhappy outcomes like false claims. If you do receive a subpoena (whether it’s from a Grand Jury or an Agency Inspector General), it is important to determine what needs to be done and to act promptly and carefully to ensure that you properly collect and preserve data and documentation.