The civil False Claims Act (FCA) prohibits entities from fraudulently inducing the Government to contract, take or refrain from taking action, or make payment. Under the FCA, contractors that falsely certify their compliance with contract specifications can be assessed a civil penalty for each false claim in addition to treble damages. In USA v. Honeywell International Inc., the Court of Appeals for the District of Columbia Circuit was asked to determine the appropriate measure of damages arising from allegedly false claims made about the ballistic performance of Z Shield material made from Zylon fiber purchased from third parties and sold by Honeywell to Armor Holdings for the production of bullet proof vests, which were then sold to the federal Government and federally-funded state and local government entities. In the case, the Government sought approximately $35 million in damages for the full amount paid for the vests, trebled. During the proceedings, the Government recovered $36 million in settlements with Armor Holdings and the Zylon providers for their role in the manufacturing and supply of the vests. Honeywell, which had not settled, moved for summary judgment to apply a pro tanto approach to the calculation of damages that would be owed in light of these settlements. Specifically, Honeywell argued that since the Government only sought $35 million in damages, its recovery of $36 million in settlements should preclude the Government from recovering any damages from Honeywell even if the facts alleged in the case were true. The Government sought to recover a proportionate share of damages from Honeywell under its proposed offset standard, which would allow for the Government to recover more than the $35 million sought in the case.
On August 18, 2022, the Office of Federal Contract Compliance Programs (“OFCCP”) issued “Advancing Pay Equity Through Compensation Analysis,” a revision to Directive 2022-01, “Pay Equity Audits.” The revised Directive states that in order to determine that a contractor has satisfied its obligation to conduct a compensation analysis under 41 CFR § 60-2.17(b)(3), OFCCP requires certain documentation. Although the original Directive used the phrase “pay equity audit” to refer to contractors’ obligations under 41 CFR § 60-2.17(b)(3), this revised Directive instead uses the term “compensation analysis” to avoid any confusion regarding the nature of a contractor’s obligations.
Three things to know about the revised Directive:
Traditionally, a fixed price government contract is one in which the contractor absorbs the risks and costs of performance. Absent an economic price adjustment (EPA) clause in the contract, an unforeseeable event, such as a force majeure, or government imposed contract change, the contractor is stuck with the benefit or lack of benefit of the particular contractual bargain. In a cost reimbursement contract, while actual allowable, allocable and reasonable costs will be captured and paid, any fee contemplated to address the risks of performing that commitment are typically low.
However, the current landscape is not a normal one. It may be due to the COVID-19 pandemic sickness, restrictions and lockdowns, the war in Ukraine, China’s belt and road initiative, US spending of trillions of public dollars on entitlement programs, or something else, however, we see the impact in growing workforce, materials and product shortages. Economic theory aside, we know that so long as there is a continuing demand for limited services and supplies inflation will continue to grow. And, if price controls are instituted, they will not aid existing product shortages, and in fact may compound them.
Increasingly, the Federal government implements a rule for government contractors which then makes its way in some form into all of US industry. Cybersecurity regulations, mandating that government contractors, grant and agreement holders, and their subcontractors, maintain certain security controls and report on cyber incidents, have been in effect for a number of years. Indeed, Deputy Attorney General Lisa Monaco announced a Civil Cybersecurity Fraud initiative to go after government contractors, grant and agreement holders that falsely represent the cybersecurity of their products and services or the state of their compliance with cybersecurity requirements in seeking or performing government contracts. With a reported 1885% increase in ransomware attacks and high profile cyber events such as Colonial Pipeline in 2021, therefore, it is not surprising that the Securities and Exchange Commission (SEC) is making the move to require public companies to increase their cybersecurity activities and to report cyber incidents so investors have greater insight into their investments.
Effective Compliance Evaluations and Enforcement
On March 31, 2022, the U.S. Department of Labor’s Office of Federal Contract Compliance Programs (OFCCP) issued a new directive concerning enforcement of its equal employment opportunity laws. The new directive, DIR 2022-02, Effective Compliance Evaluations and Enforcement, provides updated guidance on agency compliance evaluation policies and expectations for government contractors. The practical effect of this update is to remove some of the flexibility previously provided by the OFCCP when reviewing contractors for OFCCP compliance. It is anticipated that these new directives are being pushed out in advance of releasing an updated Corporate Scheduling Announcement List (CSAL) notifying contractors that they will likely be included in OFCCP’s audit scheduling list.
The directive purports to allow OFCCP to strengthen the effectiveness of its compliance evaluations and promote greater contractor compliance by:
- Conducting comprehensive compliance evaluations and reducing delay by promoting the timely exchange of information.
- Promoting a proactive approach to compliance where federal contractors are required to actively self-audit employment systems to identify and resolve problems in their employment practices.
- Coordinating multi-establishment compliance review, including evaluations of common policies and patterns, when an employer has multiple establishments scheduled for review.
- Promoting regular, open, and transparent communication by all parties during the compliance evaluation to ensure contractors understand the nature of any concerns identified and to facilitate a prompt resolution of violations and completion of reviews.
In addition, the directive explains updated agency policies regarding the scheduling of contractors for compliance evaluations.
- OFCCP is enhancing its neutral scheduling procedures for selecting federal contractors for compliance evaluations to reach more contractors and subcontractors. OFCCP will continue to post its CSAL to notify contractors that they are included in OFCCP’s audit scheduling list.
- OFCCP will no longer delay scheduling contractors for 45 days after the issuance of a CSAL. As of March 31, 2022, OFCCP may begin scheduling contractors upon the publication of the CSAL.
The directive also describes contractors’ obligations regarding timely submission of Affirmative Action Programs (AAPs) and supporting data, supplemental information, and access to employees, applicants, and other witnesses.
- Supply and service contractors are required to develop an AAP within 120 days of the commencement of a covered federal contract and to update that AAP on an annual basis.
- Supply and service contractors must annually certify that they have developed and maintained complete AAPs in compliance with OFCCP’s requirements through its Contractor Portal.
- Upon receipt of a Supply and Service Scheduling Letter and Itemized Listing or a Construction Scheduling Letter and Itemized Listing, a coveredcontractor that is scheduled on or after March 31, 2022, is required to submit all AAPs and itemized listing data, including supporting data, within 30 calendar days. Where a contractor needs additional time, OFCCP retains the authority to grant an extension for extraordinary circumstances.
- OFCCP reiterates its long-standing policy that the agency may request supplemental data, follow-up interviews, and/or additional records and information if a contractor’s desk audit submission is incomplete or OFCCP identifies issues that warrant further analysis. When requesting this supplemental information, OFCCP will reasonably tailor the request to the areas of concern, allow contractors a reasonable time to respond, and include the basis for the request. The directive provides additional information regarding OFCCP’s ability to request additional information or expand the investigation if the agency identifies additional compliance issues.
- OFCCP stressed the importance of contractors providing access to their premises and records relevant to OFCCP’s investigation, including records that will enable OFCCP to directly contact current and former employees and other witnesses.
The directive also highlights how the agency is increasing contractor accountability. In accordance with DIR 2022-02, when covered contractors use OFCCP’s Contractor Portal to register and annually certify compliance with their AAP obligations, they are certifying that they have developed and maintained complete AAPs. Contractors can now begin certifying their compliance in the Contractor Portal, which has been ready for use since March 31, 2022. Certification must be completed by June 30, 2022.
In adopting and implementing the new procedures described above, the directive also rescinded and replaced four prior directives, DIR-2018-06, DIR 2018-08, DIR 2020-02, and DIR 2021-02, which were promulgated under the prior administration.
Pay Equity Audit
On March 15, 2022, OFCCP also issued a new directive, DIR 2022-01, Pay Equity Audit, to provide guidance on how OFCCP will evaluate federal contractors’ compliance with pay equity audit obligations. The directive is broken down into three categories: (1) the audit; (2) the documentation; and (3) OFCCP’s authority to review.
- Audit. As part of their affirmative action obligations, supply and service contractors are required to perform an in-depth analysis of their total employment practices, including an in-depth analysis of their compensation systems to determine whether there are gender-, race-, or ethnicity-based disparities. By proactively conducting this pay equity audit, contractors can determine whether impediments to pay equity exist and develop action-oriented programs to address these problems. If the audit reveals disparities in pay or other concerns about a contractor’s compensation practices, OFCCP may request additional information to investigate the contractor’s compliance.
- Documentation. OFCCP has the authority to review a contractor’s pay equity audit to understand the methodology used and verify compliance. OFCCP will request that the contractor provide a complete copy of pay equity audit(s) and that such audits show all pay groupings that were evaluated, any variables used, and the results of the analyses, including any disparities found. OFCCP may also request additional information including the model statistics and/or information relating to the frequency of pay equity audits, the communication to management, and how the results were used to rectify disparities based on gender, race and/or ethnicity.
- Authority to Review. OFCCP acknowledges that contractors may retain counsel to assist with the preparation of the pay equity audit and compliance records. But contractors must maintain and make available to OFCCP documentation of their compliance with OFCCP regulations. According to the new directive, a contractor cannot withhold its documentation of its pay equity audit based on the attorney-client privilege or work-product doctrine.
This directive is additional evidence of the OFCCP’s continuing and enhanced scrutiny of contractors’ compensation systems. It emphasizes the need for contractors to conduct and document their comprehensive compensation analysis (preferably using a statistical regression model) in order to demonstrate compliance during an audit.
For more information about these new OFCCP directives and their impact on federal contractors, please contact Amy Conway, Kelly Maxwell, or Stephanie Scheck.