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Are You a Federal Contractor/Subcontractor? Not Knowing the Answer to this Question Could Have Costly Consequences

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Important to understand status as a potential Federal Contractor

Federal contractor/subcontractor status carries significant legal obligations. Such obligations include nondiscrimination and affirmative action requirements, which are enforced by the Office of Federal Contractor Compliance Programs (“OFCCP”).

To avoid the potentially costly consequences of noncompliance, companies should begin by ascertaining whether they are subject to the OFCCP’s jurisdiction (and should do so before the OFCCP shows up for a compliance evaluation).

federal contractor or subcontractor

Generally, determining whether a company maintains the status “federal contractor” is not an overly complicated task—such status applies to any company that is a party to a government contract with an aggregate value that, in any twelve-month period, exceeds $10,000 (i.e., a “Covered Government Contract”).

However, discerning whether a company is a “federal subcontractor” can require a more onerous undertaking. Federal subcontractors are companies that enter into a “subcontract” with an aggregate value that, in any twelve-month period, exceeds $10,000. Subcontract is defined as any agreement for the purchase, sale, or use of personal property or non-personal services that are, in whole or in part, necessary to the performance of a Covered Government Contract.

The OFCCP, Office of Administrative Law Judges, and courts have all taken a rather expansive approach to the determination of whether a subcontract is necessary to the performance of a Covered Government Contract. By way of example, in OFCCP v. Monongahela Railroad Company, No. 85-OFC-2 (Apr. 2, 1986), an Administrative Law Judge held that because “the type of service provided by defendant, i.e. the transportation of coal, is necessary to the performance of Detroit Edison’s government contract to supply electricity, defendant meets the definition of a subcontractor under the regulations.” In Monongahela, the railroad argued that its services were not necessary to the performance of a Covered Government Contract, because (i) it was not the only company transporting coal to the power plant and (ii) the federal government only used about 0.4% of the power plant’s annual output of electricity. Ultimately the Administrative Law Judge rejected the railroad’s argument and sided with the OFCCP, noting that “it should not make any difference whether the [railroad’s] contribution to the government contract is large or small, significant or insignificant.”

Importantly, lack of knowledge as to federal contractor/subcontractor status will not be a defense in the event a company is selected by the OFCCP for a compliance audit, even in situations where the prime contractor fails to disclose its status as a federal contractor to its subcontractor. Thus, it is essential that companies review their contracts and undertake an informed analysis.

Further, it is important to keep in mind that knowing whether a company qualifies as a federal contractor/subcontractor (pursuant to the analysis set forth above) is only part of the analysis. While maintaining the status of federal contractor/subcontractor triggers basic nondiscrimination compliance requirements, the size of the company and the value of its contracts can trigger additional requirements.

Additional Requirements for Federal Contractors & Subcontractors

Such additional requirements include preparing affirmative action plans and maintaining detailed application and employment related records concerning applicants’ and employees’ race, gender, disability status, and veteran status.

Federal contractors/subcontractors must fulfill these requirements if they employ more than 50 employees and are federal contractors/subcontractors holding government contracts in excess of $50,000. It is also important to keep in mind that a company with no direct connections to federal government contracts may nevertheless qualify as a federal contractor/subcontractor if it is part of a “single entity” with a parent, subsidiary, or affiliate company that is a federal contractor/subcontractor.

As noted above, failure to comply with the OFCCP’s nondiscrimination and affirmative action obligations can have costly consequences. Such consequences might include, for example, back pay awards based on alleged patterns or practices of discrimination, conciliation agreements mandating increased oversight and scrutiny, and even disqualification from participating in or benefiting from Covered Government Contracts for an indefinite or fixed-term period. Accordingly, companies should conduct reviews to evaluate whether they are a federal contractor/subcontractor, and they should do so on a regular basis.

This article was prepared expressly for OutSolve, LLC by Todd Mobley, Associate at Andrews Kurth.

Copyright © 2015. Andrews Kurth. This communication has been prepared by Andrews Kurth for informational purposes and does not constitute legal advice. A past performance or prior result is no guarantee of a similar future result in another case or matter. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Attorney Advertising.

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