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A Word of Warning When it Comes to Contracting With the Federal Government: Beware

Employment Law Update

November 10, 2016

Employers who regularly contract with the federal government are, most likely, already well aware that doing so can be both difficult and complex. This is particularly the case this time of year, when many are undergoing compliance audits.  So here’s a word of warning for those considering entering into contracts with the federal government or becoming federal subcontractors who provide goods or services for prime contractors:

Beware. While at first glance, an engagement with the federal government may appear lucrative, the venture comes with many strings attached, and the cost of compliance with the rules can quickly outweigh the financial benefit of the contract itself.  These pitfalls are often overlooked by those who are inexperienced with the litany of compliance requirements that come with a federal or subcontractor designation. 

While a discussion of each and every obligation of federal contractors and subcontractors is beyond the scope of this article, some of the most costly and often-unnoticed employment-related compliance obligations are addressed below.

Affirmative Action

The affirmative action program (AAP) requirements are those with which current federal contractors and subcontractors are the most familiar.  However, instances of true compliance are rare.  While many think of the applicable “requirement” as the employer’s formulating a single affirmative action “plan,” this is not the case.

Executive Order 11246 (EO 11246), Section 503 of the Rehabilitation Act of 1973 (Section 503), and The Vietnam Era Veterans Readjustment Assistance Act of 1974 (VEVRAA), separately mandate that covered contractors gather data to compile, create, and maintain a distinct AAP for the groups protected under each.  EO 11246 and Section 503 require contractors and subcontractors with a single contract or subcontract of $50,000 or more and 50 or more employees to develop and maintain a written AAP for – with regard to EO 11246 – women and minorities, and for individuals with disabilities (IWDs) with regard to Section 503. VEVRAA requires contractors with 50 or more employees and a single contract or subcontract totaling $150,000 to maintain a written AAP pertaining to “protected veterans.”

Two general goals underlying the AAP requirements are to ensure that contractors do not discriminate against, and that they identify and remove barriers to employing, individuals within these protected groups.  The Office of Federal Contract Compliance Programs (OFCCP), a branch of the U.S. Department of Labor (DOL), enforces EO 11246, Section 503, and VEVRAA, including the AAP obligations.

Creating and maintaining AAPs is a lengthy and tedious process, requiring information and actions on the covered contractor’s part that are difficult and in some cases impossible to recreate after-the-fact.  Covered contractors who are not keeping up with their AAPs and other contractor-specific obligations on an ongoing basis throughout each AAP year are doing themselves a true disservice:  When the OFCCP decides to audit a covered contractor and issues a formal scheduling letter, the contractor has 30 days to get its house in order.  This includes finalizing and submitting its AAPs and supporting data to the OFCCP.  Many non-compliant contractors are caught short by this deadline and, ultimately, face burdensome and long-lasting conciliation agreements with the OFCCP.  Although contractors are not currently required, as a matter of course, to annually file their AAPs with the OFCCP, a serious discussion is underway regarding adding such a requirement in light of employers’ widespread noncompliance.  

Federal contractors and subcontractors should not feel too relieved, however, in the event they do not meet the monetary or employee thresholds for AAP obligations to attach.  This is because EO 11246, Section 503, and VEVRAA each have separate, lower thresholds that afford the OFCCP jurisdiction to impose other obligations on covered contractors. 

Additional Postings

Contracting with the federal government affords it the ability to require employers to post information above and beyond that generally required by the major employment laws.  For example, Executive Order 13496, signed by President Obama on Jan. 30, 2009, generally requires that employers with construction, supply, and service prime contracts of $100,000 or more, as well as employers who hold subcontracts of $10,000 or more, post a DOL-mandated notice of employee rights under the National Labor Relations Act (NLRA).  The NLRA is the seminal law that regulates unions and private employers. This notice must be posted conspicuously in plants and offices where employees covered by the NLRA perform contract-related activity, including all places where notices to employees are customarily posted (whether physical or electronic).

Generally speaking, the notice informs employees of covered contractors of their rights under the NLRA to organize and bargain collectively with their employers, including through unionization, and to engage in other protected concerted activity.  Such a posting is intended to, and does, encourage unionization of covered contractors – a potential cost that must be carefully weighed when entering into federal contracts or subcontracts.

Invitations to Self-Identify 

The federal government also requires that covered contractors make certain inquiries of applicants, many of which are contrary to the types of inquiries private employers are often trained by legal counsel to avoid asking. For example:

  • EO 11246 requires covered contractors with $10,000 aggregate in federal contracts or subcontracts to invite applicants, pre-offer, to self-identify their race, national origin, and gender.
  • Contractors with a federal contract or subcontract of $150,000 or more must invite applicants, both pre-offer and post-offer, to identify as protected veterans under VEVRAA.
  • Section 503 requires contractors with a federal contract or subcontract of $50,000 or more to invite applicants to self-identify as IWDs at numerous stages, including the pre-interview and pre-offer stages, post-offer, and at numerous set intervals during the course of employment. Covered contractors must take care to maintain the Section 503 self-identification forms in a separate, confidential “data analysis file” and provide this to the OFCCP when asked; such requests are a routine part of OFCCP audits.

Employers should also note that this confidentiality requirement under Section 503 is independent of the requirement contained in the Americans with Disabilities Act (ADA) that employers treat information gathered on the medical condition or history of an applicant or employee in separate, confidential medical files distinct from the personnel record.  VEVRAA imposes a similar obligation on covered employers to maintain a separate, confidential file to house self-identification responses from protected veterans.  OFCCP auditors routinely ask questions related to, and seek documentation of, contractors’ compliance with these confidentiality obligations. 

Recordkeeping Requirements

Although somewhat analogous to the recordkeeping mandates of Title VII and the ADA, each of EO 11246, Section 503, and VEVRAA requires, with some exceptions, that employers with varying contract sizes (under EO 11246, as low as $10,000 in federal contracts or subcontracts in the aggregate) preserve for two years (as opposed to one under Title VII) from the date of the making of the record or the personnel action involved, whichever occurs later, any personnel or employment record the contractor made or kept.  In addition, covered contractors must maintain personnel records of employees who were involuntarily terminated for two years from the date of termination.  Section 503 and VEVRAA contain the additional requirement that covered contractors (those with a contract or subcontract of $50,000 in the case of Section 503, and those with a contract of $150,000 in the case of VEVRAA) maintain certain documentation for three years. In the event of OFCCP compliance reviews, which are increasingly time-consuming and lengthy, covered contractors could end up having to retain relevant documents for five-plus years.  The preservation and retention of voluminous data is costly to employers, including from a personnel and IT standpoint.


The OFCCP’s reach extends to contractor handbooks as well.  For example, employers with federal contracts or subcontracts of $10,000 or more must ensure that their equal employment opportunity policy expressly prohibits discrimination on the basis of sexual orientation, gender identity, and protected veteran status.  Such contractors are also required to disseminate to both employees and applicants a pay transparency policy, the content of which the OFCCP has specified verbatim.  The DOL published its final rule on Executive Order 13665, promoting pay transparency and openness, on Jan. 11, 2016.  This policy must be incorporated into existing employee handbooks and, with limited exceptions, prohibits employers from engaging in discrimination against applicants or employees who inquire about, discuss, or disclose their compensation or the compensation of other employees or applicants. 

Section 503 requires contractors with federal contracts or subcontracts of $50,000 or more to ensure that their employees are not harassed on the basis of their disability.  This is typically accomplished by inclusion of an anti-harassment policy and reporting procedure in an employee handbook.  Covered contractors and subcontractors must also include a discussion of their affirmative action efforts with regard to IWDs and protected veterans in their employee manual.  The OFCCP will look for all of these items during a compliance audit.


One area where compliance delinquency is difficult, if not impossible, to cure relates to self-assessments.  Covered contractors with a single federal contract or subcontract of $15,000 or more are obligated under Section 503 to develop and conduct, on a regular schedule, a review of their personnel processes, procedures, and qualification standards to ensure they do not screen out disabled individuals.  In the event they do, the contractor must make necessary modifications.  VEVRAA contains similar requirements pertaining to protected veterans, but only for covered contractors with contracts or federal subcontracts of $150,000 or more.

In Conclusion

Conducting business with the federal government is an expensive proposition.  There are numerous requirements in addition to those discussed above that may include, without limitation, paying a minimum wage higher than the prevailing federal minimum wage to employees, including specific regulatory-based language in job postings, contracts, and purchase orders; union notification requirements; mandatory training; evaluation of utilization goals for IWDs, as well as setting and evaluating hiring benchmarks for protected veterans, and development of policies, procedures, and programs to correct any related issues; early listing of employment openings with appropriate state workforce agencies in order to afford protected veterans priority as compared to other jobseekers; and gathering of data for inclusion in and filing the VETS-4212 form with the DOL’s Office of Veterans’ Employment and Training Service.

Those employers who are already contractors or subcontractors for the federal government, or those who are considering becoming such, are well-advised to seek comprehensive guidance from their labor and employment counsel on the resulting compliance obligations.

The Employment Law Alert is published as a service to our clients and friends. It is intended to be informational and does not constitute legal advice regarding any specific situation.