Ignorance is NOT Bliss in Government Contracting

By: Don Walsh

Many government contractors are baptized by fire into the labor requirements of government contracts.

Although a bumpy ride, the majority of government contractors have become familiar with such things as having appropriate documentation of employment eligibility, security clearances and the importance of accurate and certified payrolls.

Over the past few years, however, the landscape for employers has dramatically changed creating issues for unsuspecting contractors who do not realize that these requirements may trump even contractual requirements and bid prices.

For contracts imposing the Service Contract Act (SCA), employees must be paid wages and fringe benefits that are no less than the prevailing wages and fringe benefits paid to private and public sector employees in the same locality who perform similar work. Unlike the commercial market where the parties to a contract may agree on the wages to be paid an employee, the SCA interjects the Department of Labor into the process. Its Wage and Hour Division is authorized to make the determination of the "prevailing wage" regardless of what the contracting officer may have agreed to and regardless of what the contractor may have proposed.

This ability of the Department of Labor to modify the payment terms of the contract poses an inherent risk to the contractor and has provided fertile ground for contract disputes.

In addition to incorrectly classifying an employee’s labor category, the Department of Labor and private litigants have also launched increased scrutiny into whether salaried employees are exempt from overtime pay under the Fair Labor Standards Act. Careful inspection of the duties of all salaried employees is necessary to ensure that they meet one of the tests created for overtime exemption. Similar to labor misclassifications, the overriding power of the Department of Labor and the jurisdictional limitations of the various Boards of Contract Appeals limit the ability of the contracting officer to permit the employer to defend these misclassifications based on the contract, the treatment of employees by predecessor contractors or even by similar positions and pay by the government.

Improper classification of labor category or overtime exemption status frequently involve multiple current and former employees and expose employers to back wages, liquidated damages, and the employee’s counsel fees.

This is not to say, however, that contractors are left without any contractual remedies. With moderate success, many contractors have recovered increased costs utilizing either the Price Adjustment Clause in their contracts or "common law" theories, such as constructive change, mutual mistake, superior knowledge, and equitable estoppel.

To avoid such entanglements, prudent contractors must take special precaution to carefully review all of the duties of positions proposed to ensure the appropriate classification.

Don Walsh is a partner at Offit Kurman, PA concentrating in commercial litigation, employment law and all aspects of government procurements including contractual and administrative issues arising when doing business with federal, state and local governments. He can be reached at 443.738.1583.