Labor Secretary, IRS Commissioner Sign Memorandum of Understanding Regarding Worker Misclassification

Secretary of Labor Hilda L. Solis recently signed a memorandum of understanding with the Internal Revenue Service that will improve efforts to end the business practice of misclassifying employees in order to avoid providing employment protections. Labor commissioners and other agency leaders representing seven states signed memorandums of understanding with the department’s Wage and Hour Division and, in some cases, its Employee Benefits Security Administration, Occupational Safety and Health Administration, Office of Federal Contract Compliance Programs and Office of the Solicitor. Participating states include Connecticut, Maryland, Massachusetts, Minnesota, Missouri, Utah and Washington. Secretary Solis has announced agreements for the Wage and Hour Division to enter into memorandums of understanding with the state labor agencies of Hawaii, Illinois and Montana, as well as with New York’s attorney general.

The memorandums of understanding will enable the U.S. Department of Labor to share information and coordinate law enforcement with the IRS and participating states in order to level the playing field for law-abiding employers and ensure that employees receive the protections to which they are entitled under federal and state law. You can read more about this effort here.

Final Rule Regarding Contractor Business Ethics Program Takes Effect

A final rule providing guidance regarding the responsibility to ensure that contractors have implemented the mandatory contractor business ethics program requirements of FAR 52.203-13 to the list of contract administration functions at FAR 42.302 took effect June 30, 2011.

However federal prime contracts that exceed $5 million and have a period of performance of 120 days, and all subcontracts of the same dollar amount or duration, contain a clause which requires contractors to have a written Contractor Code of Business Ethics and Conduct.  This Code must be made available to each employee working on the contract.

Whether clause 52.203-13 applies or not, contractors may be suspended and/or debarred if a principal fails to timely disclose to the government, in connection with the award, performance, or closeout of a government contract performed by the contractor or a subcontractor, credible evidence of a violation of Federal criminal law involving fraud, conflict of interest, bribery or gratuity violations found in Title 18 of the United States Code or a violation of the civil False claims Act. Knowingly failing to timely disclose credible evidence of any of these violations is cause for suspension and/or debarment until three years after final payment on a contract.

If applicable,  contractors must also have an ongoing business ethics awareness and compliance program, which must be established within 90 days of a contract award. In general, this program must periodically communicate the standards and procedures of the contractor’s business ethics program to the contractors principals, employees, and its agents and subcontractors when appropriate.

Federal auditors have been charged with “vigorously verifying contractor compliance programs”.  Contractors should be aware that it’s likely they will be asked to produce evidence of compliance with the requirement to have a written code of Business Ethics and Conduct and, if applicable, to have an ongoing business ethics awareness and compliance program.

California Cracks Down on Worker Misclassification

If you perform work in California, be aware that the penalties for willful misclassification of a worker as an independent contractor rather than an employee are about to increase substantially. Each violation can carry a fine between $5,000 and $25,000.

Another point to note in SB 459 is that liability is not limited to employers.  The language states that “any person” who willfully misclassifies someone as an independent contractor can be fined. This means there is potential for a manager who misclassified a worker to be held liable and fined.

Looking at the bill more in-depth, it provides that it is unlawful for any person or employer to willfully misclassify an individual as an independent contractor or to charge that individual a fee or make any deductions from that individual’s compensation that would have been prohibited were that individual not an independent contractor.

“Willful misclassification” is defined as “avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor”.  This language is somewhat ambiguous, and California’s criteria for establishing whether a worker is an independent contractor rather than an employee is not cut and dried. If your clients have questions regarding classification of any of their workers, they should seek legal advice.

The bill calls for penalties of $5,000 to $15,000 for each violation. Every deduction or fee charged to a willfully misclassified independent contractor may result in a separate penalty. Furthermore, if it is determined either a court or the California Labor Workforce Development Agency that the person or company has engaged in a pattern or practice of violations, the penalties increase to $10,000 – $25,000 per violation.

Employers who are found to have violated the law must post a notice prominently on their websites, if they have one, that informs all employees and the general public that they have been found to have  willfully misclassified employees, and advising any worker who believes he or she is being misclassified to contact the Labor Workforce Development Agency. Employers who do not have websites must post the notice in the workplace.

US DOL Publishes Final Rule Affecting SCA Worker Displacement

In late August, the US Department of Labor published a final rule which implements a 2009 executive order aimed at preventing displacement of incumbent SCA workers if a contract for the same or similar services is awarded to a new company.  The rule will not be implemented until the accompanying FAR rule is complete.

Executive Order 13495 stated that that when a service contract expires and a follow-on contract is awarded for the same or similar services at the same location, the Federal Government’s procurement interests in economy and efficiency are better served when a successor contractor hires the predecessor’s employees.

Section 1 of Executive Order 13495 requires  that service contracts and solicitations for service contracts include a clause that requires the  contractor and its subcontractors, under a contract that succeeds a contract for performance of the same or similar services at the same location, to offer those employees (other than managerial and supervisory employees) employed under the predecessor contract, whose employment will be terminated as a result of the award of the successor contract, a right of first refusal of employment under the contract in positions for which they are qualified. Section 1 also provides that there shall be no employment openings under the contract until such right of first refusal has been provided.

More information on the final rule can be found here.

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To learn about Manning & Napier’s investment philosophy, and to read insights about various events affecting the markets both nationally and globally, visit their website. You’ll find videos and newsletters with perspective on economic trends.

SCA Compliance Gains Attention

The importance of complying with the SCA on covered projects has gained attention following a D.C. District Court judge’s recent denial of a motion to dismiss a False Claims Act case in which failure to pay workers SCA wage rates is a substantial component.

The case involves Maryland-based “The Kane Company”, which provides office-moving services to both government and corporate clients. A former employee of The Kane Company alleges that he became aware of the company’s failure to comply with SCA, and that the company continued to ignore its obligations under SCA even after the issue was brought to their attention.

The former employee, Anthony Head, alleged that The Kane Company had submitted several false invoices over the course of ten years which reflected that the company was, in fact, paying its workers at least the minimum wages required by the SCA. The judge in the case allowed the False Claims Act charges to go forward on the grounds that the invoices submitted were false. If Kane is found liable, it faces a penalty of up to $11,000 for each false invoice, plus three times the amount of each false invoice.

White House Orders Federal Agencies to Reduce Contract Spending

Recently the White House ordered federal agencies to reduce contract spending for acquisition support, information technology development and other services by $6 billion over the next year.

Procurement officers are officially encouraged to seek “best value”. In theory, this does not necessarily translate to lowest bid price. However, as cost cutting becomes an increased focus throughout federal agencies, in many cases “lowest price” has become “best value”. This builds an even stronger case for SCA contractors to contribute the entire fringe portion of the prevailing wage to bona fide benefits programs in order to maximize savings on payroll burden and reduce overall bid costs. As the amount of funding available for SCA contracts decreases, competition will tighten. Companies that currently contract with federal agencies can help position themselves favorably if they can demonstrate ways to decrease costs.

Army Contracting Command executive director Jeff Parsons stated that a company’s past performance and technical ability are still important. He adds, however: “That doesn’t mean we’re going to pay a large amount of money for what could be a small increase in overall value.” Defense department entities are also being encouraged to explore more sole source contracts for longer durations.

Over the past 10 years contract spending on 15 different types of professional and management support services has increased four-fold from $10 billion in 2000 to $40 billion in 2010. The Office Of Management and Budget (OMB) has asked agencies to contract less, make larger department-wide or agency-wide bulk purchases in hopes of reducing costs, and review contract vehicles with an eye toward more firm fixed-price contracts – which translates to increased risk for contractors.

Currently only 26% of service contracts are fixed price contracts. The remainder are structured to reimburse contractor costs on a recurring basis, resulting in higher risk to the federal government. Increasing pressure to mitigate costs is driving a shift from reimbursable contract structures to fixed- price structures.

Given the emphasis on cost containment, contractors who use the entire fringe portion of the prevailing wage to reduce payroll burden will gain an advantage in an increasingly competitive environment. To succeed under these circumstances, service contractors must be willing to assume more contracting risk and seek out ways to drive down both direct and indirect costs.

The Debt Ceiling: Its Impact & Potential Issues

Currently there’s much discussion about the debt ceiling and the need to raise the current limit before the August 2nd deadline.

Over the course of the past ten years, the combination of major spending increases and reductions in revenue has resulted in our country needing to take on more debt in order for government to meet its financial obligations. Recent debate concerning the debt ceiling seems to be entwined around trying to balance two equally unfavorable remedies: deep cuts to popular government programs and major tax increases.

I’d argue that a more critical issue is what happens if there is no increase. The consequences of failure to raise the debt ceiling could potentially be paralyzing.

According to the Congressional Budget Office (CBO): “If the U.S. Treasury were precluded from borrowing due to a binding debt limit in times when federal outlays outpaced revenues, the government would no longer meet all its legal obligations in a timely manner.” Essentially, the Government would become unable to issue new debt to manage cash-flows or to finance an annual deficit, rendering it incapable of obtaining the cash needed to pay its bills.

Consequently the government would likely have to lay off workers. Private companies may soon follow. The government may also stop paying military salaries, other federal employees, and unemployment insurance. In this scenario unemployment would surge and the government would not have financial means to solve the problem.

Should the government default on its debt, interest rates would be driven to extremely high rates to finance future deficits. This could push up the price of all commodities, including oil.

Furthermore, as reported by the Congressional Research Service (CRS) in April 2011, “the government could delay or even stop paying interest on its debt which would trigger a default and risk serious negative repercussions for economies and financial markets around the world. The U.S. government’s reputation in capital markets would be compromised and raise the costs of federal borrowing in the future.”

If the debt ceiling is not increased, federal contractors could be seriously affected. The government may delay payments to borrowers, vendors, contractors, beneficiaries, state and local governments, or employees. In some cases, as with contractors, interest could accrue as a result of the Prompt Pay Act. This could put contractors in a precarious position because they would still be liable for their responsibilities, such as wages, insurance, and rent.

The debate continues and the deadline approaches. It remains to be seen whether a solution will be presented, and what impact the actions of our Congressional leaders will have on contractors and the country as a whole.

DOL Extends Fee Disclosure Effective Dates

The Department of Labor has extended the effective dates of both 408(b)(2) sponsor disclosures and 404a participant fee disclosures.
408(b)(2) sponsor disclosures

When the DOL initially released its interim final rules for 408(b)(2) rules, the effective date was July 16, 2011. The newly amended rule pushes the effective date back to April 12, 2012.

This change means covered service providers must provide initial disclosures on or before April 1, 2012. In addition, covered service providers must provide initial disclosures with regard to an arrangement with a covered plan entered into, extended, or renewed after April 1, 2012 within a reasonable time prior to entering into, extending, or renewing the arrangement.
404a participant fee disclosures

The 404(a)(2) final rules apply for plan years beginning after October 31, 2011. The newly amended rule means the deadline for plan administrators of covered plans to provide the annual plan, expense, or investment disclosures to participants is now 60 days after the later of:

1. The effective date of the 408(b)(2) regulations (April 1, 2012), or
2. The date the regulations apply.

For calendar year plans, the deadlines would be:
•         Initial annual disclosure must be delivered by May 31, 2012.
•         The first quarterly statement requirement (i.e., showing actual fees charged for the preceding quarter) deadline is August 14, 2012.  In practical terms, this means the first statement that must include these fees is the June 30, 2012, quarterly statement.

Additional information

Additional information about the fee disclosure regulations is available on the EBSA website at http://www.dol.gov/ebsa and the Final Rule on Extension and Alignment of Applicability Dates for Retirement Plan Fee Disclosure Rules.

New SCA Fringe Rate Announced

It was announced today that the prevailing health and welfare fringe benefits required by the McNamara-O’Hara Service Contract Act (SCA) has been increased to $3.59 per hour.  This rate takes effect June 17,2011.