OFPP tightens up the labor rules on subcontracts

Joseph J. Petrillo

The movement to encourage federal agencies to contract for commercial products and services took a step backward recently when the Office of Federal Procurement Policy withdrew some exemptions from the
Service Contract Act.

The act requires most federal service contracts to include wage determinations, that is, listings of minimum wages and fringe benefits for those working on the contract. When a preceding contractor's work force is unionized, wages and fringes are usually those in the collective bargaining agreement. Otherwise, they are based on Labor Department statistics for the work site.

Information technology maintenance contracts have long enjoyed a broad exemption from the Service Contract Act. Industry convinced Congress and the administration that scarce, high-demand IT main-tenance workers were hardly at risk for wage busting or other predatory labor practices.

The Federal Acquisition Streamlining Act spurred the Federal Acquisition Regulation drafters at OFPP to go even further. FASA permitted exemptions from other legal requirements to encourage government contracting for commercial items.

When FASA took hold in 1995, the rewritten FAR included a blanket exemption from the Service Contract Act for all subcontracts for commercial items.

But the administrator of OFPP and the secretary of Labor decided that this exemption was too broad. In a set of new rules promulgated in July, they reinstated Service Contract Act coverage of some subcontracts for commercial items.

Remember the rules

The new regulations no longer exempt any and all commercial item subcontracts. The exemption is now restricted to two areas, covering automated data processing maintenance and repair, and certain other services performed by a work force shared with commercial customers.

The exemption for ADP maintenance subcontracts uses the same definitions as the IT Management Reform Act. These definitions capture some IT equipment used by contractors but exclude embedded IT.

To qualify for the exemption, the subcontractor must certify that it meets three conditions. First, the IT equipment must be used regularly for other than government purposes and must be sold by the subcontractor commercially in substantial quantities. Second, the prices must be based on established catalog or market prices. Just having a price list isn't enough; the contractor must demonstrate sales at the listed price to a significant number of buyers. Third, the subcontractor must compensate all its employees under the same rules, whether they work on federal or commercial contracts.

The second exemption applies to a long list of industries and activities. For IT, these include facility management services, telecommunications, timesharing, systems analysis and online information services.

For this exemption, subcontractors must meet five conditions. The first determines whether the services are commercial. The second requires that the subcontract be either sole-source or awarded competitively when price counts for no more than half the total evaluation. The third requirement is that the service employees spend less than 20 percent of their work time on the subcontract.

The last two conditions are the same as the last two for the IT maintenance exemption. It's a toss-up whether it is easier to claim this exemption, or simply to comply with the Contract Service Act.

For either exemption, the prime contractor determines whether the subcontractor is entitled to the exemption. Labor has the right to audit the subcontractor and determine whether the exemption was proper.

If not, the prime contractor is liable to the government for any underpayments of wages or fringes by the subcontractor. The prime contractor, of course, can collect the underpayments from the subcontractor if the subcontract so provides.

The new rules are effective immediately on an interim basis. But Labor is accepting comments and could consider amending the new exemptions.

Anyone who will be affected adversely by the new rules needs to speak up and soon.

Joseph J. Petrillo is an attorney with the Washington law firm of Petrillo & Powell.
E-mail him at [email protected].


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