Government Contractors: Get Out of California

Apparently there is yet another executive order with far reaching consequences for government contractors, Executive Order 13673  (does it bother anyone else that we are up in the 13 thousands on these?  Did they start numbering at 1?)  Hans Bader has the details:

A July 31 executive order by President Obama will make it very costly for employers to challenge dubious allegations of wrongdoing against them, if they are government contractors (which employ a quarter of the American workforce). Executive Order 13,673 will allow trial lawyers to extort larger settlements from companies, and enable bureaucratic agencies to extract costly settlements over conduct that may have been perfectly legal. That’s the conclusion of The Wall Street Journal and prominent labor lawyer Eugene Scalia.

This “Fair Pay and Safe Workplaces” order allows government officials to cut off the contracts of contractors and subcontractors that do not “consistently adhere” to a wide array of complex labor, antidiscrimination, harassment, workplace-safety and disabilities-rights laws. Never mind that every large national business, no matter how conscientious, has at least one successful lawsuit against it under federal labor and employment laws, which is inevitable when a company has thousands of employees who can sue it in hundreds of different courts that often have differing interpretations of the law. The order also bans using perfectly legal arbitration agreements, overstepping the President’s legal authority.

I can say as someone who absolutely bends over backwards to be in compliance, it just is not possible to be totally clean.  We have won most all of the lawsuits and actions against us over the years vis a vis labor laws and related charges.  A lot of these are pro forma discrimination charges that some employees in protected groups file automatically when terminated, usually without any evidence of specific discrimination.  We have, to date, won all of these "was he a Hispanic that was terminated rather than he was terminated because he was Hispanic" suits.  We have only lost one case.  To give you an idea of how hard it can be to be 100% in compliance, let me describe it:

We had a government contract governed by the Service Contract Act, which sets out minimum wages to be paid for different types of jobs.  These wages typically are in two parts - a base wage and, if the company does not have benefits, a fringe payment in lieu of such benefits.  For example, it might say that a day laborer must be paid (I will use round numbers for simplicity) $12 an hour base wages plus $4 an hour for fringes.  So we paid the worker $16 and hour and felt ourselves in compliance.  

Then we had a Department of Labor audit.  The investigator insisted that the law required that we break these two payments into two lines on the paycheck.  So instead of having  a paycheck that said 40 hours times $16, it needed to say 40 hours times $12 and 40 hours times $4.  Thus we were found to be in violation and issued a huge fine.  I protested that the law said no such thing -- the law said I had to have a clear paper trail of what I paid people.  It did not say the labor and fringes had to be shown separately on the paycheck, nor did any DOL published regulation require this  (and of course I also pointed out that the intent of the law that someone get paid a minimum amount had been fulfilled).  

Apparently, the DOL had an internal handbook that suggested this as a correct practice, but this had never been tested in court nor embodied in a published regulation.  To impose the fine, my attorney said they had to take me to court.  I said go for it.  The DOL chose not to press the case, and we adjusted our paycheck practices to avoid the issue in the future.  I was happy to comply with this, as stupid as it was, but it was impossible to know it was an actual requirement until I got busted for violating this double-secret practice.  But there it is on my record - VIOLATION!

I will leave it to Bader's article to explore some of the implications of this order, but I want to add some unintended(?) consequences of my own:

  • Government contractors would be insane to operate in California (and perhaps other regulatory hell-holes, but I am familiar with California).  California has a myriad of arcane labor laws (like break laws and heat stress laws) that are difficult to comply with, combined with a legislature that shifts the laws every year to make it hard to keep up, combined with a regulatory and judicial culture that assumes businesses are guilty until proven innocent.  If state labor violations or suits lead to loss of business at the national level, why the hell would a contractor ever want to have employees in California?
  • I have a couple of smaller competitors who have sent employees into the parks we operate who then filed extensive, manufactured complaints to the government about our service, timed to make it difficult on us when we bid against them for the contract renewal.  How tempting will it be for companies to place employees in their rival who then file serial labor complaints to undermine that rival in future contract awards?
  • Companies that do government contracting as a sideline are going to be driven out of the business, reducing the choice and competition among contractors.   Earlier I discussed how 41 CFR 60-2.1  and 41 CFR 60-4.1, also the result of an Obama executive order, drove our company out of our last incidental contracting business (though we deal with the government all the time, it is generally through concession contracts where we get paid by the public, not by the government, so a lot of government contracting law does not apply to these contracts).


  1. Ergo:

    I'd say the bigger problem is encapsulated within this parenthetical:

    (which employ a quarter of the American workforce)

  2. Tom Lindmark:

    "... it is generally through concession contracts where we get paid by the public, not by the government, so a lot of government contracting law does not apply to these contracts)." At least for now.

  3. Daublin:

    It's not quite so simple. The message is more, get out of California, unless you are buddies with the administration. Commenters seem to think that if you are a solar company, or an implementor of the Obamacare exchanges, the regulators will just ignore you.

  4. Max Lybbert:

    It turns out there have been more than 13,000 executive orders. Based on the footnote on (found through Wikipedia), orders weren't numbered until partway through Teddy Roosevelt's presidency.

  5. Shane:

    When you make businessmen crooks, only crooks will be businessmen.

  6. Craig Loehle:

    When I worked at Savannah River Lab (part of the Dept Energy labs) 17 yrs ago, the requirements for quality assurance and record keeping were so onerous, that if we had a job (let's say sampling and analyzing water quality) that was less than $80,000 no one would bid on it. They couldn't make any money.

  7. Peter:

    Your figuring our what to pay was easy compared to what I am regularly faced with. The required pay I face has the formula base+fringe+A+B. Where A is the minimum vacation requirements based on number of years worked and B is the minimum required number of federal hollidays that must be paid. If your company does not meet the A or B requirements how in the world do you break those out to an hourly rate. What if you are not working on the project anywhere near the fed holiday. I have to call everytime a project comes up to get somebody on the record for what I am required to pay. Many times the people I speak to can't even agree as to what the job classification is. In addition I am required to file a certified payroll with the awarding authority despite the fact many times the awarding authority tells me they dont want it. Never heard of having to have separate line items on the paycheck for base and fringe however if the employee works overtime during the week where he has worked on a prevailing wage job then I have to pay calculate a blended rate to pay his overtime. The blended rate is the weighted average of all payrates the employee has earned that week multiplied by 1.5 and applied to all overtime hours worked for the week. Try asking ADP or other payroll company about that and all you hear is silence. I did have a sales rep from ADP tell me one time I would need to pay for a premium service to handle those kind of payroll questions.