Coyote Blog

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).

An Obama Administration executive order / regulation (hard to tell the difference any more)

Department of Labor
29 CFR Part 10
Establishing a Minimum Wage for Contractors; Proposed Rule

34568 Federal Register / Vol. 79, No. 116 / Tuesday, June 17, 2014 / Proposed Rules

This document proposes regulations to implement Executive Order13658, Establishing a Minimum Wage for Contractors, which was signed by President Barack Obama on February 12, 2014.

The Executive Order therefore seeks to increase efficiency and cost savings in the work performed by parties that contract with the Federal Government by raising the hourly minimum wage paid by those contractors to workers performing on covered Federal contracts to: $10.10 per hour, beginning January 1, 2015; and beginning January 1, 2016, and annually thereafter, an amount determined by the Secretary of Labor.

Liberal and leftish economists in the audience, please explain the line in bold.

The administration wants to apply this to concessionaires as well.  This will force us to raise a $20 camping rate by $4 a night.

Bruce McQuain has an article on how McDonald's is closing some contract-operated fast food outlets at military bases.  The article speculates that the closures on new government minimum wage regulations for government contracts.

Frankly, I doubt this explanation.  I know something of the world of government contracting, and contractors in these cases routinely just pass on wage increases to their customers in the form of higher prices.  After all, their contracts give them a monopoly of sorts in these bases.

I would like to offer an alternative explanation.

In March, a new regulation took effect that all contractors with anything larger than a $50,000 a year contract with the government must go through an expensive affirmative action planning process for ALL of their locations, not just for the people involved in that particular contract (41 CFR 60-2.1  and 41 CFR 60-4.1)

We don't do government contracting work.  We lease government facilities, but get paid 100% by customers -- since we don't take government money, we are not a contractor.  But there is one exception.  We have a $52,000 a year contract to clean bathrooms near the campgrounds we operate in California.  Basically, we bid this contract at cost because we want the bathrooms cleaned well -- if they are not, it hurts our nearby businesses.

In this contract, we have government-mandated wage requirements under the Service Contract Act.  When these mandated wages go up, we just raise the price to the government in proportion.  No big deal.

We were informed that having this contract, under the new March Obama regulations, now made us liable to go through an expensive and time consuming affirmative action planning process for every location -- of which we have over 120 -- not just for this one contract.  So this one contract was going to force us to create 120 annual written plans and presumably get them approved by someone in the government.  No way.  I might have done it if I only had to do a plan for the contract, but it is just too much work to do this everywhere merely because I have a $52,000 contract on which I make no profit.  So we told the Feds we were dropping the contract.

I think it is very unlikely that private businesses will be accepting government contracts as 5 or 10% of their business any more.   This new regulation just imposes too much cost on the other 95% of the business.  Many will drop the government contracts.

I wonder if this is what is really going on with McDonalds.  A regulatory requirement that applied just to the base operations, like a minimum wage, strikes me as manageable.  But having these three or four contracts drive an expensive requirement to create some sort of affirmative action plan for every location - essentially every one of their tens of thousands of stores, so tens of thousands of plans - that would drive them out of these contracts VERY fast.