Government Contracts Monitor

Executive Order Seeks to Limit Displacement of Qualified Workers Performing Service Contracts

May 29, 2009

On January 30, 2009, President Obama signed Executive Order 13495 (“Order”), which affects a contractor’s or subcontractor’s ability to hire new employees when a contract to provide services to the Federal Government expires and a new contract for the same services is awarded to a different contractor.

Specifically, the Order applies to service contractors and subcontractors providing similar services at the same location as the previous contractor. These contractors and subcontractors must offer service employees, other than managerial and supervisory employees, employed under the predecessor contract or its subcontracts whose employment will be terminated as a result of the award of the successor contract, a right of first refusal of employment in positions for which they are qualified. 

The Order does not apply to contracts or subcontracts that: (1) are under the simplified acquisition threshold; (2) are awarded pursuant to the Javits-Wagner-O’Day Act; (3) contain agreements for vending facilities entered into pursuant to the preference regulations issued under the Randolph-Sheppard Act; (4) provide guards, elevator operators, messengers, or custodial services to the Federal Government with sheltered workshops employing the severely handicapped as described in section 505 of the Treasury, Postal Services, and General Government Appropriations Act; or (5) employ workers who were hired to work under a Federal service contract and one or more nonfederal service contracts as part of a single job. Further, if the head of a contracting department or agency finds that the application of any of the Order’s requirements would not serve the purposes of the Order or would impair the Federal Government’s ability to procure services on an economical and efficient basis, the agency head can exempt its department from the requirements of any or all of the Order’s provisions. The new contractor or subcontractor is also exempt from the requirements if hiring its predecessor’s workers would require layoffs of service employees who have been employed for at least three months immediately preceding the commencement of the contract or subcontract within its own company.

Covered service contractors and subcontractors must, therefore, offer employment to employees (other than managerial or supervisory employees) from the predecessor contract and provide those employees with a period of at least ten days to accept the offer. However, the new contractor or subcontractor is not required to offer a right of first refusal to any employee of the predecessor contractor or subcontractor whom the contractor or any of its subcontractors reasonably believes, based on the particular employee’s past performance, has failed to perform suitably on the job. The new contractor or subcontractor also retains the ability to determine the correct number of workers to employ to perform efficiently the contract and may elect to employ fewer employees to perform the work than had been previously employed. 

The Order makes the Secretary of Labor (“Secretary”) responsible for investigating and obtaining compliance with it and authorizes the Secretary to issue final orders proscribing appropriate sanctions and remedies. Possible remedies include both orders to hire employees who worked under the expiring contract and awards of lost wages to the employees. The Order also authorizes the Secretary to include in the implementing regulations a provision barring a contractor or subcontractor or any firm in which they have a substantial interest from eligibility for any contract with the Federal Government for up to three years for (1) failure to comply with any order of the Secretary; or (2) willful violations of the Order or the regulations issued pursuant thereto.

While the Order establishes many requirements, it lacks some important details. First, it is unclear whether the new contractor or subcontractor must pay the same wages as the predecessor contractor paid its employees. Also, the Order does not clearly define which “managerial” and “supervisory” employees are not covered. The Secretary is responsible for issuing regulations, which may provide additional details, no later than July 29, 2009.

The contractual provisions required by the Order will not appear in contracts until the Secretary issues the regulations. Thus, hiring practices of contractors that provide services to the Federal Government are not immediately affected by the Order. However, the new provision will appear in applicable contracts within a few months. Contractors and subcontractors that perform service contracts should monitor the regulations and any new contracts to ensure compliance with the Order’s requirements.