Backpay, Civil Money Penalties, and DEBARMENT!? OH MY!!
As an employer, there are multiple reasons for following Department of Labor Regulations. The potential for having to pay large sums in back wage restitution and, possibly, liquidated damages as well as Civil Money penalties (i.e., fines) are chief among them. Federal Contractors, however, have an extra incentive: The prospect of debarment.
What is debarment?
Debarment is the term used when a “any person or firm” is declared ineligible to be awarded Federal contracts as a result of having violated the Service Contract Act (SCA) of 1965.
The SCA provides that any firm or person found to have violated the SCA is to be declared ineligible to receive further Federal contracts, unless the Secretary of Labor recommends otherwise due to “unusual circumstances”.
Once a firm or person(s) have been debarred, their name is added to a not-so-flattering “Ineligible Bidder’s” list containing the names of every party who has been found to be ineligible to receive Federal contracts because they violated the SCA. The Comptroller General then distributes that list to all Government Agencies to ensure no [Federal] contract is awarded “to any firm, corporation, partnership” who appears on it. Additionally, any association in which such [debarred] persons or firms have a substantial interest are also barred from receiving Federal contracts.
The Department of Labor considers a direct or beneficial ownership of at least 5%, or being an officer or director in a firm, to constitute a “substantial interest”. Therefore, if a debarred person decides to form a different company in which he/she has any “substantial interest”, the newly formed company will be automatically debarred, for as long as he/she maintains said “substantial interest”.
Once a firm or person’s name has been added to the list, they will remain ineligible to be awarded any contracts until after three years have passed since the publication of the list in which they initially appeared. The SCA does not provide a means for early removal from the list, therefore, once a party has been placed on the list, they will need to remain on it for the full 3-year term, unless their name(s) were placed on it by mistake.
Although the SCA does not specify what would constitute “unusual circumstances”, the Regulations make one thing clear: The burden of establishing their existence is on the contractor. In other words, you must convince the Department of Labor (or Administrative Law Judge) that there is a good reason for the violations happening.
The Department of Labor evaluates the existence of “unusual circumstances” on a case-by-case basis, guided by the facts gathered during their investigation. As one would think, willful, deliberate, or aggravated violations of SCA, and/or its recordkeeping requirements (e.g., Falsifying records) are sure ways to land a contractor on the Ineligible List. But to kick things up a notch, the regulations also tell us that a “plea of ignorance” is not sufficient to warrant debarment relief, neither is the fact that the contractor has agreed to pay back wages, as it is the contractor’s obligation to ensure that its pay practices comply with the Act.
The regulations state that any violation of the SCA would constitute a “debarrable” offense, unless it can be established that there is a very good reason for them occurring (The Contracting Agency’s failure to incorporate a Wage Determination timely comes to mind). Therefore, it is essential that a contractor have a robust compliance program that not only monitors performance and adherence to established requirements, but also implements corrective actions as soon as noncompliant areas are identified. Otherwise, a contractor would be, for all intents and purposes, leaving it to luck and putting itself at the mercy of DOL’s interpretation of the regulations.
How do you best reduce or minimize this liability?
There is no absolute way to avoid SCA violations outside of just not accepting or targeting SCA covered contracts. However, you can mitigate these risks of violations by considering some of the following:
1) SCA Education
Ask yourself – Is my compliance team, not only versed, but do they possess the practical knowledge around SCA to keep the company compliant? Are they attending regular continuing education programs or courses that keep their knowledge fresh and up to date with changes to regulations or case law?
2) Outsource Compliance Support
Use a third-party administrator to assist with meeting SCA Compliance Standards and finding gaps in your company’s policies/practices that could expose you to an SCA violation.
3) Regular “spot” audits
Conduct self-audits on a regular basis (annually or semi-annually) or use a third-party to do you SCA compliance audits.
The three options above are a few best practices that can help you mitigate the potential for violations and that ever-lurking debarment risk – because as we have learned, ANY SCA violation puts a contractor up for debarment.
So, the question is: What is your company’s reason for non-compliance with the SCA?
Service Compliance Manager at Onsi Group