In the latest Weekly Wright Report:

• Labor Traps in Your Contract – read now

Labor Traps In Your Contract

Many government contractors are baptized by fire into many of the requirements of government contracts.   Although a bumpy ride, the majority of government contractors quickly become familiar with labor limitations such as having appropriate documentation of employment eligibility, labor classifications and the importance of certified payrolls.  Over the past few years, however, the landscape for government contractors has dramatically changed creating issues for unsuspecting contractors who do not realize that these requirements trump contractual requirements, bid prices and subcontract relationships.

Unlike the commercial market where the parties to a contract may agree on the wages paid an employee, the Service Contract Act (SCA) and Davis Bacon Act (DBA) interject compliance checks by the Contracting Agency and/or the Department of Labor into the process.  For contracts imposing compliance with the SCA or the DBA, employees must be paid wages and fringe benefits which are no less than the appropriate wages and fringe benefits either determined by the Department of Labor for the activities involved or paid to similar employees in the contractor’s locale performing similar work.  The DOL is authorized to make the determination of the appropriate wage regardless of what the contracting officer may have authorized in the contract and regardless of what the contractor and employee may have negotiated. This ability of the DOL to modify the terms of the contract poses an inherent risk to the contractor and has proven fertile ground for contract disputes.

In addition to ensuring that employees are appropriately classified depending on the work they perform, the DOL and private litigants have launched increased scrutiny into whether salaried employees are exempt from overtime pay.  Careful inspection of the duties of all salaried employees is necessary to ensure that they meet one of the tests created for overtime exemption.  Similar to wage misclassifications, the overriding power of the DOL and the jurisdictional limitations of the Courts and Contract Appeals Board limit the ability of the employer to defend these misclassification and improper payment suits based on the contract, the treatment of employees by predecessor contractors or even by similar positions and pay made by the government.  Even more important, the DOL have made it clear that they are imposing increased scrutiny on subcontractors who violate these provisions seeking to hold both the subcontractor and the prime contractor responsible.

Improper classification of labor categories or overtime exemption status frequently involve multiple current and former employees and expose employers to back wages, liquidated damages, and the employee’s counsel fees.  This is not to say, however, that contractors are left without any contractual remedies.  With moderate success, many contractors have recovered increased costs utilizing either the Price Adjustment Clause in their contracts or “common law” theories, such as constructive change, mutual mistake, superior knowledge, and equitable estoppel.  To avoid such entanglements, prudent contractors must take special precaution to carefully review all of the duties of positions proposed to ensure the appropriate classification and pay.

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