As the government contracts and employment/human resources communities dig out from the deluge of articles on the Final Rule under the Fair Pay and Safe Workplaces Executive Order (E.O. 13673), there are key takeaways for the subset of federal contractors who focus on commercially available off-the-shelf ("COTS") items. If you sell COTS items to the federal government, one simple change will save you extraordinary amounts of time, hassle, and money when the resulting FAR provisions come into effect on October 25, 2016.

The Final Rule, implementing Executive Order 13673 establishes four new obligations for federal contractors:

  • Disclose "labor law decisions" both before and after contract award.
  • Give a wage statement to employees containing for each workweek the number of hours worked, the number of overtime hours, rate of pay, additions to and from gross pay, and total gross pay.
  • Provide written notice to independent contractors informing them that they are independent contractors and not employees.
  • No longer enter into agreements with employees or independent contractors that require arbitration of claims under Title VII of the Civil Rights Act (includes discrimination and retaliation claims based on race, color, religion, sex and national origin) or sexual harassment claims.

The one exception to all four new obligations is subcontracts for COTS items. To clarify, if you sell a COTS item directly to the federal government you will feel the brunt of the new obligations (though you are exempt from the arbitration prohibition); by contrast, if you sell the exact same item to another legal entity, which then sells it to the federal government there are no new obligations for you.

But wait, it gets better. The obligations are specific to only the "legal entity" that has entered into the relevant contract. See 81 FR 58569 (FAR Final Rule); 81 FR 58662 (DOL Guidance). Though the DOL Guidance, predictably, notes the possibility of considering affiliates' information as part of the broader responsibility determination (81 FR 58662) there is not, as of yet, the kind of "single entity" analysis that plagues many companies in managing Office of Federal Contractor Compliance Programs ("OFCCP") E.O. 11246 compliance. The result is that an entity that wants to insulate itself may need only create a new legal entity through which to sell products to the federal government.

As contractors have more time to absorb and come to terms with the Final Rule and the new FAR provisions, more of the macro-trends and best practices will emerge. A particular concern for COTS contractors, though, is that by their nature, they tend to primarily focus on commercial non-governmental sales and are not always aware of the nuances in government contracting provisions and obligations. As such, it would be easy for this type of company to lose sight of the COTS subcontractor loophole and fall prey to the substantial obligations that will soon accompany a COTS prime contract.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.