The Obama Administration’s onerous new requirements are deterring many franchisees from doing business with the federal government and reducing the products and services available.

By Michael Layman and Shelby Shaw

The legislative and regulatory assault on franchises can start to feel personal to our businesses. Overtime, joint employer, discriminatory minimum wage, franchise relationship bills, predictive scheduling bills — the current list of federal, state and local government actions harmful to franchising goes on and on. But if there is another segment of industry that has been hit even harder than franchises during the Obama years, it may be employers that do business with the federal government.

Through overly complex regulations — and often bypassing the will of Congress — the Obama Administration has required federal contractors to pay a $10.10 minimum wage, meet a seven percent benchmark for hiring veterans and disabled workers, provide paid sick leave, and protect an expanded set of workers based on their status. But the biggest whopper of all the new federal contractor regulations is the so-called “Fair Pay and Safe Workplaces” rule, more commonly known as the “blacklisting” rule, because the rule bars employers from receiving federal contracts if they have committed labor violations.

Massive New Disclosure Required

President Obama called for the blacklisting rule in July 2014, and the rule implementing the order was finalized on Aug. 25, 2016, by the U.S. Department of Labor and the Federal Acquisition Regulatory Council. The rule will require federal government contracting firms to report past violations under 14 federal labor laws AND all of their state law equivalents to the U.S. Department of Labor before engaging in contracts with the federal government.

Beginning on Oct. 25, 2016, prospective contracting firms will be required to disclose violations issued during the past three years pursuant to workplace protections, including matters of workplace safety, workplace discrimination, and minimum wage. Somewhat outrageously, the rule also will require businesses to report alleged violations that have not been fully adjudicated.

What will the government do with all this reported information? Good question. The rule directs the DOL to oversee an extensive review of reported violations. Each violation will be assessed to determine whether it is “serious, willful, repeated, or pervasive.” If the violations raise concern, the federal agency has the option of rejecting, suspending, or even cancelling existing contracts, rendering the contactors unable to conduct further business with the federal government. Additionally, contractors who enter into contracts with the federal government will be obligated to provide their employees with an itemized wage statement to verify the accuracy of each paycheck.

The executive order will take effect in phases; initially, only prime contractors with solicitations valued at $50 million or more must disclose violations beginning in October. The next phase is scheduled for April 25, 2017, for solicitations valued as low as $500,000. Subcontractors must provide disclosures in October 2017.

Potential Double Punishment of Businesses

Although the regulation is touted as an accountability measure, it raises significant concerns about the unnecessary burdens it places on law-abiding businesses by requiring them to collect and provide such information.

Further, forcing the disclosure of previously resolved violations is unfair to some eligible contractors who may have settled rather than contesting a charge because the fine was minimal and not worth the cost and effort of going to court. If the business had known that settling the case could result in being barred from doing business with the government, they might have made a different decision. Thus, this ex post facto punishment potentially imposes a double punishment for minor violations.

Moreover, the blacklisting rule is redundant since regulations are already in place requiring contractors to disclose findings of fault and liability made in civil proceedings. This order will complicate the bidding process for prospective contractors by unfairly focusing on minor infractions and could unfairly punish businesses that have had false allegations levied against them.    

Another consideration is the possible interaction of the blacklisting rule with the new definition of joint employer. If a franchisor is deemed to be a joint employer with its franchisees, are other franchisees in the system required to disclose all of the labor violations in the brand system? It is imperative that the department provide guidance with respect to the obligations of entities that are deemed to have a joint employment relationship under the Fair Labor Standards Act. As with many government regulations, the good intentions behind the blacklisting rule are trumped by the negative unintended consequences. 

Of course, many franchises are also federal contractors and are thus taking twice the incoming fire from regulators. Unfortunately for the military service members, government employees, and other customers in the federal marketplace, the Obama Administration’s onerous new requirements are deterring many franchisees from doing business with the federal government and reducing the products and services available.

Michael Layman is IFA’s Vice President of Regulatory Affairs and Executive Director of the Coalition to Save Local Businesses. Shelby Shaw is Coordinator of Government Relations & Public Policy.

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