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Federal contractors should consider limits on OFCCP’s audit authority, expert advises

October 23rd, 2013  |  Cynthia L. Hackerott

Because long and contentious audits have been the trend during the current administration, contractors may want to consider challenging the OFCCP’s authority to conduct audits, including the “nuclear option” of challenging the constitutionality of Executive Order (EO) 11246, advised employment law expert David A. Copus at the National Employment Law Institute’s (NELI) Thirty-First Annual Affirmative Action Briefing in Chicago, Illinois. Recognizing that litigation challenging the OFCCP’s authority can take years, Copus emphasized that he was not advocating that all contractors mount such challenges, but rather, that they at least consider doing so. In any event, when responding to the OFCCP’s demands, contractors should state their objections in order to preserve their rights should they chose to exercise them.

Constitutionality of EO 11246. Executive Order (EO) 11246 may not be constitutional, according to Copus, adding that this issue has never been squarely resolved by the courts. Because the Constitution does not grant the President legislative authority, the President cannot validly issue an executive order, unless Congress has delegated that authority to the President, he explained. However, the specific of grant of legislative authority by Congress to the President, if any, that authorizes EO 11246 is not clear, he said. On this point, he highlighted the following statement from the U.S. Supreme Court’s 1979 decision in Chrysler Corp v Brown (19 EPD ¶9121): “The origins of the congressional authority for Executive Order 11246 are somewhat obscure and have been roundly debated by commentators and courts.”

Only one statute, the Federal Property and Administrative Services Act of 1949 (commonly known as “the Federal Procurement Act”), might allow the Presidential authority for EO 11246, Copus said. He cited two court decisions touching on this issue — Chrysler Corp and the Fourth Circuit Court of Appeal’s 1981 decision in Liberty Mutual Insurance Co v Friedman (24 EPD ¶31,457).

In Chrysler Corp, the High Court addressed a challenge by a federal contractor to OFCCP regulations regarding agency disclosures to third parties under the Freedom of Information Act.  Although it did not rule specifically on whether the Procurement Act authorized the President to issue EO 11246, the High Court held that in order for any regulations under EO 11246 to have the force and effect of law, there must be a nexus between the regulations and the delegation of the requisite legislative authority. The Labor Department asserted that several statutes, including the Federal Procurement Act and Title VII, provided the requisite grants of legislative authority by Congress for the regulations at issue. But the Court disagreed, finding the required nexus did not exist because, when Congress passed these statutes, it was not concerned with public disclosure of trade secrets or confidential business information.

The Fourth Circuit applied this nexus test in Liberty Mutual Insurance Co, where it held that the OFCCP could not apply EO 11246 regulatory requirements to a federal subcontractor that sold workers’ compensation insurance to federal contractors because such application was outside the scope of any grant of legislative authority. The appeals court examined the possible statutory sources of congressional authorization for EO 11246, and, citing a footnote in Chrysler Corp, found that neither Titles VI nor VII of the Civil Rights Act of 1964 contain any express delegation of substantive lawmaking authority to the President. The Fourth Circuit determined that the only plausible Congressional source for the President’s authority to issue the EO was the Federal Procurement Act, which authorizes the President to prescribe policies and directives necessary to fulfill the Act’s purpose of promoting efficiency and economy in the government’s procurement process. Still, the Fourth Circuit avoided the question of whether the Federal Procurement Act was in fact a legitimate grant of legislative authority for EO 11246 and found that even if it was, there was not a reasonably close nexus between procurement costs and the defendant insurance company’s employment practices.

UPMC Braddock appeal. Copus pointed out that this issue has been raised in a case, UPMC Braddock v Perez, currently pending before the D.C. Circuit Court of Appeals.

In that action, three hospitals affiliated with the University of Pittsburgh Medical Center (UPMC) Health Plan, an HMO, have appealed a ruling by the federal district court for the District of Columbia holding that, although the hospitals did not directly contract with the federal government, they were still subject to OFCCP jurisdiction as federal subcontractors (UPMC Braddock v Harris, March 30, 2013, (96 EPD ¶44,801)). The district court found that the hospitals were covered federal subcontractors because they had contracts with an HMO to provide medical products and services covered by the HMO under the HMO’s contract with the US Office of Personnel Management OPM to provide medical coverage to US government employees. In their appellate brief, the hospitals assert, among other arguments, that neither Title VII nor the Federal Procurement Act provide the necessary legislative authority for the affirmative action programs for minorities and women required by the OFCCP’s regulations implementing EO 11246.

Fourth Amendment. Aside from the issue of the constitutionality of EO 11246, contractors should consider protections against OFCCP investigative authority afforded to them under the Fourth Amendment, Copus said, explaining that the Fourth Amendment provides both procedural and substantive protections. Moreover, there is “plenty” of legal authority that a contractor’s Fourth Amendment rights cannot be waived as a condition of contracting with the federal government, according to Copus.

Procedural protections. He noted that the Fourth Amendment requires, but the OFCCP has not adopted, the Fourth Amendment procedural protections of:

  1. subpoenas for contractor objections to off-site investigations, as required by the High Court’s 1946 decision in Oklahoma Press Pub Co v Walling (10 LC ¶51,222), and
  2. warrants for contractor objections to on-site investigations, as required by Supreme Court’s 1978 ruling in Marshall v Barlow’s Inc (436 U.S. 307).

Although the OFCCP has not established procedures for obtaining a warrant or issuing a subpoena the absence of such procedures has not be challenged in litigation, Copus observed.

Substantive off-site investigation protections. As to substantive Fourth Amendment protections, there is a clear distinction between on-site and off-site demands. For off-site investigations, the scope of power that the Supreme Court has granted administrative agencies such as the OFCCP is broad, Copus noted. The seminal case regarding off-site investigations is Oklahoma Press, where the Supreme Court ruled on a Labor Department demand of documents for an off-site review in a FLSA case. In essence, the only real substantive limitation on an administrative agency’s demand for the off-site production of documents or witnesses is one of “reasonableness,” he said.

Generally, the OFCCP makes two types of off-site document demands:

  1. the documents and data it receives from the contractor in response to the “Itemized Listing” that accompanies the agency’s audit scheduling letter; and
  2. supplemental data requests based on the agency’s preliminary analysis of the information it receives in response to the Itemized Listing.

Under Oklahoma Press, contractors could demand a subpoena for the above information, according to Copus, adding that the regulations which allow the OFCCP to make these demands without a subpoena are unconstitutional.

Substantive on-site investigation protections. Contractors have more substantive protections against on-site investigations, Copus said. For on-site demands, the seminal case is Barlow’s. In that case, the Court found that OSHA’s demand for entry onto a facility for safety inspection violated the Fourth Amendment because OSHA failed to justify its demand. There are only two acceptable justifications for an on-site demand, the Court ruled: (1) “probable cause,” meaning specific evidence of an existing violation of the law; or (2) a neutral selection plan.

Therefore, the OFCCP’s on-site investigation based on evidence of an existing violation of the law cannot go beyond scope of potential violation identified by the agency. Thus, contractors should get the OFCCP to define precisely what the suspected violation is before allowing the agency on-site, and contractors should not allow the OFCCP on-site access beyond this scope, Copus advised.

Again, he pointed out that the Fourth Amendment’s procedural requirements apply to all government civil investigations, and thus, suggested that contractors consider demanding that the OFCCP obtain a warrant prior to conducting an on-site investigation.

If a contractor chooses to accede to the OFCCP’s demands for information or access, Copus advised that the contractor preserve its rights — by including in its responses to the OFCCP’s demands explicit disclaimers of any waivers of rights — in order to preclude any later claim by OFCCP that the contractor has waived its rights to object by complying with the agency’s demands.

Paperwork Reduction Act. Another constraint on the OFCCP’s investigative authority is the Paperwork Reduction Act (PRA). The PRA requires that requests for information using identical questions posed to, or reporting or recordkeeping requirements imposed on, ten or more members of the public be approved by the Office of Management and Budget (OMB).

In United Space Alliance, LLC v Solis, the federal district court for the District of Columbia ruled that the OFCCP’s practice of requesting data beyond that required in response to the OMB-approved standard scheduling letter (including the Itemized Listing) did not violate the PRA (November 14, 2011 (94 EPD ¶44,325)). The contractor in that case argued that such a request violated the PRA because it was based on an investigation standard (used to determine “indicators” of compensation bias) applied in OFCCP desk audits throughout the county. But the court disagreed. The PRA was not applicable because prior OMB approval is required only for general investigations of a category of companies; prior OMB approval is not necessary for investigations of specific companies. Because the OFCCP’s request was based upon “indicators” of potential discrimination specific to United Space Alliance, it was a PRA-exempt investigation of a specific company, the court concluded.

Even though United Space Alliance provides that the OFCCP does not need prior OMB approval for boilerplate data requests when investigating specific companies, the decision also states that the agency must obtain prior OMB approval for boilerplate information requests when conducting general investigations of a category of companies, Copus pointed out. Thus, contractors should be able to challenge, based on the PRA, standardized off-site or on-site investigation demands not based on “indicators” of potential discrimination.

Debarment risk. Copus described debarment, i.e. rendering a company ineligible to receive federal contracts, as the OFCCP’s “nuclear option.” However, involuntary debarment is not a risk that contractors ever really face from resisting the OFCCP’s demands, he said.

Courts have uniformly held that the OFCCP cannot use debarment as a punishment for contractors who simply oppose the agency’s demands, according to Copus. Both EO 11246 and the relevant case law provide that the OFCCP cannot debar on contractor without a hearing. The hearing process typically begins when the agency files an administrative complaint against the contractor and the process may eventually go through the federal court system. Under the doctrine articulated in the Seventh Circuit’s 1979 decision in Illinois Tool Works, Inc v Marshall (20 EPD ¶30,134), the agency cannot take any action regarding the company’s contracts throughout the trial and appeal process.

Even if the agency goes through the hearing process and the contractor ultimately loses, the contractor can still avoid debarment by simply complying with the OFCCP’s demands, Copus stated. In the alternative, the contractor could voluntarily give up its government contracts rather than comply. “It’s your choice,” he told the audience.

The presenter. Copus has more than 35 years of litigation and counseling experience and has regularly represented employers in OFCCP matters, including hundreds of standard OFCCP compliance evaluations and “glass ceiling” audits. He began his legal career in 1969 at the Equal Employment Opportunity Commission (EEOC), where for many years he headed the National Programs Division. Since 1977, he has been in private practice representing employers, and he has recently retired from Ogletree Deakins in Morristown, New Jersey.

NELI’s Thirty-First Annual Affirmative Action Briefing was held in Chicago on October 3-4, 2013. For more information on NELI, including its publications and future programs, call (303) 861-5600 or go to NELI’s website at: www.neli.org.

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