On October 24, 2016, a federal district court in Texas issued a preliminary injunction in a case called Associated Builders & Contractors, et al. v. Rung, in which it halted implementation of the most controversial aspects of the newly-minted “Fair Pay and Safe Workplaces” FAR rule and the corresponding Department of Labor guidance, including the disclosure provision and the restriction on arbitration agreements. This post discusses the district court decision, which represents a sweeping repudiation of the most significant provisions of the controversial Fair Pay and Safe Workplaces rule and guidance. Mayer Brown previously published a Legal Update explaining the new rule and the Department of Labor guidance in far greater detail.

On October 24, 2016, a federal district court in Texas issued a preliminary injunction halting implementation of the most controversial provisions of Executive Order 13673, Fair Pay and Safe Workplaces, as well the implementing final FAR rule and DOL final guidance—all of which were scheduled to be phased in beginning on October 25, 2016. As discussed in our previous blog post, the new FAR rule, which was issued by DoD, GSA, and NASA on August 25, 2016, imposes a number of significant disclosure requirements on contractors, as well as numerous other onerous provisions. Most of these mandates apply to prime contractors and subcontractors alike in procurements estimated to exceed $500,000, including commercial contracts (with the exception of contracts for commercial off-the-shelf items).

The plaintiffs in the case challenged the following three provisions of the final FAR rule and DOL guidance:

  • Disclosure Provision: contractors must represent whether they have been subject to any “administrative merits determination, arbitral award or decision, or civil judgment,” and contracting officers must consider this information in deciding whether a contractor is “responsible” enough to do business with the government. Notably, as the court pointed out, the required disclosures are available to the public and include “non-final administrative merits determinations, regardless of the severity of the alleged violation, or whether a government contract was involved, and without regard to whether a hearing has been held or an enforceable decision issued.”
  • Paycheck transparency clause: covered contractors and subcontractors must provide wage statements and other information to covered employees, and must provide independent contractors with statements advising them about their legal rights. This provision is scheduled to become effective on January 1, 2017.
  • Arbitration Rule: the new rule also includes a contract clause that prohibits pre-dispute arbitration agreements regarding claims arising under Title VII of the Civil Rights Act and torts based on allegations of sexual assault or harassment. (Unlike the other two provisions, this one only applies to non-commercial procurements exceeding $1 million.)

In a strongly worded opinion, the federal district court granted a preliminary injunction as to the disclosure requirement, on four different statutory and constitutional grounds.

First, the court determined that the disclosure provision exceeded the statutory authority of the FAR Council and DOL and were preempted by other federal laws. The court noted that “[i]n a majority of the labor laws cited in the Executive Order … Congress spelled out in precise detail what agency or court would be empowered to find a violation, how such a finding would be determined, and what the penalty or remedy would be.” Most significantly, the court found that Congress only authorized disqualification or debarment in a narrow set of circumstances, and even then only after a final decision or adjudication, “subject to judicial review, with full protection of contractors’ due process rights.”

Second, the court also determined that the Final Rule and DOL Guidance violated the First Amendment, which “requires that [the government] not dictate the content of speech absent necessity, and then, only by means narrowly tailored.” The court found that the government had failed to show any necessity in requiring the public disclosure of “non-adjudicated, unresolved allegations of labor law violations.” The court also found that the requirement to disclose and consider non-final decisions is not narrowly tailored.

Third, the court also found that the requirement that contracting officers consider non-final judicial decisions in making responsibility determinations is a “denial of fundamental and constitutional [due process] rights.” The court also found that requiring contractors to disclose this information publicly violated their liberty interest to be “free from stigmatizing governmental defamation having an immediate and tangible effect on [their] ability to do business.”

And fourth, the court determined that requiring contracting officers—who generally lack expertise in labor law—to make legal judgments within three days about complex factual and legal questions “evince[s] arbitrary and capricious rulemaking.”

In addition to the its rejection Fair Pay and Safe Workplaces rule’s disclosure requirements, the court enjoined the rule prohibiting contractors and subcontractors from entering into mandatory, pre-dispute arbitration agreements with employees or independent contractors on certain matters. According to the court, the provision conflicted with the requirement set forth in the Federal Arbitration Act that arbitration agreements be enforced in accordance with their terms.

Finally, the Government did prevail with respect to the paycheck transparency requirement, which the district court declined to enjoin. The court determined that the plaintiffs had failed to establish a substantial likelihood of success on the merits with respect to the requirement—or that a denial of the injunction would cause them to suffer irreparable harm.

The district court’s decision in Associated Builders & Contractors v. Rung represents a sweeping repudiation of the most significant provisions of the controversial Fair Pay and Safe Workplaces rule and guidance. Nonetheless, the decision is, in all likelihood, merely the first salvo in what is likely to be a long and contentious legal battle. Although litigation may delay (and perhaps even block) final implementation of the rule, Government contractors would be well advised not to take anything for granted—and to continue preparing for the new regulation. In the meantime, additional information about the new FAR Rule and DOL Guidance is available in Mayer Brown earlier Legal Update, which discussed the new rule and guidance in far greater detail.