On Monday, August 29, 2011, the Department of Labor issued a final rule implementing Executive Order 13495, Nondisplacement of Qualified Workers Under Service Contracts. According to Executive Order 13495, the federal government’s procurement interest in economy and efficiency is better served when a successor contractor who wins a follow-on contract for the same or similar services at the same location hires the predecessor’s employees. The government believes that using a carryover workforce reduces disruption to the delivery of services during the period of transition between contractors and provides the federal government the benefit of an experienced and trained workforce that is familiar with the federal government’s personnel, facilities and requirements.

The final rule states that a contractor who wins a follow-on services contract for performance of the same or similar services at the same location, and its subcontractors, must offer workers employed under the predecessor contract (other than managerial and supervisory employees) the right of first refusal of employment under the successor contract in positions for which they are qualified if their employment would otherwise be terminated as a result of the award of a successor contract to another company.

The new contract clause includes the following provisions:

• Not less than 10 days before completion of the contract, the outgoing contractor must give the contracting officer a certified list of the names of all service employees working under the contract and its subcontracts during the last month of contract performance.
• The contracting officer must provide the list to the successor contractor, and if requested, to the encumbent employees or their representatives.
• The successor contractor and its subcontractors determine the number of employees necessary for efficient performance of the contract and may elect to employ fewer employees than the predecessor contractor employed in performance of the work.
• The successor contractor and its subcontractors may not offer employment under the contract to anyone before having complied fully with the obligation to offer employment to employees on the predecessor contract.
• The successor contractor and its subcontractors must make a bona fide, express offer of employment to each employee that includes the amount of time within which the employee must accept such offer (must be no less than 10 days).

Although many contractors bidding on follow-on contracts routinely try to hire the most qualified encumbent staff, this regulation now makes it a requirement to hire all encumbent staff covered by the Service Contract Act unless the contractor can justify one of the very few exceptions. These exceptions are the government’s attempt to recognize comments to the proposed rule, such as the rule denies contractors, who have full responsibility for performance under the contract, the ability to select the workforce they believe is best suited to meet the contract requirements and perform the contract as they deem appropriate.

The exceptions to this requirement are:

• The follow-on contractor or subcontractor may retain its own employees if they have worked for the contractor or subcontractor for at least three months preceding commencement of the contract if those employees would otherwise face lay-off or discharge.
• The requirement to offer encumbent employees employment does not apply to employee(s) who are not service employees within the meaning of the Service Contract Act, 41 USC 6701(3).
• The follow-on contractor or subcontractor is not required to offer a position to any encumbent employee(s) whom the contractor or its subcontractors reasonably believe, based on the particular employee’s past performance, has failed to perform suitably on the job.

The final rule will apply to all service contracts above the simplified acquisition threshold ($150,000). The effective date of this final rule is pending.