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INCREASED RISK FOR CONTRACTORS AND GRANTEES – GOVERNMENT MOVES TOWARD COMPELLED EMPLOYEE INTERVIEWS AND DISALLOWED COSTS FOR MANAGEMENT SPEECH ON UNION ACTIVITY

Smith Pachter McWhorter PLC
Government Contracts Update
Vol. V, No. 1    February, 2009

By Stephen D. Knight

Smith Pachter McWhorter constantly tracks current events, issues, and trends in Government Contracts to keep clients on the cutting edge of legal and policy developments. This e-letter highlights the most important issues, and the attached index provides weblinks to the source documents of these and many more developments.

I.      “Authorized to Interview Company Employees”

The recently-enacted American Recovery and Reinvestment Act of 2009, Pub. L. No. 111-005 (February 17, 2009) (“the Stimulus Law”), the National Defense Authorization Act for Fiscal Year 2009, and recent DCAA audit guidance all have one thing in common – the assertion of the government’s audit access to interview contractor employees as a matter of right.  This is a dangerous turn of events for anyone involved in government contracts, subcontracts, grants, and federally funded work.  Any company taking federally funded work must verify the adequacy of their procedures for processing government requests for information, including interviews of employees, and must train its employees regarding the government’s assertion of a right to interview employees.  This training must consider the employees’ rights under the U.S. Constitution, the right to decline to be interviewed, and employee rights under applicable labor law, and must caution against transgressing the False Statements Act, 18 U.S.C. § 1001, the Obstruction of Federal Audit Act, 18 U.S.C. § 1516, or other felony statutes.

Historically, outside of Grand Jury subpoena power and civil investigative demands under the civil False Claims Act, 31 U.S.C. §3733, the government has not had legal authority to compel contractor employees to give testimony in non-litigation settings.  The government has had only legal authority to compel the production of documents from contractors and subcontractors.  For example, the Inspector General Act of 1978, 5 U.S.C. App. § 6, and the statutory authority underlying FAR 52.215-2, Audits and Records, 10 U.S.C. § 2313 and 41 U.S.C. § 254d, provide for subpoena power only over documents, records, and similar materials.

The government is now attempting to alter the landscape.  Last year, in the National Defense Authorization Act for Fiscal Year 2009, Pub. L. No. 110-417 (October 14, 2008) (“FY09 DOD Act”), Congress amended the statutes relating to the authority of the Government Accountability Office (“GAO”) to gain audit access to contractor information.  In Section 871 of that Act, Congress changed the statutes to read:

[E]ach contract awarded after using procedures other than sealed bid procedures shall provide that the Comptroller General and his representatives are authorized to examine any records of the contractor, or any of its subcontractors, that directly pertain to, and involve transaction relating to, the contract or subcontract, and to interview any current employee regarding such transactions.

More recently, Section 1515 of the Stimulus Law extends the authority of the Inspectors General in the same direction.  That section states:

  1. Access – With respect to each contract or grant awarded using covered funds, any representative of an appropriate inspector general appointed under section 3 or 8G of the Inspector General Act of 1978 (5 U.S.C. App), is authorized –
    1. to examine any records of the contractor or grantee, any of its subcontractors or subgrantees, or any State or local agency administering such contract, that pertain to, and involve transactions relating to, the contract, subcontract, grant or subgrant; and
    2. to interview any officer or employee of the contractor, grantee, subgrantee, or agency regarding such transactions.
  2. Relationship to Existing Authority – Nothing in this section shall be interpreted to limit or restrict in any way any existing authority of an inspector general.

Similarly, on December 19, 2008, the Defense Contract Audit Agency (“DCAA”) issued Audit Guidance 08-PAS-042(R), “Audit Guidance on Denial of Access to Records Due to Contractor Delays.”  DCAA has taken an aggressive position in this audit guidance, claiming entitlement to virtually immediate access to contractor records and personnel.  DCAA’s guidance states in part:

When an auditor requests supporting documentation from a contractor (either verbally or in writing), the request should clearly state what support is needed and when it should be provided.  The contractor should be provided a reasonable time period to provide the data given the specific circumstances.  Generally, documentation supporting the contractor’s assertion (e.g., the contractor’s proposal or other submission) should be readily available.  Therefore, unless the request requires analysis by the contractor or there are extenuating circumstances (e.g., the request is for a voluminous amount of data or for data stored at an off-site location), the contractor should provide the documentation upon request.  For example, support for proposed labor hours should be provided the same day requested, given the information would have been generated by the contractor prior to submitting the bid proposal.  If the request requires analysis or if extenuating circumstances exist, auditors should allow the contractor additional time deemed necessary to provide the requested documentation.

Support includes access to personnel, in addition to the documentation/data supporting the contractor’s assertion (e.g., cost records, policies and procedures, management reports).  Auditors should generally obtain supporting documentation directly from the person responsible for the information.  The contractor’s use of a liaison for requests from DCAA should not result in delays in providing requested documentation or inhibit the auditor’s access to contractor personnel needed to conduct the audit.  Such delays and/or restrictions should be address in writing to senior management of the company.

Aside from displaying DCAA’s utter lack of comprehension concerning document and data storage and retrieval in a business, DCAA’s audit guidance provides no authority for its assertion of right to obtain supporting information directly from company employees.  No such authority exists.  Indeed, DCAA’s guidance flouts FAR 52.215-2; that clause does not provide for access to employees, and FAR 52.215-2(c) states clearly: “The Contractor shall make available at its office at all reasonable times the records, materials and other evidence …”  The standard for audit access is “reasonable times,” not “provide the documentation upon request.”  See also the definition of “full cooperation” in the recently changed FAR 52.203-13, Contractor Code of Business Ethics and Conduct (“timely and complete response to Government auditors’ and investigators’ requests for documents and access to employees with information”).

Given the government’s recent emphasis on gaining access to contractor employees for interviews, companies must determine how best to respond.  Neither the Stimulus Law, nor the FY 09 DOD, nor any other authority has granted to Inspectors General or government auditors the right to subpoena witness testimony.  So it is doubtful that these statutes’ grant of “authority to interview” includes compulsion to testify.  Inspectors General and GAO auditors may be “authorized to interview” contractor employees, but such “authority” does not include the right to demand testimony to a government agent.

Contractors can expect increased demands from the government for employee interviews.  Accordingly, contractors should review appropriate procedures with employees.  Those procedures should include a reminder that the decision whether to permit an interview belongs to the employee.  If the employee decides to permit an interview, he or she must tell the truth; otherwise, the employee runs the risk of violating felony statutes such as the False Statements Act and the Obstruction of Federal Audit Act.  Contractors should also review relevant labor and employment agreements for requirements that pertain to the government’s interview request.  For example, collective bargaining agreements may contain provisions bearing on such requests.

Contractors have something to say about the conditions of a requested interview.  For example, contractors may agree or decline to permit interviews by Inspectors General or GAO auditors during business hours on company premises.  Management can request an employee who has decided to grant an interview to permit a company representative or representatives (e.g., legal counsel, audit liaison, compliance officer) to attend the interview.  With each government request for an interview, management should consider the company’s obligation, if any, to discuss with the employee the need for separate legal counsel for the employee.

These are just a few of the issues raised by a government request to interview contractor employees.  Other issues may include the implications of such a request in the context of FAR 52.203-13, determinations of “credible evidence” under that rule and the status of ongoing internal or external investigations by the company.  The important point for contractors to remember is that, while Inspectors General and GAO representatives are “authorized” to interview company employees, employees may not be compelled to speak in the absence of other compulsory process.

II.   Yet More Oversight and Enforcement Powers in Stimulus Law – and Compelled Testimony

Sections 1521-30 set forth the duties of a newly created Recovery Accountability and Transparency Board (“the Board”) whose purpose is to “coordinate and conduct oversight of covered funds to prevent fraud, waste, and abuse.”  Sections 1541-46 establish the Recovery Independent Advisory Panel (“the Panel”) whose purpose is to “make recommendations to the Board on actions the Board could take to prevent fraud, waste, and abuse relating to covered funds.”  All taxpayers share a concern that stimulus funds should be spent for the purpose intended and not siphoned off.  Yet, given the existing layers of oversight and enforcement –  including Inspectors General, GAO, DCAA, the Department of Justice, and “whistleblowers” – one may question the need for additional enforcement mechanisms.  It might turn out that the Board and the Panel prove to be examples of the waste they are charged to prevent.

The Board’s specific functions include: review of contracts and grants for purpose and performance measures; review for satisfaction of competition requirements; auditing for “wasteful spending, poor contract or grant management, or other abuses … and referring matters …to the inspectors general”; review of whether sufficient qualified acquisition and grant personnel oversee covered funds; review adequacy of training for acquisition personnel; review of mechanisms for interagency collaboration, “including coordinating and collaborating  … with the Inspectors General Council on Integrity and Efficiency …” 

Section 1524 sets forth the Board’s powers; they are broad.  That section states in part:

  1. In General – The Board shall conduct audits and reviews of spending of covered funds and coordinate on such activities with the inspectors general of the relevant agency …
  2. Audits and Reviews.  The Board may –
    1. conduct its own independent audits and reviews relating to covered funds; and
    2. collaborate on audits and reviews relating to covered funds with any inspector general of an agency.
  3. Authorities –
    1.  Audits and Reviews – In conducting audits and reviews, the Board shall have the authorities provided under section 6 of the Inspector General Act of 1978 …  Additionally, the Board may issue subpoenas to compel the testimony of persons who are not Federal officers or employees and may enforce such subpoenas in the same manner as provided for inspector general subpoenas …
    ...
  4. Public Hearing – The Board may hold public hearings and Board personnel may conduct necessary inquiries.  The head of each agency shall make all officers and employees of that agency available to provide testimony to the Board and Board personnel.  The Board may issue subpoenas to compel the testimony of persons who are not Federal officers or employees at such public hearings …

Section 1524 appears to grant the Board subpoena power, not only for documents, but to compel the testimony of private individuals in two ways: first, in connection with audits and reviews and second, in connection with public hearings.  Companies that receive federal funds either through contract, subcontract, or grant under the Stimulus Law are on notice that their performance will be scrutinized by the Board under compulsory process, as well as by existing audit and investigatory entities.  Such companies must ascertain that they have systems in place to assure compliance with all contract, subcontract, and grant requirements.  Companies must also consider the prospect of addressing multiple proceedings, given the scrutiny to be applied to the use of funds under the Stimulus Law.  A contractor could face simultaneous or overlapping audits and investigations by DCAA, GAO, an Inspector General, a “whistleblower,” and now subpoenas from the Board.

While Section 1543 authorizes the Panel also to hold hearings, take testimony, and receive evidence, the Panel appears not to have subpoena power to compel document production or witness testimony.  The Stimulus Law states that the Panel has five members, that a majority constitutes a quorum, and that a “lesser number of members may hold hearings.”

Other parts in the Stimulus Law about which contractors should be concerned include Buy American (Section 1605) and Whistleblower Protection (Section 1553) provisions.  Section 1605 contains the Buy American provision, which appears to enforce a policy similar to the Buy America Act, 41 U.S.C. § 10a (whose regulations are contained in FAR Part 25), and Buy American Act, 49 U.S.C. § 5323(j) (Section 165 of the Surface Transportation Assistance Act of 1982, Pub. L. No. 97-424, whose regulations are contained in 49 C.F.R. Part 661).  One of the differences between these two “Buy America” laws is that trade agreements such as NAFTA may serve as an exemption in the former but not the latter.  Section 1605 sidesteps the question of a trade agreement exemption and states: “This section shall be applied in a manner consistent with United States obligations under international agreements.”  That statement may mean that an exemption would exist under contracts awarded by the federal government using Stimulus Law funds, but not under grants to state agencies using Stimulus Law funds.

III.   Executive Orders Apply Directly to Government Contractors

On January 30, 2009, President Obama issued three executive orders that directly pertain to government contractors.  In Executive Order 13496, “Notification of Employee Rights Under Federal Labor Laws,” the president stated as policy:

When the Federal Government contracts for goods or services, it has a proprietary interest in ensuring that those contracts will be performed by contractors whose work will not be interrupted by labor unrest.  The attainment of industrial peace is most easily achieved and workers’ productivity is enhanced when workers are well informed of their rights under Federal labor laws, including the National Labor Relations Act … [which] recognizes “encouraging the practice and procedure of collective bargaining and … protecting the exercise by workers of full freedom of association, self-organization, and designation of representatives of their own choosing, for the purpose of negotiating the terms and conditions of their employment or other mutual aid or protection” will “eliminate the causes of certain substantial obstructions to the free flow of commerce” and “mitigate and eliminate these obstructions when they have occurred” …  Relying on contractors whose employees are informed of such rights under Federal labor laws facilities the efficient and economical completion of the Federal Government’s contracts.

What is remarkable about this measure is that it is not preceded by any finding that the work of Government contractors has been “interrupted by labor unrest.”  Or that the lack of additional measures has resulted in anything other than “efficient and economical completion of the Federal Government’s contracts.”  Nevertheless, this executive order requires the insertion of a contract clause in government contracts that will require contractors to post notices containing information, as prescribed by the Secretary of Labor, informing contractor employees of their rights under federal labor laws. 

On the same day, President Obama issued Executive Order 13494, with the curious name “Economy in Government Contracting.”  That executive order makes unallowable “the costs of any activities undertaken to persuade employees … to exercise or not to exercise, or concerning the manner of exercising, the right to organize and bargain collectively through representatives of the employees’ own choosing.  Such unallowable costs shall be excluded from any billing, claim, proposal, or disbursement applicable to any such Federal Government Contract.”  While the executive order asserts that the government is “impartial concerning any labor-management dispute involving Government contractors,” the two executive orders read together demonstrate that the federal government is not impartial.  Executive Order 13494 treats as allowable “costs incurred in maintaining satisfactory relations between the contractor and its employees.”

Thus, Executive Order 13496 requires government contractors to inform employees of their rights to unionize for collective bargaining, and Executive Order 13494 holds unallowable any costs in connection with persuading employees on the subject of unions and collective bargaining.  The president’s assertion of impartiality is disingenuous – there is little chance that a contractor would incur costs to persuade employees to form a union and engage in collective bargaining.  The executive orders were designed to support unions and, through cost disallowance, to stifle management speech designed to persuade employees of the benefits of not joining a union.

In a third executive order, Executive Order 13495, President Obama implemented a “right of first refusal” for employees (excluding managerial and supervisory employees) under predecessor service contractors and subcontractors, when a successor service contractor takes over the job.  The executive order states in part:

It is the policy of the Federal Government that service contracts and solicitations for such contracts shall include a clause that requires the contractor, and its subcontractors, under a contract that succeeds a contract for performance of the same or similar services at the same location, to offer those employees (other than managerial and supervisory employees) employed under the predecessor contract whose employment will be terminated as a result of the award of the successor contract, a right of first refusal of employment under the contract in positions for which they are qualified.  There shall be no employment openings under the contract until such right of first refusal has been provided …

These three Executive Orders are plainly pro-labor, pro-union measures that serve to reward unions for their support of President Obama during his campaign.  Through these Executive Orders, the administration has sent an early signal of its intention to use Government contracts as a vehicle to beef up union membership, which has been lagging for some time.  Yet, for all its emphasis on new compliance measures, the administration has yet to appoint an Administrator for the Office of Federal Procurement Policy.  It remains to be seen whether President Obama will turn to neglected areas of acquisition, such as fostering and supporting a workforce of contracting professionals.  

IV.    Litigation on Cost Issues

Two cases relating to contractor cost allocability and allowability are noteworthy.  In Teknowledge Corp. v. United States, the U.S. Court of Federal Claims held that a contractor’s software development costs were not allocable to government contracts.  The case is important for contractors because of the court’s discussion of allocability.  While the court used the correct “nexus” language from Boeing North American, Inc. v. Roche, 298 F.3d 1274 (Fed. Cir. 2002), the court also used troublesome language, stating “the Government has not received a benefit from the from the TekPortal technology,” and “the word ‘benefit’ as defined in the allocability test requires some showing that the cost relates to a government contract …”  The FAR allocability standard contained in FAR 31.201-4 explicitly recognizes that some costs may be allocable to government contracts “although a direct relationship to any particular cost objective cannot be shown.”  Perhaps this is a case in which the facts indicated that the software development costs really bore no relationship or nexus whatever to government work, and the court used imprecise language.  Also interesting is the fact that the court did not discuss any implications of CAS 420 and FAR 31.205-18.

In Boeing Company v. Department of Energy, CBCA Nos. 337 et al., the contractor recovered as allowable costs those costs of defending itself in a civil False Claims Act action, for those claims and counts on which the contractor prevailed.  The board distinguished this case from Rumsfeld v. General Dynamics Corp., 365 F.3d 1380 (Fed. Cir. 2004).  The board noted that General Dynamics concerned interpretation of a 1988 provision from the Major Fraud Act and a settlement, while this case pertained to interpretation of a provision from the FY 1986 DOD Authorization Act.  The board allowed defense costs relating to counts on which the contractor prevailed, but disallowed such costs relating to counts on which the contractor did not prevail.


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If you wish to discuss these or any other government contract issues, please contact the following individuals or view the attorneys sections of our website to view additional attorney biographical information:

John S. Pachter
703 847 6260
jpachter@smithpachter.com 		Stephen D. Knight
703 847 6284
sknight@smithpachter.com
Richard C. Johnson
703 847 6266
rjohnson@smithpachter.com		 Jonathan D. Shaffer
703 847 6280
jshaffer@smithpachter.com
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Edmund M. Amorosi
703 847 6268
eamorosi@smithpachter.com 		Mary Pat Gregory
703 847 6303
mgregory@smithpachter.com