Welcome to the second edition of Legal Landscape, a series designed to provide government contractors with a quick, but thorough, summary of important legal developments and regulations in government contracting, as well as a plain-English explanation of how those developments may affect contractors at all levels of government. In this issue, we discuss recent compliance and enforcement trends in federal as well as state and local government contracting. State and local contractors should keep in mind that state and local agencies often look to changes in federal regulations as a guideline; changes recently made in the federal arena are likely to trickle down to state and local governments soon. This series is authored by Maria Panichelli and Edward DeLisle of Cohen Seglias Pallas Greenhall & Furman PC. 1 Increased Focus on Preventing Discrimination against LGBTQ Individual The Department of Labor (DOL) recently issued a final rule, implementing Executive Order 11478, and prohibiting all federal contractors from discriminating on the bases of sexual orientation and/or gender identity. The DOL’s FAQ page on the final rule is available on the agency’s website. The final rule became effective on April 8, 2015, meaning that any federal contract entered into, or modified, after that date, must comply with the terms of the rule. Specifically, under both Executive Order 13672 and the Final Rule, federal contracting agencies must include sexual orientation and gender identity as prohibited bases of discrimination under the Equal Opportunity Clause incorporated into their contracts. Contractors have two options: They may simply use the phrase “equal opportunity employer;” or alternatively, contractors may state that they do not discriminate on any of the protected bases under Executive Order 11246, and list the bases on which discrimination is prohibited, including sexual orientation and gender identity. Contractors will also be required to display an updated “EEO is the Law” poster reflecting the new protected bases once that poster is finalized by the EEOC and OFCCP. Contractors are not required to engage in outreach activities or update their Affirmative Action Plans (AAPs), policy statements or handbooks. The DOL’s final rule is consistent with an increased nationwide focus on preventing LGBTQ discrimination and improving LGBTQ civil rights laws. Many state and local agencies have already enacted, or are in the process of enacting, anti-discrimination laws, for example: In the State of Pennsylvania (one of the few states on the east coast that does not already have LGBTQ discrimination laws on the books), Senator Larry Farnese co-sponsored Senate Bill 300, which would amend the Pennsylvania Human Relations Act by adding the terms “sexual orientation” and “gender identity or expression” as prohibited bases of discrimination. A growing number of cities in Pennsylvania, including Philadelphia, Pittsburgh and the state capital Harrisburg, have passed ordinances prohibiting discrimination on the basis of sexual orientation and/or gender identity. Takeaways for Contractors: Be familiar with all national laws relating to LGBTQ discrimination, as well as all state and local laws or ordinances, for every locality in which you do business. Often times, local laws are more specific, and prohibit a wider range of conduct. Know the types of conduct prohibited by these laws and the specific steps you need to take to ensure prevention. For example, are you required to change your company’s affirmative action plan, conduct sensitivity training or set up a particular complaint process relating to incidences of discrimination? Determine whether the applicable laws require changes to the contents of your contracts. For example, does a law require you to include a certain clause, or revise the contents of that clause, as the DOL rule, explained above, does? 2 Changes to Case Law Affecting Inter-Affiliate Sales Exception If you are a small business contractor, you know that affiliation is generally something you want to avoid. As we have explained before, a finding of affiliation can increase a company’s size and thereby eliminate its small business eligibility. To avoid a finding of affiliation, many businesses rely on the exceptions to affiliation set forth in the Small Business Administration (SBA) affiliation regulation, 13 C.F.R. 121.103. However, a recent case our firm had before the SBA Office of Hearings and Appeals (OHA) case makes it clear that at least one of those exceptions – namely, the “inter-affiliate transactions” exception – is extremely narrow. That exception is codified at 13 C.F.R. § 121.104(a) and explains how, when two companies are deemed affiliated, their collective receipts should be counted for purposes of making a size determination. However, the regulation states that total receipts do not include “proceeds from transactions between a concern and its domestic or foreign affiliates.” Based on a reading of the regulation, it seems that inter-affiliate transactions are excluded from a calculation of receipts for size purposes. As a result of this reading, our client appealed an SBA determination to the OHA, arguing that the SBA erred by calculating our client’s receipts by including transactions between itself and its affiliates. However, OHA took a different position, and ruled that the inter-affiliate transaction exclusion applies “only if the concerns in question have a parent-subsidiary relationship and are eligible to file a consolidated tax return.” Takeaways for Contractors: Be aware that, despite the clear language of 13 C.F.R. § 121.104(a), frequent transactions with affiliates are not excluded from the calculation of receipts, and thus could push you over your size standard threshold and destroy your small business eligibility. Many contractors will need to review the way in which they structure transactions in order to avoid affiliation. 3 Increased Importance of Federal and State False Claims Acts The past five years has seen an enormous uptick in Federal False Claims Act (FCA) actions. The federal government in particular has made FCA enforcement a real priority. It’s not surprising then, that 2014 set new FCA enforcement records, with even higher recovery totals. In fact, the Department of Justice (DOJ) obtained a record $5.69 billion in FCA recoveries in 2014. 2014 was the first year in which recoveries under the FCA exceeded $5 billion. With this enormous addition, recoveries from January 2009 through the end of the fiscal year 2014 now total approximately $22.75 billion. In addition to the federal FCA, many state agencies have their own similar acts which address frauds perpetrated against state or local governments; state agencies were spurred to enact their own legislation when the Deficit Reduction Act (DRA) of 2005 was passed. In addition to their own recoveries, the DRA authorized state agencies to receive, 10 percent of the federal government's share of recovered Medicaid funds if their state false claims acts were as strong, or stronger than, the federal FCA. New York, California, Florida and Vermont are among the numerous states whose legislators worked to create, update or strengthen their respective false claims acts over the past few years. All of this demonstrates just how focused governments have become on their FCAs, and how much FCA enforcement has expanded. This trend seems likely to continue throughout 2015 and 2016: Federal appeals courts have expanded FCA liability and drastically extended the applicable statute of limitations for FCA actions and penalties. Qui tam actions and cases based on state and local false claims acts have also grown drastically. The DOJ promises to place a renewed emphasis on nonmonetary methods of curbing fraud. The Supreme Court is expected to rule in two cases that could greatly impact, and theoretically, further expand, federal FCA enforcement. Takeaways for Contractors: Stay vigilant to avoid any potential FCA liability and keep abreast of the various ways in which the federal FCA and its state and local counterparts are evolving. Be prepared and informed: An experienced legal professional trained in government contracting law can assist in interpreting the laws of your locality and identifying any potential areas of liability. 4 Suspensions and Debarments on the Rise On March 31, 2015, the Interagency Suspension and Debarment Committee (ISDC) issued a report to Congress, which detailed federal suspensions and debarment actions in 2014. According to the report, the number of suspensions climbed from 889 to 1,009, while proposed debarments increased from 2,229 to 2,241 and actual debarments rose from 1696 to 1929. In short, the report demonstrated an upward tick of nearly 14% in suspension and debarment proceedings. It’s no coincidence that the increase in these exclusion actions coincides with the escalation in FCA enforcement actions as discussed above. Increased scrutiny on wage, hour and labor violations could also be a factor. In the report, the ISDC efemphasizes that it plans to further strengthen suspension and debarment programs. So it would seem that the future will bring more aggressive enforcement, and even more exclusion actions, by federal agencies. It’s not surprising, then, that most state agencies (and even some smaller localities) have their own suspension and debarment programs, each of which operates to root out contractors engaging in misconduct and eliminate them from doing business with government entities. Takeaways for Contractors: Given this increased focus on suspension and debarment, contractors should take extra steps to ensure that they are compliant with every applicable regulation. The best defense is a vigorous business ethics and compliance program. A good ethics training program can help educate employees and make sure issues are resolved before they cause a compliance program. Moreover, the existence of such a program is often a line of defense against certain types of fraud, compliance or exclusion actions. Compliance concerns are business-specific, and thus ethics programs should be tailored to each individual contractor. If you have questions about what type of program is right for you, consult a legal professional. We hope that you check back for more government contracting legal updates in the next edition of Legal Landscape.