Wage Busting, Pricing of Adjustments, and the Service Contract Act Successor Contractor Rule
“Be careful what you wish for.”
—Unknown
Here is a short primer on the Section 4(c) successor contractor rule and the pricing of adjustments as it pertains to Service Contract Act (“SCA”) covered solicitations.
First, contractors need to figure out the term of the new contract. If it is annual year money, that means you get a new SCA wage determination (“WD”) every option year. With that new WD comes a new examination of whether the option year contract has a predecessor collective bargaining agreement (“CBA”). If yes, that new CBA succeeds to the former CBA, and the new CBA becomes the new WD for the option year. Accordingly, it is possible for a successor contractor to renegotiate a CBA and get take backs which would apply in the option year. Ordinarily, a successor contractor is liable for the wages and fringe benefits in the CBA of a predecessor contractor for one contract period only.
It is also possible for the successor to "bust" the union or refuse to sign a CBA (albeit as noted below that may be unwise and result in labor strife and contract performance issues) and then the CBA-based WD may disappear after the base year, and the prevailing WD comes back in the option year.
This is a dangerous bidding strategy, however, at best. If you get a take back in the option year, it must be priced out and provided to the Government under the SCA/FLSA Price Adjustment clause. That means the successor doesn't get to keep the monies. It arguably must be given back to the government in the option year price adjustment as a downward price adjustment. Thus, if you price the reduction of wages or benefits in your proposal out years, you can end up paying a second time for dubious assumptions on cost saving twice. The warranty proviso in the SCA/FLSA Price Adjustment clause says that you have not included such costs in your proposal. Accordingly, you end up being hurt technically because of the risk of labor unrest, and yet any price advantage you seize ends up going to the government, and even gets possibly accrued twice --once in the bid and a second time as a downward price adjustment.
Meanwhile, there is the question of how you plan to get take backs from the workers. Is that feasible? What are the risks say of strikes? How are you going to get around the Executive Order on non-displacement which requires you to hire the incumbent work force, particularly if it goes into the solicitation after the issuance soon of a final FAR clause implementing the Executive Order? And if you hire the workers, you end up with the union under the NLRA and must negotiate in good faith. Thus, getting take backs is no foregone conclusion and may result in a technical or even pricing risk factor being assigned to the bid. You may be the lowest priced offeror, but you also may get a higher risk assessment in the technical evaluation.
There are two other complications -- one is multi-year contracting and the other is some of the more employee friendly case law.
If the contract is multi-year funded, then the DOL only requires a new WD not less often than every two years. Thus, the base period of performance might be two years where the successor is bound by the predecessor's CBA. Before the contractor tries to get any take backs, figure out if the solicitation is annual or multi-year funded, and how much time there is before the next renewal period.
And one court, in California, has said that the successor contractor rule applies over the whole term of the contract, including base and option years. That would mean that the predecessor contractors rules apply for up to five years in the ordinary service contract, at least out on the West Coast. DOL doesn't follow that case in other jurisdictions. But the law is uncertain and so there can be disputes about how long the predecessor's CBA would remain in effect. There is a recent case where it was found that even though there was no CBA in effect, the successor had effectively ratified the predecessor's wages and benefits and was bound to pay them for the life of the contract. The logic was fuzzy, and I have been puzzled by that case, but it shows the risk of wage busting in this arena.
I honestly can't think of any good strategy of an incumbent contractor to get out of its own CBA. Bidding as part of a joint venture with a new entity is problematic under the NLRA which will likely make you a successor to the old entity and its CBA.
The better strategy is re-evaluating the terms of your CBAs to look for items arguably not covered by the SCA -- like premium overtime, call-in/reporting pay, or call-back pay. Expense reimbursement, per diems, and other monies not for hours worked are also along the same lines. They don’t count as wages or benefits under the SCA so they are outside of the price adjustment process. You can renegotiate the expense reimbursements, overtime or call-in pay, and offer something else in lieu thereof, keep the savings for these non-SCA items, and pass the bill for the increased SCA-covered wages and benefits to the Government. That is how the hardball game can be played here. Certainly, the grievance/arbitration proceedings, work rules, featherbedding and seniority rules found in CBAs are not picked up by the SCA, and thus are not required to be priced into the competitor's proposal costs. Think about renegotiating these kinds of non-SCA terms with the union. The Government takes the position these kinds of terms are is not required by the SCA and thus is not enforceable on the successor contractor. If you have such items in your CBAs, you may want to reopen the bargaining and get them out of your agreement and get the new CBA in the Government's hands quickly, so it is picked up under section 4(c) of the SCA.