Back to Basics: the Successor Contractor Rule Embodied In Section 4(c) of the Service Contract Act
“Success without a successor is ultimately failure.”
-John C. Maxwell
The 1972 Amendments to the SCA, P.L. No. 92-473, 86 Stat. 789 (1972), made US Government service contractors subject to added provisions of Section 4(c)of the Act, otherwise sometimes known as the “successor employer” doctrine. This is a different rule than the better known National Labor Relations Act successor contractor rule. A contractor that replaces a contractor that was subject to a collective bargaining agreement (“CBA”), under Section 4(c) is required to pay its employees not less than the wage rates and fringe benefits that the predecessor would have had to pay under the CBA, including any prospective increases provided by such agreement. 41 U.S.C. §6707(c)(1). This provision was enacted to ensure that the Secretary of Labor would take into account existing CBAs in determining prevailing wages, thus putting an end to competitive bidding at the expense of employee salaries. Service Employees’ International Union v. GSA, 443 F. Supp. 575 (D. Pa. 1977).
On December 28, 1994, Part 22 of the FAR was amended to clarify that a contractor’s successorship obligations are self-executing. 59 Fed. Reg . 67,039. This requirement is not contingent upon incorporation of a wage determination based upon the predecessor’s CBA into the successor’s contract. Id. However, the controlling DOL regulations provide that the CBA is self-executing only if the procuring agency and, therefore, the bidders are timely notified of the existence and contents of the CBA. 29 C.F.R. §4.1b.
In this back to basics blog, we will cover some selected issues arising under the SCA successor contractor rule.
What’s not covered under Section 4(c)
Seniority rights, grievance procedures, work rules, and the like are not binding on the successor. Note that the successor doctrine is limited to wages and fringe benefits. Successor contractors are not required to adopt the seniority systems, grievance procedures, expense reimbursement, or work rules in the predecessor’s CBA. See Clark v. Unified Services, Inc., 659 F.2d 49 (5th Cir. 1981). It makes sense to have counsel examine CBAs of your competitors bidding to determine what parts of the CBA are binding and which are just work rules or other nonbinding requirements. This analysis can be very complex.
An example of that complexity is the case of CAE USA, Inc., ASBCA No. 58006, 13-1 BCA ¶35,323. There, the CBA referenced an internal company document that described additional fringe benefits, but that additional document was not provided to bidders. The contractor brought claims of unilateral mistake, Government concealment of superior knowledge, and Government breach of the duty to cooperate, but the ASBCA denied them because the contractor knew at the time of bidding that it did not possess the document and that the document described additional fringe benefits. In a subsequent decision, the Board held that there can be no reasonable doubt that pursuant to FAR, it was the responsibility of the contracting officer to provide a complete CBA and that the CBA provided was not complete. But, the Board said, “It is equally without doubt that CAE knew the CBA did not contain the complete information necessary to determine what the full wage and fringe benefit amounts necessary to comply with the SCA and FAR were. . . . Having chosen to submit an offer on the basis of its own assumptions, without notice to the government of the incompleteness of the CBA or what CAE’s assumptions were, it cannot now be heard to complain that its assumptions were not correct.” CAE USA, Inc., ASBCA No. 58006, 14‑1 BCA ¶35,519.
Who Is A Successor Contractor?
Section 4(c) of the Act provides that a contractor that replaces a predecessor that was subject to a CBA is required to pay its employees not less than the wage rates and fringe benefits that the predecessor would have had to pay under the CBA, including any prospective increases provided by such agreement. 41 U.S.C. §6707(c)(1). That requirement is known as the “successor contractor” rule. It applies whether the successor is unionized or nonunion. Under the rule, the CBA rates, rather than the prevailing wages in the WD for the locality, would apply. In other words, the CBA rates supersede the prevailing wage and fringe benefit rates. The regulations provide, however, that if an applicable area wage determination contains wages or fringe benefits higher than specified in a CBA, the higher wage determination rates apply. 29 C.F.R. §4.165(c).
The rule is most commonly applied in competitions where the predecessor contractor had a unionized labor force and its CBA wages and fringe benefits become applicable to a different, successor firm. However, because DOL treats the exercise of an option as a new contract (requiring a new SCA WD), the rule also comes into play when the contract is extended or renewed or an option is exercised. Thus, a contractor may become a “successor” to himself for the new contract, the contract extension, or option period.
An interim contractor (e.g., one who performs a contract for a short period while a solicitation is being completed or while new contractor is coming up-to-spec) is also treated as a successor contractor. See E.V. Allen & Assoc., Inc., SCA-1182 (W.H. Administrator, July 19, 1985). The same rule applies if one uses the predecessor contractor’s workforce. See Houston Bldg. Services, Inc., ARB No. 95041A (Aug. 21, 1996). The contractor there had argued unsuccessfully that it was not a successor contractor because it had hired the predecessor’s workforce only temporarily while it awaited security clearances for its own employees.
Exceptions to the Successor Contractor Doctrine
1. Different Locality
In certain circumstances, the successor contractor’s rule will not apply and the contractor should substitute wage determination (“WD”) rates for the predecessor’s collectively bargained rates. First, the successor contractor rule does not apply to contracts which are performed in a different locality than the predecessor contract. See 29 C.F.R. §4.53(c); 48 Fed. Reg . 49,789-90.
DOL originally applied the successorship doctrine regardless of where the work was and will be performed. GAO believed that the provision was intended to be applied only where the same employees and the same locality are involved. It argued that the purpose of the provision was to eliminate low bidders from taking over the operation and reducing the wages of the predecessor’s employees.
The impact of the original DOL position is illustrated in AV Corp., B‑179250, 74‑1 CPD ¶111. In that case, an Army base in the San Antonio, Texas area issued an IFB for the continuation of film processing services. There were two predecessor contracts, one being performed in New York, the other in Los Angeles (both higher wage areas than Houston). In each case, the predecessor had a CBA whose rates were established by DOL as the minimum for the successor contract. An offeror in Houston who also operated under a CBA protested the use of the predecessor agreements from the high wage rate areas. While the GAO agreed that DOL’s interpretation was questionable, it could not find that the application of the predecessor CBAs was prohibited by the SCA.
It was pointed out, however, that the effect of DOL’s practice would be to require the Houston-based offeror either to pay the New York and Los Angeles rates, thus pricing itself out of the market for local commercial business, or to remain competitive locally and decline Government business. The likely result will be to limit competition to the highest wage rate areas.
This interpretation conflicted with the locality requirement because the predecessor’s CBA takes precedence over the wage rates and fringe benefits determined for the locality. The predecessor’s CBA rates do not apply, if after a hearing, the Secretary of Labor finds these rates at variance with those in the locality. Presumably, locality refers to the Government installation site. See 29 C.F.R. §4.53(b). This could lead to the absurd illustration postulated by the Department of the Army under which a Dubuque, Iowa firm, successor to a New York City contractor with a CBA, on a contract with a Washington, D.C. Government facility, must pay New York City wages unless he can convince a Labor Department ALJ that those wages are at variance with Washington wages, in which case he must pay Washington wages.
The 1983 regulations resolved this problem. Section 4.163(i) of the regulations limits application of the successorship provisions of Section 4(c) of the Act to successor contracts which are performed in the same locality as the predecessor contract. 48 Fed. Reg . 49,789-90. Prior regulations imposed no such restrictions.
2. No Valid CBA
As noted, the SCA, in certain circumstances, permits an employer to substitute collectively bargained rates for prevailing rates. However, this is not the case, and the successor contractor rule does not apply, when the purported CBA is invalid. In Raymond G. Richardson, Jr., BSCA No. 93-03 (May 6, 1994), the contractor paid its employees pursuant to “in-house agreements” rather than according to the wage determinations. None of the in-house agreements were developed through what would be characterized as a formal collective bargaining process; the drivers were not unionized nor were they formally organized, although they did negotiate informally with the Richardsons through the senior driver. The BSCA said:
To be sure, the relationship between Respondents and the drivers lacked the formalities which usually attend a bona fide collective bargaining relationship. We need not, however, determine the extent to which such formalities are necessary, for as noted in the Administrator’s post-hearing brief, this case lacks even the most basic element of a collective bargaining relationship-that is, that the representatives of management and of labor have “at least theoretical parity necessary to represent, respectively, the independent interests of the employer and the independent, collective interests of the workers.”
Id. at 5-6. The Board said that the absence of this element was apparent from the testimony that Richardson himself acted as the spokesman for the drivers. Id. at 6.
3. Not at Arm’s Length
The successor doctrine also does not apply if the CBA was not the result of “arms-length negotiations.” This requirement has been held to be an important ingredient in ensuring that wage rates and fringe benefits are in general accord with those prevailing in the locality. Trinity Services, Inc. v. Marshall, 593 F.2d 1250 (D.C. Cir. 1978). See also Guardian Moving and Storage Corp., ASBCA Nos. 54248, 54479, 04-2 BCA ¶32,753.
4. Substantially At Variance
When the wage rates and fringe benefits in the CBA are found by the Secretary of Labor, after a hearing, to be “substantially at variance” with those prevailing in the locality for services of a similar character, the successor is not obligated to pay the CBA rates. 41 U.S.C. §6707(c)(2). This is probably the most important exception. Note that DOL can make the determination that the CBA was not entered into as a result of arms-length negotiations without a hearing. However, a finding that the bargained wage rates and fringe benefits are substantially at variance with those prevailing for similar services in the locality can only be made after a hearing. Id.
In implementing this exception, DOL requires that the contracting agency advise DOL if the agency has reason to believe that the rates and fringe benefits in the CBA are at “substantial variance.” The contracting agency is to furnish such advice and any supporting information along with a copy of the applicable CBA to DOL with its request for a WD (Standard Form 98). 29 C.F.R. §4.4(c). DOL will then conduct a “substantial variance proceeding.” 29 C.F.R. §4.10.
A request for a hearing also can be made by the contracting agency or “other person affected,” including contractors, prospective contractors, contractor associations, employee representatives or unions, and other “interested” government agencies. 29 C.F.R. §4.10(b)(4). The hearing will only be held if information available to, or furnished to, the Secretary by interested parties establishes a prima facie case that a substantial variation exists. 29 C.F.R. §4.10(b)(1). The hearings are conducted by an ALJ. 29 C.F.R. §4.10(b)(3). All affected parties have an opportunity to be heard and to furnish written factual evidence or arguments prior to the hearing. 29 C.F.R. §4.10(c). The Secretary has the power, enforceable through the Federal district courts, to subpoena witnesses.
In determining whether a “substantial variance” exists between the rates under the CBA and the prevailing wage rate for services of a similar character in the locality, no discrete comparison is conclusive; instead the totality of the circumstances must be weighed. United Health Serv., Inc., Nos. 89-CBV-1 (Dep. Secy. of Labor, Feb. 4, 1991). Collectively bargained rates often can be expected to exceed prevailing wage and fringe benefit rates, and the mere existence of a variance between the CBA wage rates and the prevailing rates in the locality is not sufficient to negate the collectively bargained wage rates. Rather, the variance must be substantial, i.e., the collectively bargained wage rates must “clearly fall out of line when compared to a comprehensive mix of rates.” In the Matter of Applicability of Wage Rates Collectively Bargained by BAE Systems, Inc. and International Brotherhood of Electrical Workers (IBEW) Local Union 1260 (AFL-CIO) under Contract No. NOO604-08-C-0002 etc., Case No. 2012-CBV-00001, slip op. at 13-14 (Feb. 14, 2012) (citing All Agency Memorandum 166 (Oct. 8, 1992)). In that case, the ALJ found no substantial variance where the average CBA rate was 15.40% higher than the applicable WD, with individual variances between 12.32% and 96.31%. Id. at 16.
In Meldick Services, Inc., 87-CBV-7 (Dep. Secy. of Labor, Mar. 23, 1990), collectively bargained wage rates were found to be “substantially at variance” with wages prevailing in the locality. The CBA rate for mess attendants was $6.21 per hour. A WD for the locality included a rate of $4.28 for mess attendants, which DOL had established by “slotting.” Wage survey data supported a rate of $4.28 for “janitor, porter and cleaner” and the Wage and Hour Division had determined that the skills and duties of mess attendants and janitors are rated the same in the federal job classification system. In upholding the ALJs’ decision, the Deputy Secretary found the CBA’s $6.21 rate to be “substantially at variance” with the $4.28 rate prevailing in the locality and directed Wage and Hour to issue a new WD containing a correct prevailing rate for mess attendants.
In theory, wages negotiated in a CBA can be too low, and the union might try to get them declared to be substantially at variance. See Gracey v. Int’l Brotherhood of Electrical Workers, 868 F.2d 671 (4th Cir. 1989) (suggesting that this would be an improper use of the substantial variance process). In the Gracey case, the union attempted to use substantial variance proceedings to prove that the wages and fringes agreed to in collective bargaining were lower than those prevailing in the locality. Traditionally, DOL has allowed unions to bring variance proceedings seeking upward adjustments in wage rates set by collective bargaining.
5. Contingent CBA Provisions
Frequently, CBAs contain provisions which prospectively increase wages and fringe benefits contingent upon any number of factors, including approval by the Wage and Hour Administrator, issuance of a WD, incorporation of the WD in the contract, and adjusting the contract price. In response to a perceived increase in the number of such CBA clauses, DOL issued Memorandum No. 159 on January 21, 1992, advising all Government contracting agencies that starting April 1, 1992, on all invitations for bids issued, negotiated contracts awarded, options exercised, or contract extensions consummated, such prospective wage rate and fringe benefits provisions that are effective only upon such contingencies will not be recognized by Wage and Hour as resulting from arms-length negotiations. Thus, DOL will not issue prospective wage rates and fringe benefits increases based on such contingency provisions. DOL then implemented these requirements in its regulations. 59 Fed. Reg . 67,039.
If the contractor includes contingency provisions in its CBA which are deemed improper, the CBA rates may not apply to the competition, and the contractor may find itself obligated under the CBA to terms different than that of its competitors. See Guardian Storage and Moving Co., ASBCA Nos. 54248, 54479, 04-2 BCA ¶32,753.
6. Different Skills and Duties
CBA rates do not apply to a successor contract if the prior contract required skills and duties different from the successor contract. Professional Helicopter Pilots Assoc., No. 89-SCA-WD-4 (Dep. Secy. of Labor, Jan. 30, 1991). The same can be true if a new contract combines the predecessor contract with work from other contracts. When a new contract entails a substantial reconfiguration of work, it is no longer deemed a successor contract.
7. Lapsing Of CBA Agreement
The successor contractor rule applies with respect to wages and benefits the workers “would have received” but for the change in contracts. 41 U.S.C. §6707(c)(1). Thus, in situations where the CBA lapsed prior to the start of the successor contract, the rule does not apply and the successor may pay prevailing wages.
Note, however, that CBAs commonly contain what are known as “savings clauses” whereby the CBAs survive past a stated termination date unless written notice of termination is given more than a certain number of days before that termination date. Pursuant to such savings clauses, absent a proper notice, a CBA might be deemed not to have lapsed, and the wages and benefits therein may be applied to the successor contract. Of course, if an unequivocal and proper notice to terminate the CBA was given, the CBA would not be “saved,” and the contract would revert to the general wage determination.
Likewise, if a collective bargaining agreement was signed by the predecessor contractor and the union but never implemented it does not bind the successor contractor. Upshaw v. Akal Security, Inc., 2008 WL 818266 (N.D. Ill., Mar. 20, 2008).
8. Duration of the Successorship Obligation
The successorship obligation created by section 4(c) of the Act is not absolute. Rather, as with all service contracts, successor contracts are governed as well by subsection 4(d) of the Act which states that no service contract to which the Act applies shall be for a term of more than five years and that all service contracts are subject to an adjustment of wages and fringe benefits, no less often than once every two years. 41 U.S.C. §6707(d).Normally, the successor contractor rule only applies for the base period of contract performance. After the exercise of an option, or not less often than every two years for multiyear contracts, a new wage determination is issued. If there is no union agreement at that time, then there is no successor contractor requirement.
9. Pitfalls of the Successor Contractor Rule
There are potential pitfalls in the application of the successor contractor rule which contractors must be careful to avoid.
The effective date of a CBA and/or future wage or benefit increases thereunder might fall after the current contract has expired and therefore may be deemed not applicable. Thus, if the contractor wishes to ensure that CBA rates will apply in future contract periods, it must make the effective date of the CBA prior to the expiration of the government contract or option year. The contractor may wish to include also a savings clause ensuring the CBA survives past the current contract period.
If a new CBA is entered into during the base year of the contract, for example, it is advantageous to the contractor to save the wage and fringe benefit increases for the option year. If wages or fringes are increased during the base year, it will be at the contractor’s expense because it is not subject to price adjustment until the option year. Moreover, the difference between the WD rates and the CBA rates in that year will likely have to be absorbed by the contractor through the entire contract period, i.e., through all the option years. Accordingly, the timing of wage and fringe benefit increases can be crucial under the price adjustment clause.
Conclusion
This blog just touches on a few of the many possible issues that come up under the SCA section 4(c) successor contractor rule. It is a very complex area of the law, and it is one place where the engagement of competent SCA counsel may aid in dealing with disputes.