When Are DOL Back Wage Withholding Actions Arbitrary and Capricious?
“They're trying to kill me," Yossarian told him calmly.
No one's trying to kill you," Clevinger cried.
Then why are they shooting at me?" Yossarian asked.
They're shooting at everyone," Clevinger answered. "They're trying to kill everyone."
And what difference does that make?”
― Joseph Heller, Catch-22
To protect the rights of covered workers under the Service Contract Act (“SCA”) and the Contract Work Hours and Safety Standards Act (“CWHSSA”,) the US Department of Labor (“DOL”) regulations provide for seizure of the proceeds of the Government contract when compliance is in question. Similar processes are followed for the Davis-Bacon Act. This blog focuses on the SCA and the DOL enforcement action known as “withholding.” It involves a directive to the Contracting Officer to take funds otherwise due the contractor and hold them or pay them to DOL. The funds are supposed to be sufficient to satisfy alleged wage underpayments pending resolution of a wage dispute. The calculation by DOL of the amount of withholding funds is usually very liberal in light of the remedial purposes of the laws. Where a contractor refuses to pay or where the withholding action is necessary to protect the employees’ interests, such as potential insolvency, the action assures the availability of funds for the payment of the back wages.
DOL’s Power to Withhold
Sums equivalent to underpayments of wages due may be withheld by the Government from payments due on any contract between the same contractor and the Government, regardless of whether or not such contract is subject to the SCA. See National Security Service Co., DOTCAB No. 1033, 22 Government Contractor ¶369 (Sept. 22, 1980) (contractor corporation and parent corporation treated as identical for purposes of applying §352(a) [now 6705(a)]); see also NISSI Corp., SCA-1233 (Dep. Secy. of Labor, Sep. 25, 1990) (contractors on two contracts were found to be the same, therefore, the withholding by the Government on the second contract for SCA underpayments on the first contract was proper).
The contracting agency head and Secretary of Labor are expressly authorized to invoke and administer the withholding remedy. 41 U.S.C. §6705(b)(1). As stated by the Comptroller General:
The legislative histor[y] of [the SCA] disclose[s] a progressive tendency to extend a more liberal interpretation and construction in successive enactments with regard to worker’s benefit, recovery and repayment of wage under-payments. Further, as remedial legislation, it is axiomatic that [the SCA is] to be liberally construed.
Comp. Gen. Dec., B-170784 (Unpub. 1971).
Contract funds which are or may become due to a contractor under any Government contract may be withheld prior to the institution of any hearing by the Secretary. McCasland v. United States Postal Service, 82 Lab. Cas. (CCH) ¶33,607 (N.D.N.Y. 1977); but see Bailey v. Secretary of Labor, 810 F. Supp. 261 (D. Alaska 1993). Administrative proceedings instituted under the SCA, moreover, are not barred or stayed by a bankruptcy order in favor of the contractor. See Joydon, Inc., 83 Lab Cas. ¶33,644 (D. Ohio 1978); Soledad Enterprises, Inc., SCA-574-578, 2 Lab. L. Rep., Wages-Hours (CCH) ¶31,169 (W.H. Admin., Jan. 31, 1978) [1973-1978 Transfer Binder]. See also Eddleman v. United States Dept. of Labor, 923 F.2d 782 (10th Cir. 1991) (DOL’s administrative enforcement proceeding satisfies “pecuniary purpose” and “public policy” tests for exemption from automatic stay provisions in 11 USC §362(a).
Absolute Power Corrupts Absolutely
DOL can and frequently does abuse the withholding power. The Wage and Hour Division (“WHD”) thinks the withholding power is a tool in its arsenal of enforcement, and they use it oppressively at times even when withholding isn’t warranted. Withholding is a way to work their will on recalcitrant contractors.
Over the years, I have been involved in many cases where the SCA clauses and wage determinations have been left out of the contract. In those circumstances, DOL has investigated and often directed the contract agency to add the SCA clauses and WDs by unilateral modification to the contract and to apply them retroactively. The SCA regulations and FAR allows for this, of course, but the rules provide that the contracting agency is required to adjust the contract price. In other words, the government is supposed to fund the change and provide the money for the back wages. DOL knows this is the case, yet it insists upon threatening and even ordering withholding anyway when the Government agency fails to fund the change order. This subjects the completely innocent contractor to the extortive demands of DOL for payment for the change order. This is patently unfair and indeed a breach of contract by the Government. The Government can’t withhold monies from the contractor for sums which by law or regulation the Government is supposed to pay for. This is a Government fiscal obligation, not a contractor obligation. That is just an unmitigated failure to pay, which is a contract breach.
And it gets even more comical when the Government agency which violated the SCA and which now owes the money for the change order is DOL. Then DOL is ordering DOL to take the monies from the contractor that DOL is obligated to fund. I have an ongoing case right now where the Government agency was the DOL which left the SCA clauses and WDs out of the contract and told the prime contractor the work was professionally exempt. Yes, even DOL has trouble complying with the SCA. The WHD ordered the procurement officer at DOL to correct this government error. The contract was modified, but no funds have been forthcoming. So what did the WHD folks do? Well, they punished the prime contractor by directing withholding. Thus, WHD directed DOL procurement to take the money from the prime contractor even though it was DOL procurement office who owed the back wages to the workers. How is that for a Catch-22?
In addition, in my recent case the DOL withholding order violated the FAR because it came from an individual at DOL who under the mandatory regulation wasn’t authorized to direct the withholding. WHD has a different viewpoint than the mandatory FAR provisions as to who is an authorized agent. A contracting agency may withhold funds on its own initiative or at the direction of DOL. The SCA contract clause set forth at 29 C.F.R.§ 4.6(i) and FAR 48 C.F.R. § 52.222-41(k) directs the contracting officer to withhold or cause to be withheld, from the prime contractor, sums an appropriate DOL official requests or sums the contracting officer decides may be necessary to pay underpaid employees of the contractor or subcontractor(s). FAR 22.1022 requires that the requires a DOL directive be signed at the “level no lower than that of the Deputy Regional Administrator.” DOL, however, in recent years, contrary to the FAR, has allowed lower-level officials to promiscuously direct withholding.
Finally, in my recent withholding case, I don’t even think there was a possible SCA violation. The withholding was precipitated by a conformance that had been submitted by a subcontractor which had never been presented to the National Office of DOL for a final determination. The DOL contracting officer had short-circuited the conformance process by asserting the SCA didn’t apply to the contract. Once a SCA clause and WD was added to the contract by a modification, the conformance still wasn’t submitted. DOL then proceeded to do its own slotting determination but never got a decision from the DOL National Office on the conformance. To withhold based on that investigator determination is improper. Only the DOL National Office is supposed to decide the conformances. Both the DOL procurement office and the DOL WHD office thus violated their own agency conformance process. DOL ordered itself to withhold money before performing its required conformance and issuing a final decision. I still can’t believe it. Even The DOL’s website says: “The investigator generally will wait until after the WHD conformance determination is made before proceeding to compute back wages due, if any, and complete the investigation.” https://www.dol.gov/agencies/whd/government-contracts/prevailing-wage-resource-book/investigative-process-withholding-disbursement-funds-sca-cwhssa-flsa. DOL put the cart before the horse when they took money from the contractor who was paying the proposed conformed rate prior to DOL issuing any final decision on the conformance. That withholding is abusive conduct by both WHD and by DOL in its procurement capacity.
Due Process for Withholding Actions
The power to withhold funds is a “taking” and it thus may violate the Fifth Amendment of the US Constitution, which prohibits takings without due process of law. To try to get some due process restraints, WHD follows the following process enforcement procedures.
a. Refusal to Pay Cases:
Where a contractor refuses to pay back wages under the SCA and funds are available for withholding, WHD will generally send a “due process” letter. This letter will include:
o A statement that the final conference was conducted at which time the contractor was provided an opportunity to discuss alleged violations; or if a final conference was not held, provide the reason(s) why;
o A brief description of the alleged violations;
o An affirmation that the contractor received a Summary of Unpaid Wages;
o A statement that the matter is being forwarded for a decision to a designated WHD deciding official, who will decide whether withholding action will be taken based on the back wage findings;
o A statement that the contractor has fifteen (15) days to provide the WHD deciding official with written views on whether the violations occurred; and
o A statement that any determination regarding the withholding of contract funds will not result in the distribution of the funds to the underpaid workers until such time as the administrative remedies available to the contractor have been completed….
b. Withholding for Missed Payroll, Bankruptcy, or Imminent Contract Close-out
The purpose of withholding is to protect the workers and make sure they get their backpay. It is not supposed to be used to oppress the employer or to punish those who have the temerity to assert defenses or rights and oppose the DOL findings. But WHD doesn’t recognize that distinction.
In certain cases, such as missed payrolls, likely bankruptcy filings, of course, it may be necessary for WHD to move quickly to preserve funds and to request withholding. But that is no excuse to violate due process. DOL, however, says in those cases it is sufficient to allow for the procedures set forth above after the fact. Based on the contractor’s post-withholding submissions, the WHD deciding official may decide to revoke an earlier withholding request. But sometimes that post withholding relief comes too late.
And sometimes WHD goes too far. For example DOL thinks it can seize money simply because the contract is coming to an end and that it has the right to the monies even before giving the contractor any due process. I think that is ridiculous and unconstitutional. The courts have limited that kind of withholding especially for small businesses who can’t afford to take the hit. The power to withhold funds is the power to destroy the business. It needs to be exercised with more care by WHD.
District courts have held that the withholding of contract payments due to a violation of SCA wages constitutes a violation of a contractor’s due process rights guaranteed by the Fifth Amendment to the United States Constitution. This may occur, for example, if withholding is implemented without a prior hearing before a neutral fact finder. Bailey v. Secretary of Labor, 810 F. Supp. 261 (D. Alaska 1993). In Bailey, the contracts were for mail hauling and shuttle bus services at a military base in Alaska. After examining the contractor’s payroll accounts, DOL determined that $98,271 were owed 10 contractor employees pursuant to SCA requirements. The contractor disputed that any additional wages were due. Unable to resolve the dispute administratively and in light of the contractor’s refusal to pay, DOL requested the contracting agency to withhold the entirety of any further payments due the contractor. As a result of the total withholding of any payments, the contractor could not meet its payroll, mortgage, insurance and other financial obligations. In fact, the court concluded that the business was in imminent danger of collapse. The court stressed the fact that if the contractor went out of business the employees who were the nominal beneficiaries of DOL’s action would become unemployed. According to the court, in order to provide plaintiff with due process, it was necessary that the contractor be provided with a prior hearing before a neutral fact finder or, where there are exigent circumstances demanding immediate withholding (not so in this case), the contractor must be provided a prompt post-seizure hearing. Thus, the contractor’s motion for summary judgment was granted, and DOL was enjoined from any further withholding until the contractor was afforded a due process hearing.
In Pony Express Courier Group v. Secretary of Labor, 3 Wage & Hour Cas.2d (BNA) 336 (W.D.N.C. 1995), the court found that the government violated Plaintiffs due process rights in withholding payments, while failing to initiate “prompt” and “contemporaneous” administrative proceedings. Id. (citing McCasland v. U.S.P.S., 82 Lab. Cas. (CCH) ¶33,607 (D.C.N.Y. 1977)). The Pony Express court stated that it was “utterly dumbfounded as to how it could take the government five months to file such a simple and routine document” as the complaint that it filed after a five-month delay.
Priority to Withheld Funds
DOL provides that the accrued funds withheld for payment of wages should not be used or set aside for other purposes until such time as the prevailing wage issues are resolved. If the investigation is resolved and the employees are paid by the employer, the funds should be released back to the employer. And if DOL needs to make the payment on behalf of the employer, the funds should be released to DOL. The public policy favors insuring the workers are paid and have priority to the withheld funds.
Wage claims for underpayment have priority over:
1. An Internal Revenue Service levy for unpaid taxes;
2. Re-procurement costs of the contracting agency after a contractor's default or termination for cause;
3. Any assignee of the contractor . . . including assignments made under the Assignment of Claims Act;
4. Any claim by a trustee in bankruptcy.
The authority for these rules comes from 41 U.S.C. §6705(b)(1) (formerly §352(a)). And the case law confirms the employees’ priority over: (i) an Internal Revenue Service levy for unpaid taxes (see Comp. Gen. Dec., B-170784 (Unpub. 1971); Comp. Gen. Dec., B-189137 (Unpub. 1977); 56 Comp. Gen. 499 (1977)); (ii) re-procurement costs of the contracting agency (see 29 C.F.R. §4.187(c)(2)); (iii) any claim by the trustee in bankruptcy (56 Comp. Gen. 499 (1977)); and (iv) any assignee of the contractor, since an assignee can acquire no greater rights to withheld finds than the assignor has in the absence of an assignment (see Modern Industrial Bank v. United States, 101 Ct. Cl. 808 (1944); Royal Indemnity Co. v. United States, 371 F.2d 462 (Ct. Cl. 1967); Newark Ins. Co. v. United States, 149 Ct. Cl. 170, 181 (1960); Henningsen v. United States Fidelity and Guaranty Co., 208 U.S. 404 (1908)). Where employees have been underpaid, moreover, the assignor has no right to assigned funds because it has no property rights to amounts withheld from the contract to cover the underpayments of workers which constitute a violation of the law and the terms of the contract. See Comp, Gen. Dec., B-164881 (Unpub. 1968); Comp. Gen. Dec., B-178198 (Unpub. 1973); 55 Comp. Gen. 744 (1976); National. City Bank of Evansville v. United States, 163 F. Supp. 846 (Ct. Cl. 1958). See generally 29 C.F.R. §4.187(b)(4).
Conclusion
Withholding of money is an enforcement tool given to DOL. It is intended to serve the important remedial purposes of the prevailing wage laws. But it is a blunt instrument and can be used abusively and in violation of due process rights. DOL needs to curb those abuses. They are becoming all too often routine. When DOL is subject to push back on its claims, the impulse is to go first to threatening and then implementing withholding, even where it is not warranted.