July 19, 2022

There and Back Again: Labor Department Issues New Proposed Nondisplacement Regulation

Holland & Knight Alert
Eric S. Crusius | Timothy Taylor


  • The U.S. Department of Labor has released a proposed regulation to reinstitute a requirement that contractors provide offers of employment to workers covered by the Service Contract Labor Standards, unless the contractor can establish an exception.
  • The regulation would implement an executive order signed by President Joe Biden on Nov. 18, 2021, and comments on the rule will be accepted until Aug. 15, 2022.
  • It is estimated that when the final rule is incorporated, it will affect between 74,000 and 329,000 small businesses.

The U.S. Department of Labor (DOL) has released a proposed regulation that would reinstitute the requirement that contractors give offers of employment to workers covered by the Service Contract Labor Standards, also known as the Service Contract Act (SCA), unless the contractor can establish an exception. The regulation would implement Executive Order 14055, signed by President Joe Biden on Nov. 18, 2021. Comments on the rule are due Aug. 15, 2022. After DOL evaluates the comments, it anticipates issuing a final rule and the Federal Acquisition Council issuing a Federal Acquisition Regulation (FAR) clause incorporating the rule into solicitations and contracts. DOL estimates that 74,097 to 329,470 small businesses will be impacted by this rule.

These rules, known as the Nondisplacement of Qualified Workers rules, have followed an on-again, off-again pattern depending on the administration in power. They were first instituted during the Clinton Administration, then rescinded during the second Bush Administration. An expanded version was instituted again during the Obama Administration, then subsequently rescinded (again) by the Trump Administration. The newly proposed rules represent the Biden Administration's effort to again reinstate the nondisplacement requirement. There are, however, key differences from Obama-era rules that we will explore below.

Basics of the New Proposed Rule

Under the proposed rule, contractors taking over a contract doing similar work at the same location from an incumbent contractor will be required to give offers of employment to the SCA-covered workforce, with some exceptions:

  • Timeline of the Requirements: The easiest way to understand this proposed rule is to examine each party's responsibility in a timeline.

First, the contracting agency must make a determination about whether to include the clause. Should the contracting agency determine that inclusion of the clause is appropriate, then it will be included in the solicitation. The contracting agency does have some discretion to waive application of the clause (or parts of it), but that decision must be made in writing based on reasons specified in the proposed rule, such as an emergency or because it would impair efficiency, and is subject to reporting requirements. If the contracting agency's reasoning centers on the rule being inconsistent with law, the contracting agency must consult with DOL in most circumstances. No matter the reasoning, the contracting agency's senior procurement executive must make the decision and report the decision on a public website and inform the U.S. Office of Management and Budget of all exemptions given at least quarterly. Interested parties may appeal this decision to the head of the contracting department or agency.

Second, assuming the applicability of the requirements, notice of the rule's applicability must be sent to the covered employees by the incumbent contractor.

Third, once the award has been made, if a new contractor will be incoming, the outgoing contractor must provide a list of incumbent covered employees 30 days before the contract ends and another list 10 days before if the employee pool changes.

Fourth, after the incumbent contractor takes over the contract, it must give bona fide offers of employment in accordance with the rule's requirements. While the offers of employment need not be for the same position, and offers do not have to be made to every employee if the new contractor plans to reduce staffing, contractors should take care to abide by the requirements when offering different positions or not tendering employment for all incumbent workers. For instance, if offers are not made to every worker and a position opens in the first 90 days of contract performance, the contractor must first go back to the pool of incumbent employees and make offers there before seeking outside candidates.

  • Summary of the Contracting Agency's Responsibilities: The contracting agency must place the clause in covered contracts in addition to ensuring that the contractor provides notice to its covered employees of their rights under these rules. The contracting agency must also conduct a location analysis to determine whether the efficiency of the contract favors keeping it in the same location. This is important to DOL because the requirements under these rules melt away when the location of the work changes. The decision not to favor or require the contract be performed at the same location must be made by the senior procurement executive within the agency and notice must be provided to the workers within five business days of the solicitation being issued.
  • Summary of the Outgoing Contractor's Responsibilities: The outgoing contractor must notify its covered employees that they are covered by the nondisplacement requirements. The outgoing contractor must provide to the contracting officer a certified list of the covered employees no later than 30 days before the contract ends and again 10 days before if the employee list has changed. The list must contain the employees' names and their employment anniversary date. The agency then supplies the list to the incoming contractor.

The proposed rules also require the contractor to inform the contracting agency if the clause is absent from a contract.

  • Summary of the Incoming Contractor's Responsibilities: The incoming contractor must make bona fide offers of employment to all of the incumbent employees unless there is a specific reason not to, including:
    • employees are not displaced because the outgoing contractor is retaining them
    • employees perform on the contract, but also perform non-federal jobs
    • employees' poor past performance would lead to their termination
    • employees are not service workers (such as exempt employees working on the contract)
    • changes to staffing patterns, including reduced staffing or changes in positions that will be filled (though for the latter, several conditions must be met)

Failure to abide by the requirements could lead to an investigation by DOL and eventual payment of wages to improperly excluded incumbent employees or debarment proceedings.

Changes Since the Obama Administration

There are some significant changes to the proposed rule that will alter contractor compliance:

  1. Incoming Contractor's Workforce: In the previous iteration of the rule, contractors were allowed to displace the incumbent workforce with their own employees if their employees had worked for the incoming contractor for at least three months and would be subject to discharge without being placed onto the new contract. The new version of the rule does not have this exception.
  2. Unsuitable Performance: While the ability to not tender an offer of employment to workers based upon their unsuitable performance still exists, the standard for doing so is more employee-friendly. The previous standard for not offering employment was if the employee "has failed to perform suitably on the job." Now the employer must demonstrate "that there would be just cause to discharge the employee if employed by the successor contractor or any subcontractor." Evidence would include a recommendation to terminate the predecessor employee (though the process was not concluded). Of course, it would be difficult for the incoming contractor to obtain such records even if they exist.
  3. Changes in Staffing Patterns: When the incoming contractor changes the contract's staffing pattern, contractors are now required to structure their staff to offer employment to the greatest number of employees in positions equivalent to the positions that they held under the previous contract. In the previous version of the rule, contractors were not required to staff the contract in a way to offer employment for the same position to as many employees as possible.
  4. Locality of Contract Performance: Agencies must now complete a locality analysis to determine whether performance of the new contract in the same location would promote efficiency. As noted above, to the extent that the agency's analysis leads it to not require or prefer the work be performed in the same location, that conclusion must be made by the agency's senior procurement executive, and workers on the contract must be given notice of that within five days of the issuance of the solicitation. This notice must be given by the contractor. This is a new requirement under this version of the rule.
  5. Subcontracts: Under the old rule, subcontracts below the simplified acquisition threshold (SAT) were exempt even if the prime contract was above the SAT.1 Now, all subcontracts are covered by the requirements when the prime contract is above the SAT even if the individual subcontracts are below the SAT.
  6. Exclusion for Special Programs Eliminated: Contracts under the Javits-Wagner-O'Day Act, along with the Randolph-Sheppard Act and other special programs, were previously excluded from these requirements. DOL is proposing to eliminate that exemption so that contracts subject to those laws are required to comply with nondisplacement requirements.
  7. Exclusion for Classes of Contracts: Previously, the head of a contracting agency had the option of excluding a class of contracts if justified. Now, exclusion must occur on a case-by-case basis. The process of excluding individual contracts also appears to be more laborious for the contracting agency. Each agency must also publish exemptions on a website and report exemptions to the Office of Management and Budget at least quarterly.
  8. Calendar Days: Employees used to have 10 calendar days to provide a response to a bona fide offer of employment. They now have 10 business days.
  9. Employee Lists: Under the old rule, incumbent contractors had to provide their updated list of employees 10 calendar days before contract end. They now must do so at 10 business days.

The sum of these changes is a tightening of the rules and fewer exceptions. There are fewer off-ramps to the rule for both agencies and contractors.

Compliance Challenges

As with the previous version of the rule, there looks to be compliance challenges to contractors subject to these proposed requirements. The most significant challenge is to prospective contractors trying to price proposals. Because employee anniversary dates are not revealed until after contract award, potential incoming contractors are bidding blind because they may inherit a staff with anniversary dates going back many years. If that occurs, contractor employees will be entitled to more vacation, and that entitlement may change staffing plans and, inevitably, the price of the contract.

Further, companies may find difficulties connected with offering employment to individuals who do not meet company qualifications but do not technically run afoul of agency requirements, or employees who have performed unsuitably, but such performance was not documented or otherwise does not meet the new, high "for cause" threshold.

Finally, in the last iteration of the rule, outgoing contractors often failed to provide the list of incumbent workers, and contracting agencies seemingly did not enforce this requirement in many circumstances. Greater enforcement of this requirement will aid in compliance of this rule for the incoming contractor.

Holland & Knight's Government Contracts Group will continue to monitor the development of these rules and provide any updates as warranted.


1 The SAT is $250,000 as of the date of this analysis's original publication.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.

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