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Federal Contractors at Risk for DOL Compliance Audits

With the ever challenging economy, many construction companies are entering the government market or focusing more of their business on federal government work. Before doing so, companies should consider the associated risks and increased administrative and operational costs. Key areas often overlooked in this analysis are the equal employment opportunity (EEO) requirements placed on federal construction contractors. These requirements are onerous and allow for demanding, periodic compliance audits by the Department of Labor (DOL). Penalties for non-compliance can be severe.

The EEO requirements are significantly more burdensome than simply complying with Title VII and similar employment statutes familiar to most businesses. They include three federal laws: Executive Order 11246 (EO 11246), Section 503 of the Rehabilitation Act of 1973 (Section 503) and the Vietnam Era Veterans Readjustment Assistance Act of 1974 (VEVRAA). Together, these laws prohibit discrimination and require federal contractors to take affirmative action to ensure that individuals have an equal opportunity for employment, without regard to race, color, religion, sex, national origin, disability or status as a protected veteran.

The required affirmative action program consists of utilization goals expressed as a percentage of hours worked in a geographic area. The goals are targets for recruitment and outreach that the government believes are achievable through good faith efforts on the part of the employer. The goals are not quotas; quotas are illegal. At first glance, these laws may not seem overly burdensome, especially for companies with only a handful of federal contracts, but the implementation of these laws is not limited to the contractor’s federal work. Federal contractors must comply with these laws and regulations company-wide. That means the utilization goals must be achieved as a whole, considering every hour worked, regardless of the project.

The regulations implementing these EEO laws require specific action by the contractor and extensive maintenance of records and documents evidencing a contractor’s good faith efforts to reach the utilization goals. For example, the regulations require a company to designate an EEO officer; create and disseminate an EEO policy to all employees; maintain extensive personnel and employment records; perform an annual review of policies and practices; track all applicants for employment; file certain paperwork with the government; and recruit minorities, women, persons with disabilities, and protected veterans. The administrative and operational costs associated with these requirements may often exceed the increased revenue generated from the federal contract work.

The EEO laws are enforced by the Office of Federal Contract Compliance Programs (OFCCP), an agency of the U.S. Department of Labor (DOL), through compliance audits. Unlike many other federal agencies, an OFCCP audit is not necessarily triggered by a third-party complaint. OFCCP can select any federal contractor for a compliance audit, without reason, and federal contractors are required to participate in the audit. According to OFCCP materials, contractors are scheduled for review on a periodic basis, generally not more frequently than every two years.

The traditional audit commenced with a desk audit where OFCCP requested certain documents concerning employee data, employment policies, affirmative action policies, and employment practices. If concerns were raised during the desk audit, an on-site investigation was requested where OFCCP auditors personally visited the contractor’s office and one or more jobsites. While desk audits are still performed, more frequently, OFCCP will start with an on-site investigation that is accompanied by the traditional requests for data and documentation. According to a recent OFCCP directive, every twenty-fifth audit is now supposed to include an on-site investigation. During the on-site investigation, the auditors may speak with management and non-management personnel, inspect the physical premises, and review personnel files and other compensation and employment data.

The purpose of the OFCCP audit is to determine whether:

  1. the federal contractor maintains nondiscriminatory hiring and employment practices, including job placement, employee training, promotion, compensation, and termination;
  2. the contractor is undertaking good faith efforts, including the use of recruitment sources, to meet its affirmative action requirements and to ensure applicants and employees have equal opportunity without regard to race, color, religion, sex, national origin, disability, or status as a protected veteran;
  3. there are barriers to advancement for qualified minorities, women, persons with disabilities, and protected veterans; and
  4. the contractor is maintaining the required documentation and reports. Good intent is not enough for OFCCP. OFCCP looks at actual data and statistical analyses; it compares a company’s data to the utilization goals set by statute and looks at sixteen criteria to evaluate its good faith efforts.

OFCCP selects companies for audits based on a variety of factors, including information contained on the EEO-1 reports submitted annually, industry or EEO trends, failure to identify or report as a federal contractor, or third-party complaints filed with OFCCP or the EEOC. A recent trend is for OFCCP to conduct on-site audits of contractors receiving funds through the American Recovery and Reinvestment Act of 2009.

If an audit results in a finding that a federal contractor is in violation of any of the three laws, OFCCP will attempt to facilitate “conciliation,” which is a negotiation process with the contractor to reach an appropriate remedy. The appropriate remedy could range from further monitoring and reporting on a periodic basis, monetary remedies, or as a drastic measure, barring the contractor from any further federal contracting work. If the conciliation is successful, a “conciliation agreement” will be drafted and signed by the contractor. The agreement is enforceable. If conciliation efforts fail, an enforcement action against the contractor could be pursued through an administrative process or in federal court.

Federal government work can be profitable, but the EEO laws applicable to federal contractors are extensive, demanding, and continually enforced through compliance audits by the DOL; therefore, before entering the government market or increasing the federal work portfolio, know the risks associated with the work and take proactive measures to protect the business.