Manju Gupta Published in Contract Management Magazine

Incorrect Wage Classifications: Potential Personal Liability for Contractors?

How a federal agency’s error in identifying the correct wage rates in its solicitation nearly put one of its contractors out of business.

by Manju Gupta

Recently, a situation arose in which a government agency had solicited a contract using the incorrect wage classification. What happens when the contract is solicited incorrectly and provides for the wrong wage classification? Is the contractor liable when the contractor itself is not getting paid adequately under the contract to pay its employees the correct wage rate? Can the contractor in fact be personally liable? What about administrators of the contract: Might they be liable as well?

The issue represents a real concern for smaller and larger contractors alike who bid contracts relying on identified wage classifications. During this whole process, the contractor did not know whether it would ultimately go out of business because of the agency’s error.

DOL’s Investigation

The agency’s error led to the Department of Labor (DOL) investigating under the Service Contract Labor Standards (SCLS) statute[1] and a finding against the government contractor for back wages owed for over $1 million.

Background—The SCLS Statute

The SCLS statute is the governing law for service providers with respect to wages. It is a minimum wage statute that guarantees that certain wages and fringe benefits are paid to government service contractors. The statute requires the secretary of labor to predetermine wages and fringe benefits by job category and geographic area.[2] Under the statute, the DOL can withhold money paid to government contractors under their contracts.

The scary thing for contractors is that under the SCLS statute, they can also be personally liable for wages to their employees. Specifically, corporate officers who are responsible for the day-to-day operations and management of employees can be held personally liable.[3] There are several cases in which the DOL has pursued officers personally.[4] So, if the contractor is relying on the terms and conditions of the contract—paying its employees accordingly—and an agency fails to compensate the contractor for back pay, the contractor can be stuck, becoming insolvent as a result and also ultimately being personally liable.

It’s important for contractors to review the occupation codes and corresponding titles under the wage determination lists that are included with solicitations and eventual contract. Likewise, it’s a good idea to review the SCLS statute’s Directory of Occupations to determine whether the occupation meets the description of the job duties that are in fact being performed. Under the statute, “the duties which an employee actually performs govern the classification and the rate of pay to which the employee is entitled under the applicable wage determination.”[5] Any work within the scope of a classification listed in the wage determinations shall be compensated at no less than the rate specified in the wage determination.[6] The determination of whether service employees performing on an SCLS-covered contract fall within a particular classification turns on whether the duties the employees are actually performing “are substantially the same as or identical to” those listed on the wage determination.[7]

Background—The Case

In this particular case, the DOL and the agency were in disagreement as to the proper wage classification. The agency believed the classification should be a lower wage classification. After conducting its investigation, the DOL concluded that the incorrect wage was being paid. The contractor was at a complete loss. While the DOL demanded the contractor pay the back wages to its employees at the proper rate, the contractor was unable to do so because it lacked sufficient funds from the agency.

Forget about any profit margin. Here, the contractor was unable to make the payment to its employees in the amounts demanded by the DOL, and if the DOL had started to withhold funds under the contract, the contractor would have had to shut its doors.

A further complicating factor was that the lower wage classification was only set forth in one of the four contracts the contractor had entered with the agency. The first contract designated the wage classification; the three ensuing contracts left the wage classification to the discretion of the contractor. All the contracts were virtually the same as the first contract, except for the location of services and specific identification of the wage classification.

The Claim vs. REA

I was a member of the legal team representing the contractor in this case. The course of action we took was filing a claim pursuant to the Contract Disputes statute,[8] then negotiating with the DOL and the agency. While the contractor had originally filed a request for equitable adjustment (REA),[9] the agency made no determination as to that request.[10]

Claims and REAs are similar but have several significant differences.[11] An REA is often the first step in requesting compensation (time, money, or both) but falls short of the procedural requirements that are mandated by a claim. REAs are considered to be contract administration rather than litigation; because of that, costs of REA preparation are allowed.[12] In contrast, the costs of prosecuting a Contract Disputes claim must be absorbed entirely by the contractor. Further, rather than including preparation costs, another key difference between an REA and a claim is that a contractor may request interest to be included from the date it submits its claim.

Once a contractor has made the decision to pursue a claim, the contractor must ensure it follows the correct procedure or it risks unnecessary obstacles and may even lose the claim entirely. The first step is to prepare a written claim that is addressed to the contracting officer, seeking a final decision.

A written demand or written assertion by the contractor seeking the payment of money exceeding $100,000, however, is not a “claim” under the Contract Disputes statute until certified as required by the statute. Claims exceeding $100,000 must be certified by an “individual authorized to bind the contractor to ensure that the claim is made in good faith and that amount requested and supporting data are accurate and complete to the best of the contractor’s knowledge and belief.” Language to the following effect must be included:

I hereby certify that this claim is made in good faith; that the supporting data are accurate and complete to the best of the Contractor’s knowledge and belief; that the amount requested accurately reflects the contract adjustment for which the Contractor believes that the Government is liable; and that I as [____], am duly authorized to certify the claim on behalf of the Contractor.

Unlike a claim, an REA does not require certification under the Contract Disputes statute. Whether the claim exceeds $100,000 or not, the best practice is to identify the request as a claim under the Contract Disputes statute, together with a request for a contracting officer’s decision. Those procedural steps will ensure the clock starts running on the 60-day time limit for the issuance of a decision or for the contracting officer to notify the contractor of the reasonable time it will take for issuance of a decision. If a contracting officer issues a favorable decision on a contractor’s claim, then the matter is ended as the contractor has received what it claimed. If the contracting officer denies the claim, the contractor can either appeal to the appropriate board of contract appeals or bring an action in the U.S. Court of Federal Claims.

In our case, the Contract Disputes claim was filed with the contracting officer, but before a decision was made, we entered into negotiations and were able to settle with the agency and the DOL.

The Negotiation

We were able to persuade the DOL from taking immediate action by filing a claim with the agency requesting the back wages owed. A key sticking point early in negotiations with the agency was the phrase, “payment of money in a sum certain.” The agency claimed because the contractor had not yet paid the back wages, the claim was “premature.” The contractor was in a conundrum. If the contractor was forced to make payment, or if the contract funds were withheld for payment, the contractor, in this case, would have no choice but to shut its doors.

The law provides that claims must set forth a specific dollar amount that the contractor is willing to accept in satisfaction of its claim. So, for instance, one cannot claim a range or amount plus some amount to be determined. Generally, however, claims based on estimates are acceptable, so long as the contractor identifies what part of the claim relies on estimates and how the contractor arrives at these estimates. In this particular instance, to counter the agency’s argument that the claim was “premature,” we pointed to case precedent that held that it was unnecessary for a contractor to first pay its employees before an agency pays the back wages.[13]  Despite the supporting case law, the agency seemed unconvinced that the claim was “ripe.”

When the DOL became aware of the agency’s position concerning ripeness of the claim, it took action and sent a letter to the agency requesting that funds be withheld under the contract. This of course was not at all what the contractor wanted—as it would mean the contractor would be unable to sustain operations.

We pointed to prior case law supporting our arguments, reliance on the first contract, the ultimate job duties, and how the higher wage classification fit those job duties better than the lower wage classification. We set forth a clear damage calculation that included all calculations to date, supporting documentation, and an identifiable sum certain that was due. We had extensive negotiations with the agency, all the while knowing that if we could not resolve the claim, the company would cease operating. Ultimately, the contractor was able to continue operations as our continued negotiations worked and we settled. We entered into separate but contemporaneous settlement agreements with both the DOL and the agency.

Conclusion

The following are a few key takeaways from this “mile in my shoes”:

  • Contractors need to be cognizant of the occupation codes as set forth in the contract and read the corresponding definitions to ensure the wage classification is justified;
  • If no occupation code is designated in the contract, then pick the appropriate wage classification by reviewing the SCLS statute’s Directory of Occupations or contacting the DOL for assistance prior to submitting a bid on the contract;
  • Depending on the circumstance, it might make sense to first submit an REA, but to be aware of the time and, if there is no response by the agency, to consider filing a claim under the Contract Disputes statute;
  • Should a claim be filed, it needs to follow the requirements set forth under the Federal Acquisition Regulation (FAR), claim a sum certain, and be as clearly organized as possible to ensure the best chance of success; and
  • Possibly engage legal counsel to help determine your best arguments to lead to successful resolution of the claim.

[1] 41 USC 6701, et seq. (formerly known as the Service Contract Act of 1965).

[2] 41 USC §§ 6702(a)(2), 6703(1)–(2); and 29 CFR 4.6.

[3] 29 CFR 4.187.

[4] E.g., United States v. Sancolmar Indus., Inc., 347 F. Supp. 404 (E.D.N.Y. 1972); Johnson v. U.S. Dep’t of Labor, 205 F. App’x 312 (6th Cir. 2006); and In the Matter of Nissi Corp., DBA Nat’l Sec. Servs., & Andrew Godbott, Respondents, BSCA No. SCA-1233 (September 25, 1990).

[5] 29 CFR 4.152(b).

[6] See In the Matter of: Kord’s Metro Servs., Inc., BSCA No. 94-06, 1994 WL 897731 (August 24, 1994).

[7] Ibid.

[8] 41 USC §§ 7101–7109 (formerly known as the Contract Disputes Act of 1978 (CDA)).

[9] I.e., a request for adjustment to the contract price. Here, the contractor had originally filed the REA to increase the contract price to cover the costs associated with paying the back wages demanded by the DOL.

[10] Because the Contract Disputes statute does not mandate any specified time in which an agency must make a determination as to an REA, the REA often sits on a contracting officer’s desk until an actual claim is filed under the statute.

[11] A claim is defined as “a written demand or written assertion by one of the contracting parties seeking, as a matter of right, the payment of money in a sum certain, the adjustment or interpretation of contract terms, or other relief arising under or relating to the contract.” (Federal Acquisition Regulation (FAR) 2.01.) Notably, however, the terms “equitable adjustment” or “request for equitable adjustment” are not defined in the FAR or anywhere else.

[12] FAR 31.205-33.

[13] Richlin Sec. Ser. Co. v. Rooney, 18 Fed. Appx. 843 (Fed. Cir. 2001).