Executive Order 13673 Pressures Employers to Capitulate to Baseless Demands and Meritless Claims

A July 31 executive order from President Obama will make it very costly for employers to challenge dubious allegations of wrongdoing against them, if they are government contractors (which employ a quarter of the American workforce). Executive Order 13,673 will allow trial lawyers to extort larger settlements from companies, and enable bureaucratic agencies to extract costly settlements over conduct that may have been perfectly legal. That’s the conclusion of The Wall Street Journal and prominent labor lawyer Eugene Scalia.

This “Fair Pay and Safe Workplaces” order allows the government to cut off the contracts of contractors and subcontractors that do not “consistently adhere” to a wide array of complex labor, antidiscrimination, harassment, workplace-safety and disabilities-rights laws.  Never mind that every large national business, no matter how conscientious, has at least one successful lawsuit against it under federal labor and employment laws, which is inevitable when a company has thousands of employees who can sue it in hundreds of different courts that often have differing interpretations of the law. The order also bans using perfectly legal arbitration agreements, overstepping the President’s legal authority.

Although it will increase the cost of government contracts (by making them legally riskier and less desirable), this sweeping executive order is purportedly grounded in efficiency.  As a defender of the order concedes, “to be sustained under FPASA, a presidential directive must have a rational, nonarbitrary relationship to the goal of  ‘an economical and efficient system’ of federal procurement.” This efficiency rationale is false and absurd: One of the laws covered by the order, the Davis-Bacon Act, not only dramatically increases contracting costs and shrinks the economy, but had racist, anti-black origins. Other laws covered by the order seek to promote inclusion or social justice, not efficiency.  For example, the Rehabilitation Act requires costly accommodations of the disabled that an efficient, profit-maximizing employer would not voluntarily make. Overtime rules contained in the FLSA increase employers’ costs and reduce flexibility in hours and scheduling. Thus, this executive order's legal justification is bogus. (Federal law bans some employment practices that are inefficient — like intentional race and sex discrimination — but it also restricts many economically rational and efficient business practices).

Liability under federal labor and employment laws doesn’t require a showing of wrongdoing by a company’s senior management (a violation can be treated as “willful” even when committed by an employee the CEO has never met), and many laws are vague or expansive enough that even well-intended employees or managers can inadvertently run afoul of them (such as disabilities-rights laws that require costly, murky “reasonable accommodations” that trigger disagreements even among veteran judges as to what is “reasonable,” and overtime laws that are vague about what employees are covered versus exempt). Moreover, agencies often find violations based on perfectly legal conduct; the Obama NLRB has often found companies guilty, only to have federal appeals courts overturn its ruling years later.

If a company can lose a billion-dollar contract over a discrimination or harassment claim, it may settle the claim even if it is baseless. This executive order creates incentives for just such extortionate settlements, driving up the long-run cost of government contracts by making them more risky and less desirable. That reality is at odds with the justification given for past executive orders dealing with contracting, which was to “promote efficiency in federal contracts.”

The order also prohibits using some arbitration agreements (such as for race and sex discrimination and harassment claims brought under Title VII). That ban lacks any valid legal or fiscal rationale. The Supreme Court has repeatedly upheld binding arbitration of employment-law and discrimination claims, noting the “strong federal policy in favor of arbitration” reflected in the Federal Arbitration Act.  Arbitration clearly saves taxpayers money (arbitrators’ fees are paid by the parties, whereas judges’ and court employees’ salaries are paid for by the taxpayers, making arbitration much cheaper for taxpayers). The justification commonly given for executive orders regulating contracting is that such regulations save taxpayers money by promoting efficiency in contracting, which is plainly not true here. Thus, this executive order is also of doubtful validity under the Procurement Act.

As Scalia notes,

Through the Fair Pay and Safe Workplaces Executive Order, government contractors are again bearing the brunt of the President’s efforts to advance the interests of organized labor and diminish employers’ ability to contest alleged labor and employment violations. By making contractors’ receipt of contracts contingent on their bureaucratically-determined lack of labor violations, the Order has dramatically raised the stakes of resisting union action and litigating employment disputes. Contractors will now seriously have to weigh the costs of capitulating to unjustified demands and settling meritless claims against the risks of suspension or debarment that may result from challenging such actions. Indeed, by requiring contracting officers and Labor Compliance Advisors to make suspension and debarment referrals for “appropriate” labor violations without providing clear guidance to define such violations, the Order creates a very real risk that minor or meritless labor violations may result in a company facing suspension or debarment.

The Wall Street Journal says this executive order violates the D.C. Circuit Court of Appeals’ decision in Chamber of Commerce v. Reich, 74 F.3d 1322 (D.C. Cir. 1996), and that it is designed to enhance the “political leverage” over business of Obama administration “political allies” like left-wing unions:

The Executive Order fact sheet notes that the new reporting rules will sweep in some 24,000 businesses with federal contracts, employing about 28 million workers, according to Labor Department estimates.

For organized labor, this is political leverage from heaven. When unions are in a collective bargaining fight with a company, they typically file complaints with the likes of OSHA, the National Labor Relations Board and the Equal Employment Opportunity Commission. Under the new executive order, the government will have the ability to revoke the contracts of those with violations. That’s punishment above and beyond any remedies meted out by the NLRB.

That would be another finger on the scales to force settlements on terms favorable to the President’s political allies. If you’re a government contractor, any time a union files an unfair labor practices charge, the pressure to settle becomes overwhelming. Choose to fight and you face not only the civil penalties of violating a law but the risk of having your federal contracts revoked or suspended. . .

The new regime in effect rewrites U.S. labor laws, from the Fair Labor Standards Act to the Americans with Disabilities Act, all of which have existing remedies for violations specified by Congress.

Former President Bill Clinton tried a similar gambit with an executive order barring the government from giving federal contracts to companies that hired permanent replacements for striking workers. The D.C. Circuit Court of Appeals rejected that effort in 1996′s Chamber of Commerce v. Reich. The court struck down the order on grounds that it violated the National Labor Relations Act.

Judge Laurence Silberman wrote that the Clinton order should fail because it “seeks to set a broad policy governing the behavior of thousands of American companies and affecting thousands of American workers. . . . No state or federal official or government entity can alter the delicate balance of bargaining and economic power that the NLRA establishes, whatever his or its purpose may be.”

With the array of labor law already in place, it’s easy for large companies to get tripped up on technical violations. The real point of the order is to establish mechanisms for interest groups to roll over employers who don’t accede to their demands.

For a sense of how the mere threat of federal funds being cut off can trigger huge payouts, the example of colleges, whose federal funds can already be cut off for civil-rights violations, is instructive. To avoid having their federal funds cut off for sexual harassment under Title IX, colleges will pay a fortune to sexual harassment plaintiffs in order to avoid a finding of liability and a possible cut-off of federal funds by the Education Department. They do this even though the Title IX statute, unlike many employment laws, does not even allow plaintiffs to recover punitive (as opposed to compensatory) damages.

For example, the University of Colorado recently paid a student a whopping $825,000 for “retaliation” after a professor hurt her feelings by questioning her sexual harassment claim against a fellow student (even though the University couldn’t be sued for the sexual harassment itself, because it convicted the accused student.). It did so even though it is doubtful that any jury would have awarded the plaintiff that much money even had she proven legally actionable “retaliation” (students, including one friend of the plaintiff, defended the professor’s actions as perfectly appropriate and not prejudicial). The University presumably feared that not paying her off would lead to a prolonged, costly, and financially risky investigation by the federal Education Department, which has the power under Title IX to cut off the federal funds of universities that permit sexual harassment or retaliation (leverage that recent legislation would magnify). The University is also trying to fire the professor for “retaliation,” which, as the professor’s lawyer notes, appears to raise serious First Amendment issues (for a discussion of First Amendment limits on retaliation liability under federal labor and civil-rights laws, see this link, discussing the court rulings in BE&K Construction Co. v. NLRB (2002), Bain v. City of Springfield (1997), and Brooks v. City of San Mateo (2000)).

Under Obama’s executive order, violations supposedly need to be “willful” OR “repeated” OR “serious” OR “pervasive” to justify a cut-off of federal funds, but these qualifications may mean next to nothing, since any of these things seems to be enough (due to the word “or”). Even showing a “willful” violation isn’t hard: often, when the law speaks of “willful” violations, it just means non-accidental acts, not that the act knowingly violated the law, or that the employer acted in bad faith. It doesn’t require any showing that company’s senior management was in any way careless or irresponsible.

The restrictions on arbitration in Executive Order 13673 have even less legal justification. Left-wing trial lawyers have denounced Supreme Court decisions like its 7-to-2 Gilmer decision upholding contractual provisions that require binding arbitration of employment discrimination cases. But in reality, arbitrators often rule in favor of employees and consumers, and award them substantial monetary damages (although they do permit plaintiffs less discovery than courts do; on the other hand, arbitration typically results in “lower litigation costs and expenses.”).