Client Bulletin #415

6.5.09

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Ignorance of the law is no defense, and lack of knowledge does not protect a company from its affirmative action obligations. In a recent decision that should strike terror in the hearts of employers who think they are not federal subcontractors, the Department of Labor’s Administrative Review Board extended coverage of the affirmative action laws to a group of hospitals that were medical providers approved by an HMO that had a contract to provide medical care to government employees. The hospitals had no idea they were covered subcontractors.

The affirmative action laws, Executive Order 11246, as well as Section 503 of the Rehabilitation Act and Section 402 of the Vietnam Era Veterans’ Readjustment Assistance Act of 1974, apply only to federal contractors and subcontractors. To be a subcontractor, a company must

* be furnishing nonpersonal services to a contractor that is necessary for the performance of the contract; or

* be performing, assuming or undertaking any portion of the contractor’s obligations under its contract.

Federal contractors are required to include specific language in their subcontracts notifying their suppliers that they are or may be covered by these affirmative action laws. However, oftentimes this language is overlooked by the contractor, and the subcontractor is not given any notice that the contract it is entering into relates to a government contract and imposes affirmative action obligations on the company. Such was the case in Braddock.

In Braddock, the Board rejected the hospitals’ argument that they did not have notice of their standing as subcontractors and therefore could not be liable for failure to comply with the government regulations. The Board held that the requirements to comply are inherent in every contract and subcontract, even if the entity entering into the contract has no knowledge of this obligation. This ruling places the burden on companies to be proactive in determining their status as affirmative action employers, in addition to scrutinizing goods and services contracts with third parties who may be federal contractors.

In addition to not having been given notice that the HMO was a federal contractor, the hospitals had a 2003 board decision in their favor. In OFCCP v. Bridgeport Hospital, the Board held that a hospital that was an approved provider for Blue Cross Blue Shield, a federal contractor, was not a subcontractor. The Board held that BCBS was just an “insurer” and that the hospital was not assisting BCBS in being an “insurer” or acting as an insurer itself.

In Braddock, the Board took great pains to distinguish Bridgeport based upon the nature of the original contract. The Board held that the HMO had a contract with the government to provide medical services (not insurance), and that the hospitals assumed the performance of parts of this contract by actually providing the medical services. Therefore, the hospitals in Braddock were subcontractors.

In determining that the HMO was more than an insurer, the Board pointed to the HMO’s brochure, which said the Health Plan “is a health maintenance organization (HMO)” that “contract[s] with individual physicians, medical groups, and hospitals to provide the benefits in this brochure,” which included medical services and supplies. The Board reasoned that because the contract “depended on medical providers like the [hospitals] to offer medical services and supplies necessary for [the HMO] to meet its obligations under its” federal contract, the hospitals were subcontractors and had to comply with the affirmative action laws.

What does this mean for you?

As this decision makes clear, it is extremely important to evaluate all contracts entered into by your company, and ascertain how the goods and services are being used by the other party. If that other party is a federal contractor -- whether it knows it or not -- you may be a subcontractor whether you know it or not.

If you need assistance in analyzing your contracts or exploring whether you are a federal contractor or subcontractor, please contact a member of Constangy’s Affirmative Action Practice Group or the Constangy attorney of your choice.

Don't forget! Constangy's Affirmative Action practice group presents a Quarterly Webinar series discussing recent AA topics, as well as their standard webinar programs. These webinars are presented to organizations individually for a flat rate regardless of number of attendees. To schedule one of our webinars for your organization, contact Cara Crotty or the Constangy attorney of your choice.

Constangy, Brooks & Smith, LLP has counseled employers on labor and employment law matters, exclusively, since 1946. A “Go To” Law Firm in Corporate Counsel and Fortune Magazine, it represents Fortune 500 corporations and small companies across the country. Its attorneys are consistently rated as top lawyers in their practice areas by publications such as Chambers USA, Super Lawyers, and Top One Hundred Labor Attorneys in the United States. More than 100 lawyers partner with clients to provide cost-effective legal services and sound preventive advice to enhance the employer-employee relationship. Offi ces are located in Georgia, Florida, South Carolina, North Carolina, Tennessee, Alabama, Virginia, Massachusetts, Missouri, Illinois, Wisconsin, Texas and California. For more information, visit www.constangy.com.

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