Hiring incumbent contractor employees under Executive Order 13495 has become a hot topic when bidding on government contracts.
Although the rules allow you to hire existing incumbent employees, there are limitations. If not done correctly, small businesses can still face dangerous problems with affiliation allegations.
For example, hiring the wrong amount of management personnel or even non-management personnel can create problems especially when using the incumbent as a teaming partner or subcontractor.
On August 26, 2011, the U.S. Department of Labor implemented Executive Order 13495 entitled “Nondisplacement of Qualified Workers Under Service Contracts”. This involves service contracts.
Government contracting agencies pay special attention to bidders that propose to use government incumbent employees in their proposals. Understanding the SBA’s affiliation and Ostensible Subcontractor Rule, and properly assessing your technical approach will reduce your chances of forfeiting your award when your competition files a size protest.
Although the SBA’s new rules reduce the impact of affiliation, the rule is still alive and well. About 65% of small business size protests are based on affiliation when hiring incumbent personnel.
The Non-displacement rule can be confusing when also considering the Ostensible Subcontractor Rule. A common mistake made by contractors is to hire incumbent personnel for management and supervisory positions under the new contract. This can lead the courts to think that you are relying too much on the incumbent contractor.
When Does Contract Incumbent Mean? How Could Hiring Predecessor Contractor Employees Create Problems?
For purposes of government procurement, a contract incumbent refers to the actual contractor that is performing the contract before bids are accepted for the new contract. There can be legal disputes when a government incumbent happens to be part of a joint venture in the newly-awarded contract. Companies bidding on government contracts can violate the Rule if the prime is relying upon the qualifications of the incumbent subcontractor to perform the primary and vital requirements of the contract.
This analysis also can flow over to the awardee prime contractor as simply having no past performance and relying solely on the incumbent’s past performance to get the contract. In the event of a size protest, the SBA’s Area Office will base its ostensible contractor determination solely on the relationship between the parties at that time of submissions.
- Evidence submitted with the proposal is fair game for legal review.
- Any assertions not in accord with the proposal and teaming agreements are, therefore, irrelevant.
- Hiring incumbent employees that are non-managerial employees does not generally create a problem.
The General Rule for Offering Jobs to Incumbent Staff Under Executive Order 13495
How Does the Right of First Refusal Rule Apply? As a government contractor, if you are the successful bidder and take over from the incumbent company in a service contract, you must offer employment on a right-of-first-refusal basis to qualified employees of the government incumbent contractor who otherwise would lose their jobs under Executive Order 13495. This rule applies to the extent that there are available positions.
- Managerial and supervisory hires are fertile ground for legal attack under the rule.
- If your technical proposal shows that you are hiring incumbent management workers, you could face a challenge under the Ostensible Subcontractor Rule.
- The rule exempts contracts and subcontracts below the simplified acquisition threshold (currently $150,000).
Avoid Hiring Incumbent Employees at the Management Level Under Executive Order 13495
Hiring incumbent employees or management staff can be dangerous under Executive Order 13495. Although your proposal or teaming agreement show that you, the prime will perform the contract’s primary and vital requirements, you can still be caught in a small business size protest if the facts show that you unduly reliant on incumbent employees (hiring large amounts of its personnel.)
The SBA Office of Hearings and Appeal (SBAOHA) ruled on this very same matter. See, SIZE APPEAL OF: Wichita Tribal Enterprises, LLC. In that case, the proposed prime contractor proposed the incumbent as the sub. The subcontractor could not have competed for the procurement on its own. The small business prime also intended to hire the large majority of its employees from the incumbent subcontractor.
- Hiring contractor employees was the biggest problem in this size protest because the prime contractor was a relatively new firm with modest revenues and little corporate experience.
Ostensible Subcontractor Rule Still Anticipates Hiring Incumbent Employees
It is normal and expected in Government services contracts for successor companies to hire an incumbent’s employees. However, hiring non-supervisory employees en mass still creates a problem. The recently promulgated Executive Order 13.495 specifically encourages contractors to offer a right of first refusal of employment to qualified incumbent subcontractor non-managerial employees. Exec. Order No. 13,495, 74 Fed. Reg. 6103 (Feb. 4, 2009).
- Hiring a number of non-management incumbent staff is allowed.
- Do not overdo it when it comes to hiring contractor employees.
- Avoid hiring managerial employees.
Do Tribal 8(a) Contractors Become Immune to the Ostensible Subcontractor Rule?
Although tribal 8(a) companies have certain unique protections from affiliation under 13 CFR 124.109(c)(2)(iii).” Under the Ostensible Subcontractor Rule, the absolute exemption from affiliation between tribally-owned sister companies for 8(a) contracts is “different than treating the sister companies as though they are one company.
The SBA may find that although tribally-owned companies may use the past performance of sister companies, if the sister company is NOT proposed as a subcontractor under the instant government contract, then the proposed tribally-owned prime may be left in the dark to defend its own performance under the upcoming contract.
- Despite the unique rules of tribal 8(a) companies, this deadly rule still applies
- Small businesses must pay special attention to hiring incumbent employees
- Seek help when responding to an upcoming proposal
For immediate help when planning to hire incumbent employees under Executive Order 13495 or drafting teaming agreements, call our Government Contract small business attorneys at 1-866-601-5518. FREE INITIAL CONSULTATION.