Piliero Mazza &
Pargament, PLLC

Vol. V, Issue 2
February 2000

An Update for Federal Contractors and Commercial Businesses

A R T I C L E S


EMPLOYMENT
Are Your Managers Entitled to Overtime Pay?



GOVERNMENT CONTRACTS
FAR Changes Address Contract Bundling and Multiple Award Contracting Concerns



SMALL BUSINESS
Recent SBA Decisions Heighten "Affiliation" Concerns






H O M E


P U B L I C A T I O N S



EMPLOYMENT

Are Your Managers Entitled to Overtime Pay?

The Fair Labor Standards Act ("FLSA") provides that employees who work more than forty (40) hours per week must receive compensation at a rate not less than one and one-half times their regular hourly rate of pay. In certain circumstances, executive employees who perform managerial duties are exempt from the FLSA overtime compensation requirements. However, merely because an employee has a "managerial" or "supervisory" job title, or performs some managerial or supervisory duties, does not necessarily mean that he or she is exempt. Mis-classifying a managerial employee as exempt from overtime compensation may result in an assessment of double damages against your company, liability for your employee’s attorney’s fees, and possible disqualification from future federal contracts. Therefore, it is critical that companies consider each employee’s specific duties before determining whether he or she is entitled to overtime.

Although there are two tests for determining whether an executive employee satisfies the managerial requirements for exemption from the FLSA overtime compensation requirements, the "short" test is applicable to supervisors who are paid on a salary basis of $250 per week or more. Since the vast majority of companies pay their employees more than $250 per week, the short test generally applies.

Under the short test, a managerial employee is exempt from overtime compensation if, (1) his or her primary duty is the management of the enterprise in which he or she is employed, or of a customarily recognized department or subdivision thereof, and (2) he or she customarily and regularly directs the work of two or more other employees.

With regard to the first prong of this two-part test, the term "primary duty" generally means that the major part, or over fifty percent (50%), of an employee’s time is spent performing managerial duties. However, the amount of time spent performing managerial duties is not always the dispositive factor in determining whether an employee’s "primary duty" is managerial. Other factors must also be considered. Such factors include the relative importance of the managerial duties as compared with his or her other types of duties, the frequency with which the employee exercises discretionary powers and the difference between the manager’s salary and the wages paid other employees for any nonexempt work performed by the manager.

Although it is not always clear what constitutes managerial duties, the Department of Labor views the following duties as managerial in nature: (1) Interviewing, selecting, and training employees; (2) Setting and adjusting employees’ rates of pay and hours of work; (3) Directing employees’ work; (4) Maintaining production or sales records for use in supervision or control; (5) Evaluating or appraising the productivity and efficiency of employees for the purpose of recommending promotions or other changes in employees’ status; (6) Hiring, firing or promoting employees; (7) Handling employees’ complaints and grievances and disciplining employees when necessary; (8) Apportioning the work among employees; and, (9) Determining techniques to be used and the type of materials, supplies, machinery, or tools to be used or merchandise to be bought, stocked, and sold.

Thus, if an employee’s primary duties are managerial, then the first prong of the two-part exemption test is met. It should be noted that an employee need not exercise all of the management functions listed above to be exempt from overtime compensation requirements. However, as the number of managerial duties declines, an employee will eventually cease to be considered an exempt employee.

One particularly important factor in determining whether a managerial employee is exempt is the authority to hire or fire other employees. Even if the managerial employee does not have direct authority to hire or fire employees, if his or her suggestions and recommendations as to hiring or firing, or to advancement, promotion or any other change in status, are given particular weight, then the employee will likely be considered exempt. Similarly, if the employee does not have the authority to hire or fire, or if his or her suggestions are not considered in hiring, firing advancement, promotion or other personnel decisions, then such employee will likely be considered non-exempt and entitled to overtime compensation.

To be exempt from overtime compensation an employee must also satisfy the second prong of the two part test, i.e., customarily and regularly directing the work of two or more employees. In order to meet this requirement, the employee must supervise "at least two full-time employees or the equivalent of two full-time employees." For example, if the employee supervises one full-time and two part-time employees, one of whom works mornings and one afternoons, then the requirement regarding supervising two full-time employees is satisfied. Additionally, the supervised employees must work in the same department as the managerial employee.

In summary, given the significant damages that can result from failing to comply with the overtime requirements of the FLSA, companies should not rely solely on an employee’s position title or job description in determining whether overtime compensation is due. Companies must consider the specific duties of each employee, apply the exemption tests set forth in the FLSA, and only then decide whether an employee is entitled to overtime compensation.








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GOVERNMENT CONTRACTS

FAR Changes Address Contract Bundling and Multiple Award Contracting Concerns

Proposed and interim regulations amending the Federal Acquisition Regulation ("FAR") have recently been published to address concerns pertaining to contract bundling and multiple award contracts ("MACs"). These issues have been the subject of controversy since the Federal Acquisition Streamlining Act of 1994 ("FASA") went into effect. Given that bundling and MACs are so prevalent, contractors should be aware of the new regulations.

FASA authorized the use of MACs. Since the law was passed, contractors have complained that being awarded a MAC often does not generate business because the government is not required to issue any task orders under these indefinite quantity contracts. The proposed rule seeks to address these complaints by establishing for the first time that indefinite quantity contracts must require that the government order, and the contractor furnish, at least a stated minimum quantity of supplies or services. To ensure that the contract is binding, the proposed rule requires that the minimum quantity be more than a nominal amount, but not in excess of the amount that the government is fairly certain to order.

The proposed rule also attempts to address criticism that there has been a lack of competition in awarding task orders under MACs. To increase competition, the proposed rule would require that the solicitation and contract state the procedures and selection criteria the government will use to provide awardees with an opportunity to be considered for each task order award valued at more than $2,500. Among other things, the selection criteria must state that price or cost will not be a factor in task order competitions. Although the contracting officer is given broad discretion in developing appropriate procedures to ensure competition, the rule would prohibit the contracting officer from using any method that would not result in fair consideration being given to all awardees.

The rule, however, would create several exceptions to the competition requirements. If there is an urgent need for the supplies or services of a particular contractor, or only one awardee is capable of providing the supplies or services, a direct award may be made. In addition, a sole-source award is permissible if it is a logical follow-on order to a requirement already issued under a MAC. A sole-source award is also appropriate if it is necessary to place an order to satisfy a minimum guarantee to a multiple award contractor.

The recently promulgated regulations also establish an interim rule regarding contract bundling. By way of background, FASA hastened the trend towards the consolidation of contract requirements. This led many small businesses and trade associations to complain about contract bundling. To address their concerns, Congress amended the Small Business Act to define contract bundling and reinforce the rights of the Small Business Administration ("SBA") to appeal unnecessary bundling actions. The interim rule implements this law. The rule establishes agency procedures for processing bundling requirements and ensuring maximum small business participation in bundled acquisitions. Under the interim rule, before a requirement is bundled, market research must be performed and the procuring agency must confer with the local SBA's procurement center representative about the proposed bundling action. If an incumbent small business concern will be affected by the bundling action, notice must be given to the company at least 30 days before the solicitation is released.

The interim rule also requires that agencies justify acquisition strategies that would result in contract bundling. This must be done by showing that there are substantial and quantifiable benefits for the bundling action. One factor in determining whether there are "substantial benefits" is whether there are cost savings of 10% on a contract valued at $75 million or less, or savings of 5% on a contract valued at more than $75 million.

To promote small business participation in bundled contracts, the interim rule requires that agencies evaluate an offeror’s proposed use of small businesses as subcontractors. Additionally, the rule requires that an offeror’s past performance in meeting small business subcontracting goals be a source selection factor in negotiated procurements for bundled requirements.

Together with the foregoing regulatory changes, a final rule was issued to codify a court decision relating to award fee determinations. Under the FAR, an award fee determination is a unilateral, judgmental determination which is made by the contracting officer and is not subject to the contract disputes clause. Relying on this provision of the FAR, procuring agencies have argued in the past that contractors may not appeal award fee determinations to the Board of Contract Appeals.

A recent federal court decision, however, held that the government may not, through the use of contract clauses, deprive the Board of Contract Appeals of jurisdiction over claims under the Contracts Dispute Act. The final rule, which goes into effect on February 25, 2000, codifies the court’s decision by deleting the FAR provision that exempts award fee determinations from the disputes clause. Thus, if a procuring agency’s award fee determination is arbitrary or capricious, the contractor may challenge the determination by appealing the decision to the Board of Contract Appeals or the Court of Claims.










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SMALL BUSINESS

Recent SBA Decisions Heighten "Affiliation" Concerns

Over the course of a five-year small business set-aside contract, it is not uncommon for small business contractors to grow to the point that they are no longer "small." Those incumbent contractors, therefore, are ineligible to compete as prime contractors for the follow-on small business set-aside contracts. Nonetheless, because incumbents often enjoy positive working relationships with the customer and have valuable experience, they commonly team with small businesses in competition for the compete for the follow-on contracts. In fact, it is not uncommon for agency personnel to encourage incumbents who have outgrown their size standards to team with small businesses in pursuit of follow-on contracts.

It is important, however, that incumbent contractors that are no longer "small" proceed with caution in pursuing follow-on small business requirements. In these teaming arrangements, the parties often agree to allow the small business to hire many or all of the incumbent’s staff, rather than bring in workers who are likely to be unfamiliar with the work and unknown to the customer. Although this practice may be common (and, in fact, encouraged by procuring agencies), recent SBA decisions emphasize that such wholesale hiring of incumbent staff in this circumstance is a strong indicia of "affiliation."

By way of background, SBA regulations state that "affiliation" can arise in a variety of circumstances. One such circumstance that is pertinent here is the "ostensible subcontractor rule." Under this rule, if a small business is unusually reliant on a proposed subcontractor for performance of the requirement, or the proposed subcontractor will perform the primary or vital contract functions, the SBA will find the two companies to be a joint venture, and therefore, "affiliated." The consequences of a finding of "affiliation" in this circumstance can be disastrous. If the combined size of the two companies exceeds the size standard applicable to that requirement, the team will be declared ineligible and disqualified.

The ostensible subcontractor rule is often an unexpected pitfall because most contractors do not understand how the rule is applied. Indeed, the case law developed by the SBA’s Office of Hearings and Appeals ("OHA") provides some, but not a great deal of guidance to teaming partners. In determining whether a prime contractor is affiliated with its proposed subcontractor under the rule, the SBA will review the "totality of the circumstances" surrounding the relationship. In the past, OHA has applied the so-called "seven factors" test, wherein the following issues will be examined: (1) which party will manage the contract; (2) which party possesses the requisite background and experience to carry out the contract; (3) which party will perform the more complex and costly contract functions; (4) whether discrete tasks will be performed by each party or personnel will be commingled; (5) what amount of work will be performed by each party; (6) which party "chased" the contract; and (7) what degree of collaboration was there on the bid or proposal. While some or all of these factors are typically considered in OHA decisions, it is sometimes difficult to predict the outcome of a size decision where some factors are present, and others are not.

Recent cases, however, emphasize that there is an increased risk of "affiliation" where a small business teams with the incumbent contractor and hires most or all of the incumbent’s employees. In Kira Incorporated, SBA No. 4360 (1999), OHA held that "[w]here the ostensible subcontractor is the incumbent and the challenged firm will hire a substantial number of the incumbent’s employees, this is a strong indicia of affiliation." When this occurs, it appears that the SBA will consider the transferred employees to be the incumbent’s employees for purposes of determining whether the small business is unusually reliant on the incumbent, which is now being proposed as the subcontractor. See Infotech Enterprises, Inc. SBA No. 4346 (1999).

Therefore, in forming teaming relationships and structuring the proposal, it is very important for the parties to recognize that the small business, itself, must possess the requisite level of technical and managerial expertise to perform the work. The fact that many incumbent employees may "switch hats" and become employed by the small business does not by itself mean that the small business has the requisite technical expertise. While the hiring of certain incumbent employees is to be expected, and perhaps unavoidable, small businesses should attempt to propose their own employees for as many key and managerial positions as possible. However, the desire to avoid "affiliation" must be balanced against the agency’s interest in maintaining the institutional knowledge possessed by incumbent staff. Accordingly, it may be possible to include appropriate language in the proposal to indicate that certain incumbent employees will be offered the right of first refusal for positions on the contract. Obviously, the appropriate language will vary depending on the solicitation’s requirements and the particular factual circumstances.

For these reasons, small businesses contemplating teaming relationships with incumbent contractors should carefully review the staffing issue at the time that the bid/no-bid decision is made. If teaming partners proceed on the assumption that the incumbent’s entire staff will simply be transferred to the small business, they could be in for an unwelcome surprise if an allegation of "affiliation" under the ostensible subcontractor rule is made.

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