Piliero Mazza &
Pargament, PLLC

Vol. V, Issue 6
June 2000

An Update for Federal Contractors and Commercial Businesses


Federal Appeals Court Issues Decision on ADA's "Direct Threat" Defense

Compensation Costs Allowed by Government

OFCCP Affirmative Action Regulations Would Ease Burdens on Contractors

SBA to Replace SIC Code System




Federal Appeals Court Issues Decision on ADA's "Direct Threat" Defense

The Ninth Circuit Court of Appeals ruled in May that the Americans with Disabilities Act ("ADA") prohibits employers from refusing to hire an applicant on the grounds that the applicant has a medical condition that may threaten his or her own safety or health. Echazabal v. Chevron USA, Inc., No. 98-55551, 2000 WL 669137 (9th Cir. May 23, 2000).

In this case, an applicant who had a liver condition was performing contract work on the premises of the prospective employer. His application for employment was rejected, and the applicant was thereafter reassigned by the contractor, because the employer feared that the exposure to the solvents and chemicals on the premises might exacerbate the applicant's liver condition. The employer defended its decision under the ADA by arguing that hiring the applicant would have posed a "direct threat" to the applicant's own safety and health.

The Ninth Circuit rejected the employer's argument, stating that the plain language of the ADA allows employers to use the "direct threat" defense only when hiring an applicant would pose "a direct threat to the health or safety of other
individuals in the workplace." The Court noted that while one other circuit court has found that the "direct threat" defense includes threats to the applicant himself, other courts that have addressed the issue have concluded that the defense only applies if there is a threat to others. Furthermore, the Court noted that most references to the "direct threat" provision in the congressional committee reports and floor debates on the ADA indicate that Congress intended that the provision not apply to threats to the applicant himself. The Court noted, for example, that the House report on the ADA stated that "[p]aternalism is perhaps the most pervasive form of discrimination for people with disabilities." Furthermore, in the "Findings" section of the ADA itself, the Congress concluded that "overprotective rules and policies" were a form of discrimination that the ADA was meant to address.

The employer cited a regulation issued by the Equal Employment Opportunity Commission ("EEOC") that interpreted the "direct threat" defense as applying to threats to the applicant himself. However, the EEOC declined an offer to defend its interpretation of the "direct threat" provision to the Court, and the Court rejected the EEOC's interpretation as contrary to Congress' intent. The Court also rejected the argument by the employer that the applicant's liver condition rendered him unqualified for the job. The Court stated that "[j]ob functions are those acts or actions that constitute a part of the performance of the job." Therefore, the risk to the applicant's health was irrelevant to his qualification because the applicant was clearly capable of performing the work.

The Court also rejected the employer's argument that forcing it to hire an applicant whose employment would constitute a risk to his own safety and health would increase the employer's exposure to tort liability. The Court noted that the Supreme Court has indicated, without expressly ruling, that state tort law is preempted by federal antidiscrimination laws, such that employers are likely not subject to tort liability that might result from complying with the federal laws. The Court also rejected the employer's argument that hiring a disabled applicant would cost the company more than hiring an applicant without disabilities. The Court stated that "[t]he extra cost of employing disabled individuals does not in itself provide an affirmative defense to a discriminatory refusal to hire those individuals."

It should be noted that the Echazabal decision is only binding in the Ninth Circuit, which encompasses several Western states. One other circuit has ruled (without explanation) that the "direct threat" defense does include threats to the applicant himself. Nevertheless, the Ninth Circuit's ruling may be influential on other courts that face this issue in the future. Therefore, employers should be cautious when making employment decisions based on a desire to protect the health and safety of the applicant due to that applicant's medical condition. Such considerations could be considered by a court to be impermissibly "paternalistic."



Compensation Costs Allowed by Government

Q. Are there limits on the amount of compensation costs that will be deemed allowable by the Government?

A. Yes, pursuant to 41 U.S.C. § 435, the administrator of the Office of Federal Procurement Policy is required to establish on an annual basis a "benchmark compensation" amount that limits the allowability of compensation costs under government contracts. The "benchmark compensation" amount does not, however, limit the amount of compensation that an executive may otherwise receive.

Q. How much is the current "benchmark compensation" amount?

A. For fiscal year 2000, the benchmark compensation amount is $353,010.

Q. How is the "benchmark compensation" amount established?

A. The benchmark compensation amount applicable to a fiscal year is the median amount of the compensation provided for all senior executives of all benchmark corporations for the most recent year for which data is available at the time of the determination. "Benchmark corporations" are publicly owned U.S. corporations with annual sales in excess of $50,000,000.

Q. What constitutes compensation?

A. "Compensation" for a fiscal year, means the total amount of wages, salary, bonuses and deferred compensation for the fiscal year, whether paid, earned, or otherwise accruing, as recorded in an employer's cost accounting records for the fiscal year.



OFCCP Affirmative Action Regulations Would Ease Burdens on Contractors

As discussed in the May 2000 issue of the Legal Advisor, the Department of Labor's Office of Federal Contract Compliance Programs ("OFCCP") has proposed significant changes in the regulations governing affirmative action plans for federal government contractors. Comments on the proposed regulations are currently due by July 3, 2000. However, groups representing employers have requested that this deadline be extended. It remains unclear whether these requests for additional time will be granted.

If enacted, the proposed changes would significantly reduce the burden of preparing written affirmative action plans. However, the proposal would also codify the OFCCP's "Equal Opportunity Survey" (the "Survey"), as well as the OFCCP's so-called "Glass Ceiling" compliance evaluation process.

The following is a discussion of the most significant changes contained in the proposed regulations.

First, the proposed regulations would greatly simplify the "Workforce Analysis" section of the written affirmative action plan. Currently, contractors are required to prepare a multi-page analysis of their workforce. Under the new proposal, this section would be replaced with a simple one page organizational chart.

In addition, the new regulations would simplify the much criticized "Availability Analysis." Currently, contractors are required to use a complicated and impractical eight-factor test to determine the availability of female and minority job candidates. The new proposal would limit the analysis to two factors: the percentage of minorities and women with requisite skills in a reasonable recruitment area; and the percentage of minorities and women among those promotable, transferable and trainable within the contractor's own workforce.

The proposed regulations would also eliminate entirely six required sections of the written affirmative action plan. The sections to be eliminated are: (1) reaffirmation of EEO policy; (2) internal and external dissemination of policy; (3) goals and objectives by organizational units and job groups; (4) support of community action programs; (5) consideration of minorities and women not currently in the workforce; and (6) compliance with Sex Discrimination Guidelines. While most of these sections are standard "boilerplate," their elimination will result in some time savings for contractors.

In the final simplification, the proposed regulations would permit contractors with fewer than 150 employees to dispense with the standard "Job Group" analysis. These smaller contractors would be permitted to use standard "EEO-1" job groups instead of creating job groups tailored to their workforces.

However, as noted above, the regulations would codify the requirement that contractors respond to the Equal Opportunity Survey, which the OFCCP began sending to contractors earlier this year. The OFCCP intends to send the survey to fifty percent of all government contractors every year. The purpose of the survey is to identify contractors with potential problems; these contractors will be selected for a compliance evaluation.

The Survey requires submission of data on employee compensation, race and gender, and personnel actions. Data is also required for applicants for employment or promotion. The OFCCP defines "applicants" to include unsolicited applicants received via the Internet and other channels. Contractors have only thirty days to respond. If a contractor fails to complete the survey, the OFCCP may pursue enforcement action. The Survey, unlike EEO-1 reports and affirmative action plans, covers only full-time, and not part-time employees.

As also noted above, the proposed regulations would codify the OFCCP's "Glass Ceiling" reviews and expand their scope. These reviews are conducted to determine whether women and minorities are facing discrimination in pay and artificial barriers to advancement into mid-level and senior management. The revised regulations would expand the scope of these reviews beyond corporate headquarters, when it appears that compliance problems may exist at other locations.



SBA to Replace SIC Code System

On May 15, 2000, the Small Business Administration (SBA) published a final rule in the Federal Register announcing its change from the Standard Industrial Classification ("SIC") code system to the North American Industry Classification System ("NAICS"). The change, which becomes effective October 1, 2000, will be reflected in revisions to the SBA's small business size regulations, 13 C.F.R. §§121.101 et seq. Under the amended regulations, the SBA will utilize NAICS industry descriptions, rather than the SIC system, to establish small business size standards.

The SBA's decision to adopt the NAICS industry descriptions to establish small business size standards is based on its belief that the NAICS is an improvement over the SIC code system in identifying and describing industries in the current United States economy. Additionally, the SBA notes that the NAICS has already replaced the SIC code system for use by federal agencies in collecting economic data

According to the SBA, the adoption of the NAICS will cause little or no loss of small business eligibility to businesses currently eligible to participate in federal small business programs. By adopting the NAICS, the SBA notes that it is not reevaluating or changing existing small business size standards. Rather, the rule is limited to replacing the existing table of small business size standards with a new one based on more current and accurate industry definitions.

There are approximately 1,175 industries identified under the NAICS. The final rule identifies the complex methodology used by the SBA in converting the industry classifications under the SIC code system to the industry classifications under NAICS. According to the SBA, small business size standards for virtually all economic activities within the SIC codes will remain the same in the NAICS.

The SBA cites numerous reasons for its change to NAICS. Foremost among these reasons is the belief that the SIC code system has not kept up with the current economy. SBA views the NAICS descriptions as more appropriate because, among other things, they recognize the growth and expansion of the services and technology industries.

Second, the SBA believes adoption of NAICS is appropriate because the Census Bureau will no longer organize and make data available for SIC industries after the 1997 Economic Census. According to the SBA, it uses census data to establish, review, change and/or otherwise modify its small business size standards.

Additionally, the SBA believes that all other federal agencies will be switching to NAICS for program and administrative purposes. Therefore, the SBA views the change to the NAICS as necessary to ensure a single industry classification system within the federal government which will avoid confusion and inconsistency. The SBA also believes that the change to NAICS will provide benefits in collecting and analyzing statistical data on small business participation in the federal procurement process by providing more accurate data, particularly in the technological and services industry.

Additional information regarding the NAICS may be viewed at the U.S. Census Bureau website, www.census.gov.

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