Month: December 2019

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Virginia Will Focus On Misclassification Of Workers As Independent Contractors

In August 2018, Governor Northam signed Executive Order 16, which established the Inter-Agency Taskforce on Misclassification and Payroll Fraud. The Taskforce’s purpose was to make recommendations on how to measure and combat “misclassification” of workers as independent contractors in the view of the Commonwealth. The Taskforce included representatives from a variety of state agencies, such as the Virginia Employment Commission, the Department of Professional and Occupational Regulation, the Department of Taxation, and the Office of Attorney General. The Taskforce did not include non-governmental representatives.

The Taskforce produced its report on November 22, 2019. The report reiterates the importance of potential misclassification of persons designated as independent contractors instead of employees. It found that “up to one-third of audited employers in certain industries misclassify employees,” reducing their overhead by 40% and lowering Virginia state income tax by $28 million a year. Further, the report criticizes independent contractor relationships and looked at ways to address related perceived “misconduct” through incentives and penalties.

Along with providing their own recommendations, the Taskforce looked at the laws and regulations of other states. According to the report, over 20 states have specific laws to combat worker misclassification and an additional 15 have taskforces for the same purpose. In some states, there is a rebuttable presumption that workers are employees/the employer has the burden of overcoming that presumption. In other states, the state must certify independent contractors. Based on the research of other states laws and an analysis of the current enforcement and investigation procedures in various Virginia agencies, the Taskforce offered the following 11 recommendations aimed at deterring and correcting what the Taskforce deemed worker misclassification:

  1. Formally adopt and continue applying the IRS standard for employment and assess greater penalties substantial enough to deter misclassification.
  2. Apply penalties to employers even when they received advice, consultation, or counsel on its business model, effectively eliminating a good faith defense to penalties.
  3. Create a private cause of action for workers to sue an employer for damages resulting from misclassification, such as wages, taxes, value of benefits, lost, and attorney’s fees.
  4. Provide whistleblower protection for those who report suspected misclassification or other workplace fraud.
  5. Allow the DPOR Board of Contractors to sanction licensed contractor firms for misclassification.
  6. Make employers who have misclassified workers ineligible to bid on contracts under the Virginia Public Procurement Act.
  7. Produce uniform investigative and enforcement procedures for the task force and the agencies to utilize in combating misclassification.
  8. Identify an agency to lead the efforts in the inter-agency investigation and enforcement of misclassification.
  9. Fund education for the general public, workers, and employers on worker misclassification.
  10. Apportion funding to support the inter-agency model to hire investigators and continue joint cooperation.
  11. Keep the Taskforce in place to monitor and inform on these efforts.

Although these recommendations do not have the force of law, they provide a signal for employers. In particular, employers can expect greater attention to perceived worker misclassification by Virginia enforcement and investigative agencies.  Losing at the agency level could lead to fines, legal expenditures, and litigation. Given the continuing evolution of these and related employment law matters, employers should continuously evaluate their independent workforce approaches and the appropriateness, and defensibility, of such arrangements. The labor and employment law attorneys at Vandeventer Black LLP can provide counsel along the spectrum of labor and employment law matters, including the proper classification of workers.

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Compliance With Overlapping Solicitation Requirements

The Berry Amendment Example

Hopeful government contractors must be aware of all the requirements of a solicitation to avoid being deemed non-responsive.  This is rarely a simple task; however, when multiple clauses govern the same subject, the risk of error in following such requirements increases.  This article demonstrates such an issue by explaining the interworking of the Buy American Act (BAA), 41 U.S.C. §§ 8301-8305, with the Berry Amendment, 10 U.S.C. §§ 2533a-2533b, which are both implemented in the Department of Defense (DOD) contracts through the Defense Federal Acquisition Regulation Supplement (DFARS).

Most government contracts incorporate the BAA into their requirements through 48 CFR § 52.225-1 et seq. See also 48 CFR §§ 252.225-7000-02 (DFARS BAA clauses).  The BAA provisions require that “domestic end products” that are deliverable under the contract be manufactured in the United States and be comprised of at least 50% domestic components by cost.  It should be noted that some exceptions apply, including the allowance of goods from countries with whom the US has entered an agreement under the Trade Agreement Act and the allowance of other goods that meet specific criteria.  The Berry Amendment, on the other hand, restricts the DOD’s purchases of certain non-domestic end products or components, including food, clothing, fabrics, tents, hand tools, and specialty metals.  See 48 CFR §§ 252.225-7008-09, 7012.

The Government Accountability Office (GAO) had heard two separate bid protests where the dissatisfied bidders were deemed non-responsive to a solicitation when they met the BAA requirements, but not the more stringent Berry Amendment requirements.  One of these protests dealt with a proposal to sell fish that would have been processed in the US but was deemed non-responsive since the fish would have been caught by foreign vessels. In re F.J. O’Hara & Sons, Inc., 1990 U.S. Comp. Gen. LEXIS 271.  The other bid was deemed non-responsive since 12% of the labor for producing the solicited clothes would have taken place in Haiti. Matter of Penthouse Mfg. Co., 1985 U.S. Comp. Gen. LEXIS 1241, aff’d 1985 U.S. Comp. Gen. LEXIS 811.  Both bidders asserted that the bids were responsive since the goods met the BAA’s requirements for “domestic end product.”

GAO construed the bidders’ protests to assert that the BAA’s definition of “domestic end product” superseded the Berry Amendment’s “Preference for Certain Domestic Commodities” which requires that covered goods “may not be used for procurement of an item if the item [or its components] is not grown, reprocessed, reused, or produced” domestically. 10 U.S. Code § 2533a(a).  The GAO rejected this argument in both protests finding that the BAA’s “domestic end product” definition was not relevant to a determination of whether a bid complied with the Berry Amendment clauses, as both are measured independently of one another.

The lesson here is that bidders must consider all the requirements of a solicitation and that if a bidder fails to do so, its bid may be deemed non-responsive.  While this article demonstrates one example of this issue, contractors should seek the advice of counsel to determine whether similar issues lie in solicitations for which they intend to compete and to assure that they remain compliant during contract performance.

Small Business Size Standards: Calculation Of Annual Average Receipts

Transition From A 3-Year Averaging Period To A 5-Year Averaging Period

As reported in the Federal Register, the U.S. Small Business Administration (SBA or Agency) is modifying its method for calculating average annual receipts used to prescribe size standards for small businesses. Fed. Reg. Vol. 84,  No. 234, Dec. 5, 2019. Specifically, in accordance with the Small Business Runway Extension Act of 2018, SBA is changing its regulations on the calculation of average annual receipts for all of SBA’s receipts-based size standards, and for other agencies’ proposed receipts-based size standards, from a 3-year averaging period to a 5-year averaging period. SBA is adopting a 5-year averaging period for calculating the annual receipts of businesses. SBA adopts a transition period through January 6, 2022, during which firms may choose between using a 3-year averaging period and a 5-year averaging period.

In response to comments received concerning its earlier Proposed Rule, SBA also clarifies how it believes annual receipts should be calculated in connection with the acquisition or sale of a division. Specifically, the final rule provides that the annual receipts of a concern would not be adjusted where the concern sells or acquires a segregable division during the applicable period of measurement or before the date on which it self-certified as small. This would be different from how SBA treats the sale or acquisition of a subsidiary, which is a separate legal entity and an affiliate. In the case of a subsidiary, SBA’s regulations provide that ‘‘[t]he annual receipts of a former affiliate are not included if affiliation ceased before the date used for determining size. This exclusion of annual receipts of a former affiliate applies during the entire period of measurement, rather than only for the period after which affiliation ceased.’’ 13 CFR 121.104(d)(4).

This final rule is effective January 6, 2020, and resolves the controversy regarding the impact of the Runway Extension Act on Small Business Size Standards. You should perform comparative calculations to determine the effect on your business and which method will be more advantageous to use during the two year transition period.

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