A Maryland-based construction company required to pay “prevailing wages” under a Federal government contract recently settled for $400,000 claims that it had violated the False Claims Act (“FCA”) by failing to properly supervise lower-level contractors in the payment of prevailing wages to their workers. The case serves as a reminder that government contractors who fail to ensure compliance with wage requirements – whether under the Davis-Bacon Act (“DBA”), Service Contract Act (“SCA”), or Walsh-Healy Public Contracts Act (“PCA”) – can face significant liability. It also highlights the ongoing expansion of the federal government’s battle against procurement fraud.

Many Government Contractors Are Subject to a Prevailing Wage Rate Requirement

Most government contractors who provide services; do construction, alteration or repair work on public buildings; or manufacture certain goods are subject to a prevailing wage requirement. Those requirements include geographically determined wage rates and fringe benefit rates set by the Administrator of the Wage and Hour Division of the U.S. Department of Labor (“DOL”) for various labor classifications. Where a government contract incorporates such a requirement, government contractors, including their subcontractors, are required to pay wages at least as high as the prevailing wage rates.

There Are Three Prevailing Wage Rate Requirements

There are three prevailing wage rate statutory regimes – SCA, DBA and PCA – which apply to different types of contracts. Contracts in excess of $2,500, the principal purpose of which is to provide services in the United States through the use of service employees, are governed by the SCA. In the absence of a collective bargaining agreement, the SCA requires that wage determinations be incorporated into contracts for services. If it is discovered that the most current, applicable wage determination was not included in the contract, the contractor must still ensure that the appropriate wage determination is incorporated within 30 days, pursuant to 29 CFR 4.5(c)(2), 29 CFR 4.101(b), and FAR 22.1015. The SCA wage determination applies to not only the prime contractor but also to subcontractors performing services under the prime contract.

Contracts in excess of $2,000 for the purpose of construction, alteration or repair of public buildings or public works are governed by the DBA. The DBA likewise requires federal contractors to include in the contract (and any bid) the applicable, local prevailing wage determination as the minimum wage to be paid to mechanics or laborers who perform work under the contract. It also requires that contractors and subcontractors provide the federal agency weekly certified payroll records. The DBA applies to contractors and subcontractors performing on not only federally funded contracts but also federally assisted contracts, such as construction projects funded by federal grants or loans.

Contracts in excess of $10,000 for the manufacturing or furnishing of goods, supplies, articles or equipment are governed by the PCA. The PCA is slightly different than the SCA or DBA in that it does not require the federal contract to directly incorporate a local wage determination. However, the PCA nonetheless requires federal contractors to pay employees who produce, assemble, handle or ship goods under the contract a minimum wage as set by the Secretary of Labor in a local wage determination.

Failure to Comply with Prevailing Wage Rate Requirements Can Have Devastating Consequences

As evidenced by the recent FCA settlement, failure to comply with an applicable wage determination can expose a contractor to liability under the FCA. This is especially important for contractors to keep in mind as the FCA authorizes treble damages as well as civil penalties and permits whistleblowers, or “relators,” to file suit in the name of the government. (The FCA suit referenced above that recently was settled for $400,000 was initiated by a relator.) The federal government has become more aggressive in its use of the FCA in recent years, recovering more than $5 billion in fiscal year 2014 alone based on claims arising under the FCA. To see more about how government contractors fared, click here. Given the federal government’s success in recovering funds under the FCA, states across the country are increasingly bringing actions under their own false claims acts, many of which mirror the federal FCA. To read more about the recent expansion of state False Claims Act, click here.

Federal contractors may face further and longer-lasting penalties and sanctions beyond possible FCA liability. First, where a non-compliance is identified, contractors are required to compensate employees for underpayments of both salary and fringe benefits. The SCA, DBA and PCA all provide for contract cancellation, withholding of contract payments, and possible exclusion by DOL from the government marketplace for up to three years, among other sanctions. (There currently are more than 400 individuals and entities “debarred” by DOL, meaning they are not eligible for government contracts and grants, federal loans, and there are restrictions on their ability to subcontract with prime government contractors, among other implications.) And, in some circumstances, corporate officials can be held personally liable for wage rate violations.

Further, last July, President Obama signed Executive Order 13,673 which requires, among other obligations, that federal contractors report adverse administrative, arbitral or civil judgments of decisions for labor violations as part of the government contract bidding process, and that agencies exclude contractors who do not “consistently adhere” to labor laws. While due process concerns and administrative challenges call into question the feasibility of full implementation of these requirements, which will apply to federal contracts valued at more than $500,000 and are expected to take effect in 2016, the Executive Order demonstrates this administration’s focus on compliance with labor requirements, including prevailing wage rates.

Given the panoply of potential negative consequences for violations of prevailing wage rate requirements, consequences that can include FCA liability, debarment, termination of government contracts, among other implications, prudent government contractors should ensure that they are in compliance with such requirements. While determination of wage rates is historically viewed as a human resources function, there is also a role for other departments to play, such as legal and compliance, in order to mitigate the risk posed by non-compliance with these requirements. And, given the government’s recent focus on labor and employment issues, compliance should be reviewed at least annually.