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What the $42 Billion Multi-Employer Pension Fund Deficit Means for the Construction Industry

Posted in Withdrawal Liability

On November 17, 2014, the federal Pension Benefit Guaranty Corp released a dire report for multi-employer pension funds – they are chronically underfunded to the tune of $42.2 billion.  As ENR reports, nearly 4 million workers in the construction industry are covered by multi-employer plans and the construction industry accounted for 55% of all multi-employer plans.

These facts will have two major consequences for employers participating in multi-employer pension plans. First, union trustees will become increasingly aggressive toward delinquent employers. I have already seen an uptick in collection claims brought against union construction firms, including against firms that are solvent, that have a strong payment history into the funds, and are otherwise dedicated to employing union labor.

Second, ERISA withdrawal liability will continue to be a big issue for employers that decide to rescind their collective bargaining agreement, merge with a non-signatory firm, or simply go out of business.

Under ERISA. an employer who completely withdraws from a multi-employer plan may be liable to the plan for vested, yet unfunded, benefits for its employees. For construction industry employers, a complete withdrawal occurs only if an employer “ceases to have an obligation to contribute under the plan,” and the employer “(i) continues to perform work in the jurisdiction of the collective bargaining agreement … or (ii) resumes such work within 5 years … and does not renew the obligation at the time of the resumption.”

Withdrawal liability can be significant especially for contractors that have been in business for many years and, thus, share a portion of vested benefits.  Withdrawal liability can follow through to a successor corporation or personally to the individual shareholders and officers of the withdrawing corporation.

The take away:  stay current on your benefit contributions and assess potential withdrawal liability before ending operations or merging with a new firm.

DOT Issues Final DBE Rule Changes

Posted in Construction Law, Disadvantage Business Enterprises (DBE)

Over two years ago, the Department of Transportation published notice that it intended to make changes to the federal regulations governing the DOT’s Disadvantaged Business Enterprise program.  After an extended comment period, today, October 2, 2014, the DOT issued the final DBE rule changes. These changes become effective November 3, 2014.  The changes impact five areas of the DBE program:  certification standards and procedures, goal setting, good-faith efforts and documentation, counting, and contract administration. Here is a look at some of the highlights of the changes as they impact prime contractors.

1.  Good Faith Effort Documentation.

The DOT has made changes to the DBE rules related to the submission of information regarding DBE participation.  The good news is that the changes do not go as far as the DOT intended to go when it issued its proposed rule.  Under the proposed rule change, the DOT would have required prime contractors to submit supporting documentation concerning DBE participation that was being used towards meeting or exceeding the DBE goal at the time of bidding and as a matter of bid responsiveness.  Prime contractors, major trade subcontractors, and trade organizations such as the American Road & Transportation Builders Association (ARTBA) and the AGC all loudly objected to the proposal.  Their objections appear to be at least somewhat successful.

Under the new rule, an apparent low bidder is mandated to submit DBE information to the transportation agency within seven days after bid opening.  Failure to submit this information within the seven day time period may result in the bid being rejected.  (Readers of this blog will note that the Commonwealth of Pennsylvania recently issued a similar rule on 100% state funded projects.)   However, at the description of the transportation agency, this information may be required at the time of bidding.  Bottom line: review your bid specifications carefully.

2.  Good Faith Efforts When Replacing a Terminated DBE

It has long been the rule that when terminating a DBE subcontractor, the prime contract must (a) get the permission of the transportation agency, and (b) engage in good faith efforts to subcontract the same percentage of work of the terminated DBE to other DBE firms.  The rules now extend the documentation efforts required after bid opening to replacement of terminated DBE firms.

Under the new rules, within seven days of terminating a DBE firm, the terminating contractor must submit documentation to the transportation agency of its good-faith efforts to replace the terminated DBE with a DBE.  Because the time period begins to run once approval of termination is given by the agency, contractors need to begin documenting replacement efforts well in advance of the request for termination.

3.  DBE Regular Dealers

The counting of DBE material suppliers as part of a prime contractor’s DBE goal has been an area of consternation for prime contractors ever since the DOT issued guidance in 2011 on DBE acting as a regular dealer v. brokers.  Under that guidance, a supplier qualified as a “regular dealer” of items on one project would not necessarily qualify as a regular dealer on a different project. In the guidance, the DOT provided the following example: “a firm that acts as a regular dealer on Contract #1 may act simply as a “transaction expediter” or “broker” on Contract #2. It would receive DBE credit for 60 percent of the value of the goods supplied on Contract #1 while only receiving DBE credit for its fee or commission on Contract #2.”  In other words, the DOT required prime contractors to address the regular dealer issue on a contract by contract basis.

Under the new rules, that guidance is now codified.  The significance of this is an issue of legal precedent.  Courts give greater deference to codified rules than they do agency guidance.

4.  DBE Trucking.

The counting of DBE trucking services has always received special treatment under the rules. Under the old rules, a DBE trucking firm could lease trucks from a non-DBE firm and receive credit for the value of the services leased from the non-DBE firm in an amount equal to the value of the services the DBE is self performing.  The example the old regulations gave was as follows:

“DBE Firm X uses two of its own trucks on a contract. It leases two trucks from DBE Firm Y and six trucks from non–DBE Firm Z. DBE credit would be awarded for the total value of transportation services provided by Firm X and Firm Y, and may also be awarded for the total value of transportation services provided by four of the six trucks provided by Firm Z. In all, full credit would be allowed for the participation of eight trucks. With respect to the other two trucks provided by Firm Z, DBE credit could be awarded only for the fees or commissions pertaining to those trucks Firm X receives as a result of the lease with Firm Z.”

Under the new rules, in addition to the above scenario, if the trucks are leased from a non-DBE firm but operated by employees of the DBE firm then full value for the leased transportation services may be counted to towards the goal without regard to the ration scenario.

5.  DBE Rules Administration

Many state agencies, including PennDOT, include language in a prime contractors contract that require it to administer its contract and subcontracts according to the DBE rules and that makes a failure to do so a material breach of contract.  The new rules require that all agencies adopt similar language in their prime contracts.

Prime contractors now have even more incentive to know and understand the DOT’s DBE rules.

Regional Manager Indicted in DBE Fraud Case

Posted in Disadvantage Business Enterprises (DBE)

In previous posts, I have discussed how failing to abide by the Department of Transportation’s DBE regulations can lead to the criminal indictment of construction company executives. Now, a case out of the Southern District of New York – a hotbed of DBE fraud prosecutions – should have all employees of a firms that fail to understand the ramifications of failing to follow the DOT’s DBE rules worried.

Last week, the Department of Justice announced the indictment of a regional manager of a general contractor for wire fraud involving the DBE program.  What is unique about this case – and why you should take notice – is that the defendant was not an owner, partner, or executive officer of the general contractor, but rather a regional manager.  Previous indictments of individuals almost always involved executive officers or those with an ownership interest.  In fact, I cannot recall any DBE indictments involving a B/C level manager. Accordingly to the indictment,  the general manager arranged a classic DBE pass-through scheme, which we have previously described on this blog.  Importantly, there is no indictment that the defendant received any form of kickback as a result of the scheme.  He concocted the scheme ostensibly to further his employers interests.

I doubt that the indictments involving this case will end with the regional manager.  But, this case underscores that everyone in your company must know and understand the ramifications of engaging in DBE fraud both for their personal well being an that of your firm.

Free DBE Compliance Audit

Posted in Disadvantage Business Enterprises (DBE)

This blog repeatedly chronicles the ramifications of failing to comply with the Department of Transportation’s Disadvantaged Business Enterprise regulations.  Jail time for executives, disbarment, fines, and bid challenges are real threats to those contractors that run afoul of the DOT’s DBE rules.  Because of the amount of interest in this area, I am pleased to announce that I am now offering a scaled back version of a full DBE audit program for FREE.  My mini-DBE audit covers many of the topics discussed in my popular DBE Compliance Webinar, including:

1.  The importance of documenting good-faith efforts;

2.  Recognizing the red-flags of DBE fraud;

3.  Assuring your contracts are in compliance with federal and state DBE rules.

Interested parties can contact me for more information by email at wally@zimolonglaw.com.

Government Set-Aside Fraud: Not Just for DBE’s

Posted in Construction Law

As readers of this blog know, fraud involving the Department of Transportation’s disadvantage business enterprise regulations is a hot topic in the construction industry. One form of DBE fraud involves a front scheme, whereby a certified DBE is not actually owned, operated, and controlled by an disadvantaged individual.  Unfortunately, this type of scheme is not limited to the DBE program.  Fraud involving the Veteran Owned Small Business program is also increasing.

Under the federal government’s Veteran Owned and Service Disabled Veteran Owned Small Business programs, federal agencies are authorized to set aside the award of contracts for only VOSB and SDVOSB entities.  To be eligible for certification as a VOSB or SDVOSB, a veteran or a service disabled veteran must own 51% or more of the entity, must manage the daily operations of the firm, and hold the highest position in the firm.  The certification rules are very similar to those for disadvantaged business enterprises.

Because under the VOSB and SDVOSB programs procurement is limited to those firms, the opportunity exists to obtain lucrative contracts where otherwise the firm may not be able to compete.  As the number of contracts procured under the program has increased, so has fraud related to that procurement.  Nefarious firms have sought to take advantage of the program by falsely claiming to be owned and controlled by a veteran.  Accordingly, authorities are taken notice and have started to crack down.  Recently, the Department of Justice announced that the owner of a fraudulent VOSB had plead guilty to a scheme to falsely claim VOSB status in order to obtain federal contracts.

This indictment is important for two reasons.  First, it is a reminder to those that might try to take advantage of the VOSB and SDVOSB program that federal prosecutors are watching and the penalties are severe.  Second, for those that work with VOSB and DVOSB subcontractors it is important to investigate any claims of fraud.  As I have discussed before, under the False Claims Act, contractors can be subject to significant civil and criminal liability for turning a blind eye to fraud on their projects.

Documenting Good Faith Efforts on 100% State Funded Projects

Posted in Disadvantage Business Enterprises (DBE)

As readers of this blog know, demonstrating “good-faith efforts” to subcontract work to disadvantaged business enterprises (DBE)  in order to meet a DBE participation goal has long been the law on projects receiving funding through the FWHA or FTA.  Recently, the Pennsylvania Department of Transportation made a revision to its regulations requiring that the same be done on 100% state funded projects in the Commonwealth.  This means virtually every transportation prime contractor performing work in the Commonwealth will have to document “good-faith efforts” of subcontracting work to DBE firms.  Because many firms will be performing this task for the first time, it is worth reviewing what qualifies as a good-faith effort and why it is important to demonstrate those efforts.

A Refresher on Good-Faith Efforts

Federal law requires that transportation projects receiving funding, in whole or in part, through the federal Department of Transportation, establish a goal for the percentage of work subcontracted to DBE firms.  The law explicitly states that the goal is not a quota and a contractor’s bid cannot be rejected simply because it failed to meet the DBE subcontracting goal set forth in the invitation to bid so long as the contractor demonstrates “good faith efforts” in attempting to meet the goal.  Appendix A to the DOT’s DBE regulations, Appendix A, 49 C.F.R. 26, provides guidance on what qualifies as a “good faith effort” to meet the DBE participation goal.  The regulations state the following are examples of good faith efforts:

  1. Aggressively soliciting from certified DBEs who have the capability to perform the work of the contract and taking appropriate steps to follow up initial solicitation
  2. Selecting portions of the work to be performed by DBEs in order to increase the likelihood that the DBE goals will be achieved. This includes, where appropriate, breaking out contract work items into economically feasible units to facilitate DBE participation, even when the prime contractor might otherwise prefer to perform these work items with its own forces.
  3. Providing interested DBEs with adequate information about the plans, specifications, and requirements of the contract in a timely manner to assist them in responding to a solicitation
  4. Negotiating in good faith with interested DBEs. It is the bidder’s responsibility to make a portion of the work available to DBE subcontractors and suppliers and to select those portions of the work or material needs consistent with the available DBE subcontractors and suppliers, so as to facilitate DBE participation. Evidence of such negotiation includes the names, addresses, and telephone numbers of DBEs that were considered; a description of the information provided regarding the plans and specifications for the work selected for subcontracting; and evidence as to why additional agreements could not be reached for DBEs to perform the work.

The New Requirements for ALL Pennsylvania Transportation Projects

In 2013, the Pennsylvania Assembly passed a law requiring contractors on projects receiving 100% state funding to demonstrate the same good-faith efforts that were previously limited to federally funded projects. In August 2014, PennDOT implemented regulations pursuant to those changes that are significant in several ways, including some that go beyond the current federal requirements.

First, PennDOT’s example of good faith efforts, perhaps not surprisingly, is nearly identical to DOT’s example contained in Appendix A of the regulations.

Second, within seven (7) calendar days after a bid opening, the apparent low bidder must document to PennDOT its good-faith efforts in soliciting DBE subcontractors. Failure to submit this required documentation shall result in the apparent low bidder’s bid being rejected.  

Third, if PennDOT reviews the documentation submitted by the apparent low bidder and determines that it has not demonstrated good-faith efforts, the bid shall be rejected.

Fourth, all firms listed in the good faith efforts submission, including those providing professional and other services, must be submitted for subcontractor approval after the contract is executed and approved before the DB’s actual performance of work. You must submit for subcontractor approval any DB to be utilized whether or not they are listed in the good faith efforts submission approved by the Good Faith Review Officer. The request for approval must include:

  • A copy of the executed signature page of the subcontract;
  • A copy of the scope of work; and
  • A copy of the unit prices as the appear in the subcontract or agreement.

Fifth, if a DBE firm needs to be replaced, contractors must notify PennDOT. However, unlike under the federal rules, PennDOT’s permission is not required before the DBE firm is replaced.

Sixth, like under the federal regulations, contractors must use good faith efforts in subcontracting change order work to DBE firms.

Finally, a contractor’s duties do not end with the project.  PennDOT is requiring contractors to keep documentation of their good faith efforts for three years after final payment is accepted.  Furthermore, following the completion of the project PennDOT will review whether the contractor has complied with the new DBE rules throughout the life of the project.  Contractors that fail to comply may be subject to sanctions.

Opportunities for Veteran Owned Firms

While many prime contractors are likely pulling their hair out at the prospect of complying with yet another regulation, some firms that are likely cheering the new rules are veteran owned and disabled veteran owned small businesses.  Under federal law, only firms that are owned 51% or more by a female or minority can qualify for DBE status.  However, PennDOT’s regulations take a more expansive view and include DVOSBs and VOSBs in its definition of “Diverse Business.”  Therefore, DVOSB and VOSB firms should be aggressively courting prime contractors in the Commonwealth and, conversely, prime contractors should not limit their good faith efforts to only women and minority owned firms on 100% state funded projects.

 

 

THE EVER GROWING MISSION CREEP OF THE OFCCP

Posted in Government Contracts

Previously, I have written and warned about the Department of Labor’s Office of Federal Contract Compliance (“OFCCP”), which I like to call the most powerful federal agency you have never heard of.  The OFCCP purpose is to enforce federal affirmative action regulations applicable to contractors and subcontractors performing work funded, in whole or in part, with federal funds.  While OFCCP has been around for years, its level of enforcement activity was low.  That changed with the election of President Obama’s and his policy of taking executive action through regulation wherever and whenever possible.  Beginning in 2010, OFCCP enforcement activity, primarily in the form of affirmative action “audits,” has exploded.  This week the OFCCP issued a notice of proposed rule, which, by its own admission, will cost the federal contractors $50,000,00.

What is the Proposed Rule?

OFCCP is proposing to make changes to 41 CFR § 60-1.7.  Currently, that regulation requires federal prime and subcontractors to file an annual EEO-1 report, which requests information related to the race, ethnicity, and gender of employees.  The regulation was promulgated under Executive Order 11246.  That Order was signed by our last great Regulator – in –Chief, Lyndon Johnson in 1965.  It was signed during the Civil Rights Era when institutional racism was a reality.  The purpose of the Order was to prohibit discrimination in employment based upon race, creed, color, or national origin (but not sex, which apparently was still ok in 1965).  The Order authorized the Department of Labor to issue regulations to promote the goal of ended discrimination in the hiring of individuals by federal contractors.

                OFCCP proposed change will extend the reporting requirements intended to snuff racial discrimination in employment, a real problem in 1965, to include the requirements intended to snuff out “wage discrimination,” which a straw man problem is made up by the Administration.  The proposed rule would require federal contractors and subcontractors with more than 100 employees and federally funded contracts of greater than $50,000 to annually report to the OFCCP an “Equal Pay Report.”  The report would require contractors to disclose to the OFCCP:

(a)    The total number of workers by race, ethnicity, and gender;

(b)   Total W-2 earnings of all workers broken down by race, ethnicity, and gender; and

(c)    The total hours worked in each job category by race, ethnicity, and gender.

According to the OFCCP, the information on the report would be kept “confidential” (just like the tax returns of non-profit tea party organizations) and would not be used as the basis for an enforcement action.

What is Wrong With the Proposed Rule?

First and foremost, an overwhelming majority of employees of federal contractors, especially construction contractors, have wages regulated by the Davis Bacon act.  Therefore, there is no disparity in pay based on race, ethnicity, and gender.

Second, the OFCCP does not explain how it expects federal contractors to capture the data necessary to complete the report.  W-2 reports do not contain the race, ethnicity, and sex of the employee.  Moreover, the federal law prohibits an employer from asking an employee about his or her race, ethnicity, national origin, or gender.

Third, OFCCP goes beyond the power granted to it by Executive Order 11246.  OFCCP states that the legal authority for the proposed rules is Executive Order 11246. However, the Executive Order says nothing about regulations concerning wage discrimination.

This Could Be the Biggest DBE Fraud Case Yet

Posted in Disadvantage Business Enterprises (DBE)

In several previous posts, we have talked about the growing risk to contractors that violate the federal, state, and local D/M/WBE programs.  This summer we saw the sentencing of the remaining defendants in the infamous Schuykill Products case.  That case was a $136 million DBE scam that the FBI called the largest DBE fraud ever.

Today, the Wall Street Journal, the New York Times, and others are reporting about a DBE fraud indictment that could far exceed Schuykill Products in size.  The case involves DCM Erectors, Inc., who was the steel erector for the 1 World Trade Center project.  According to the reports, DCM engaged in a classic DBE pass through scheme in order to obtain nearly $1 billion in contracts from the Port Authority of NY/NJ.  The indictment seeks to hold the CEO of DCM personally liable for the fraud.

While the case is a reminder to all contractors to make sure their DBE compliance procedures are in check, those performing work in the NY metropolitan area should pay particular attention.  This case was brought by the U.S. Attorney for the Southern District of New York. In recent years, the Southern District of New York has been a hotbed for DBE fraud prosecutions, including several high profile cases that have resulted in guilty pleas and convictions.

 

 

Why Unions Can No Longer Escape RICO Claims

Posted in Unions

In an earlier post, I explained how a September 2011 decision in a matter U.S. v. Larson paved the way for the indictment of ten members of Ironworkers Local 401. That post explained that because of a controversial Supreme Court decision in U.S. v. Enmons unions enjoyed almost unfettered protection from RICO claims so long as they claimed their alleged actions were in furtherance of “legitimate union objectives.” However, the Larson Court rejected the preposterous argument that otherwise illegal activity was permitted if committed by a union and its members in furtherance of bargaining activity.  A recent decision in the Local 401 case has extended the holding of the Larson Court, which was limited to the Western District of New York, to the Eastern District of Pennsylvania.

On July 21, 2014, Judge Michael Baylson issued an opinion denying a motion to dismiss filed by five of the ten ironworkers indicted under criminal RICO laws. The motions sought to dismiss the indictment in part because of the Supreme Court’s decision in Enmons. Like in Larson, Judge Baylson rejected the contention that Enmons afforded unions broad protection from prosecution so long as some union objective was shown. Judge Baylson held there was nothing legitimate about the ironworkers’ use of violence and arson in attempting to obtain unwanted work stating:

“These allegations support a finding that Defendants used threats and violence to exact unwanted or fictitious work. This is not a valid union objective, and is not protected under Emmons (sic)”

Judge Baylson’s opinion coupled with the Larson Court’s earlier opinion is very important. These cases clearly indicate that federal court’s will not afford unions broad protection from prosecution under Enmons and that unions can no longer hide behind Enmons when engaging in otherwise unlawful activity.  Interestingly, the Philadelphia Business Journal featured a story earlier this week about how U.S. Attorney Zane Memeger has made cases like the ironworkers case a priority.  We will see if the recent decision in the ironworkers case emboldens him to bring more cases against unions for activity similar to the ironworkers.