Legal Alerts

19 Apr 2013

Does No Federal Contract Mean No Compliance Oversight? Not Necessarily.

Ruling impacts federal government contractors and subcontractors

Does No Federal Contract Mean, In 2009, the U.S. Department of Labor’s Administrative Review Board upheld an administrative law judge’s finding that three hospitals were federal government subcontractors for purposes of the Office of Federal Contract Compliance Programs (“OFCCP”) regulations and thus were obligated to comply with Executive Order 11246 by establishing and maintaining an affirmative action program.

On March 30, 2013, the United States District Court for the District of Columbia upheld this ruling in UPMC Braddock v. Harris, No. 09-1210 (D.C. D.C. Mar. 30, 2013). Three hospitals, UPMC Braddock, UPMC Southside, and UPMC McKeesport all had contracts with UPMC Health Plan to provide medical services to individuals insured by the Health Plan. None of the hospitals had a direct federal contract, but UPMC Health Plan had a contract with the Federal Office of Personnel Management (“OPM”) to provide health services to federal employees.

The hospitals argued that they were not subject to the OFCCP’s affirmative action requirements because:

  1. The UPMC contracts with the OPM explicitly excluded medical service providers as “subcontractors”;
  2. The hospitals did not provide “nonpersonal services” as set forth in the OFCCP’s definition of a covered subcontract;
  3. The hospitals did not have notice of OFCCP jurisdiction as there was no equal employment opportunity clause in the contact;
  4. UPMC is not a subcontractor because the contract between the OPM and the Health Plan was for the provision of medical services; and
  5. The hospitals never agreed to be federal government subcontractors.

The District Court for the District of Columbia rejected all of these arguments. The court found that:

  1. the fact that the contract between UPMC and OPM stated that a provider of medical services was not a “subcontractor” was not determinative of whether a provider of medical services was covered by the OFCCP’s jurisdiction.
  2. the term “nonpersonal services” does not refer to the nature of the interaction between the employees of a subcontractor and those benefitting from the subcontract as the hospitals would have it (i.e., providing medical services which is personal in nature). Instead, the court held that the hospitals provided “nonpersonal services” because their personnel were neither in an employer-employee relationship with the UPMC nor under their supervision and control that an employer would exercise over its employees.
  3. a company’s status as a covered subcontractor is a matter of law and the fact that the Health Plan did not include equal employment opportunity language in the contract did not excuse the hospitals from complying with the law.
  4. the Health Plan had agreed to provide medical services to federal employees because it agreed to serve the function of an HMO, not merely that of a traditional insurer.
  5. the hospitals’ lack of “agreement” to become federal government subcontractors was of no consequence as long as the hospitals fell within the definition as set forth in the OFCCP regulations.

The Court essentially rejected each argument the hospitals maintained and granted the Motion for Summary Judgment brought by the Secretary of Labor.

Significance: Going forward, it is more likely that the OFCCP will assert jurisdiction over companies that it finds to be subcontractors under its regulations. It is critical that employers in the health care industry (as well as others) very carefully review all agreements and contracts that may result in a situation where the OFCCP can assert jurisdiction which would then subject the company to the requirements associated with being a federal government subcontractor to include development and maintenance of an affirmative action program and oversight, monitoring and periodic audits by the OFCCP.

Please contact Karen Milner for more information.


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