As the economy slowly inches back to health and M&A activity heats up, acquisitive companies buying or merging with companies with one or more significant federal contracts should be aware that one letter from a relatively obscure office within the Department of Labor could deliver with it a raft of cumbersome employment regulations for the entire corporate family.
The Department’s Office of Federal Contract Compliance Programs (OFCCP) is charged with enforcing federal affirmative action and equal opportunity regulations. OFCCP carries out its mission by conducting periodic, unscheduled compliance evaluations of contractors—a process that often begins when it sends a scheduling letter announcing the start of the evaluation.
Normally a business “chooses” whether to become subject to OFCCP’s regulations when it has at least 50 employees and enters into federal contracts valued over some minimum amount, which can be from $10,000 to $100,000 depending on the regulation. Those regulations come with strict reporting requirements, and compliance can be cumbersome for organizations employing a large workforce.
Experienced contractors are typically familiar with the regulatory strings attached to government contracts and prepare accordingly. Because of OFCCP’s expansive interpretation of its own jurisdiction, however, businesses without a government contract may unwittingly subject their entire organization to OFCCP’s regulations simply by acquiring an entity with federal contracts—even if that entity is legally separate and represents only a small fraction of the parent’s business.
OFCCP believes, with some precedent, that it can treat a parent and one or more subsidiaries as a “single entity” for purposes of asserting jurisdiction under OFCCP’s own self-made and multi-factored (i.e., complicated) “single entity test.” This “test” enables OFCCP to tie a non-contracting parent to its federal contractor subsidiary(-ies) to reach the minimum thresholds (e.g., 50 employees, $50,000 in contracts) for regulatory purposes.
The Factors
According to OFCCP, the test contains five broad factual categories:
- Common ownership
- Common directors and/or officers
- De facto day-to-day exercise of control
- Personnel polices emanating from a common or centralized source
- Dependency of operations
