Introduction of BRAC Group

WTP's Government Contracts group hosts this blog on BRAC developments in Maryland and Virginia. To read more about our Government Contracts practice and BRAC experience, visit our web site.

Wednesday, May 26, 2010

Growing Scrutiny of Independent Contractor Classification

In order to effectively leverage the potential contracting opportunities of BRAC, businesses need to be able to draw upon a skilled workforce at a moment’s notice. Of course, given the vagaries of the government contracting process, oftentimes it is not financially practical for a business to maintain a full time complement of employees. Rather, many businesses engage independent contractors, which give a business the flexibility of quickly ramping up to meet the needs of its customers without costly overhead.

Unfortunately for the unwary contractor, federal and state agencies have begun to crack down on the use of independent contractors. Specifically, government authorities, concerned about the potential misclassification of employees as independent contractors, are stepping up investigation efforts and imposing stiff penalties. And small businesses in particular will be a major target for the IRS effort, reports BusinessWeek, because these organizations typically do not have the attorneys and tax consultants employed by large businesses to maneuver through the complex rules governing classification or the financial wherewithal to defend the business through a lengthy investigation. Additionally, government contractors of all sizes appear to be under stricter scrutiny as well. For example, a Connecticut labor union may have prodded Connecticut state officials to investigate possible misclassification by a Skanska unit on a UConn construction project. Doubtless, the government contractor’s substantial payroll and subcontracting reporting requirements present ample fodder for these independent contractor misclassification investigations.

And with the recent introduction of H.R. 5107 in the U.S. House of Representatives amending the Fair Labor Standards Act to impose additional recordkeeping requirements on businesses that utilize independent contractors on both public contracts and for private work, more scrutiny and greater fines may be on the way. Potential new requirements include the maintenance of records of the hours of independent contractors and the amounts paid to the independent contractor. Additionally, civil penalties could be increased to $5,000 per misclassified worker.

These increased enforcement efforts and the potential tightening of related regulations are aimed at what is believed to be a significant, costly problem for workers and for federal and state governments. Some businesses purposely misclassify employees as independent contractors to avoid payroll taxes and workers compensation and unemployment insurance premiums. Many other businesses misclassify out of a failure to understand the law. Either way, the practice is believed to cost federal and state governments millions in tax dollars.

In order to avoid liability for misclassification, employers must understand the requirements and restrictions and take the necessary steps to ensure that those requirements and restrictions are properly implemented before classifying any personnel as an independent contractor.

Dennis Robinson, an attorney in WTP’s Baltimore office, has been tracking this issue. He recently wrote two articles that offer some practical tips for employers who wish to ensure proper classification of their employees and independent contractors. One, for the Winter 2010 issue of the Whiteford, Taylor & Preston Construction Newsletter, addresses the Maryland Workplace Fraud Act of 2009, which imposes civil penalties of up to $20,000 per employee for knowing misclassification of workers in the construction and landscaping industries. The other, for the April 2010 issue of the Perry Hall/White Marsh Business Association Newsletter, analyzes the increased federal effort to investigate and penalize misclassification.

- Dennis Robinson and Will Pearce

Wednesday, May 12, 2010

APG Fraud Hotline and False Claims Acts

The FBI announced last month the establishment of a hotline for the reporting of fraud in connection with the awarding of approximately $2 billion in BRAC–related construction contracts at Aberdeen Proving Ground, exposing the unwary or unscrupulous contractor to a variety of sanctions.

The most typical form of fraud associated with these contracts is submission by a contractor of a false claim for payment from the Government, which is prohibited under both the Civil and Criminal False Claims Act (“FCA”) statutes. Under the Civil FCA, lawsuits may be brought against contractors by either the U.S. Department of Justice or by a whistleblower, usually a competitor or a disgruntled employee of the contractor being sued, who stands to recover up to 30% of any money recovered from a contractor under the Civil FCA.

The Civil FCA broadly defines “claim” to include “any request or demand, whether under a contract or otherwise, for money or property which is made to a contractor, grantee, or other recipient if the United States Government provides any portion of the money or property which is requested or demanded, or if the Government will reimburse such contractor, grantee, or other recipient for any portion of the money or property which is requested or demanded.” While the most obvious examples of a “false or fraudulent claim” include a contractor’s presentment of an invoice to the Government for work it never performed, or for supplies never delivered, in recent years, the U.S. Department of Justice and some federal courts have significantly broadened the definition of what constitutes a false claim for purposes of Civil FCA liability to include a number of situations far more subtle than flagrant mischarging and fraudulent invoicing. For example, the Government may elect to impose civil penalties against a contractor if the work for which the contractor seeks payment does not conform to the contract specifications. In addition, some courts have interpreted the Civil FCA to also prohibit a contractor from making false statements or records in order to avoid an existing obligation to the Government. Liability can also arise under the Civil FCA if a contractor fails to comply with the various laws and regulations incorporated into most federal contracts – including wage and hour laws, equal employment opportunity laws, OSHA regulations, environmental laws, and the like. In theory, if a contractor is required to comply with such laws and regulations in the performance of its contract, and the Government’s payment under the contract is contingent upon a contractor’s compliance with these laws and regulations, a contractor that violates any such regulation but still gets paid may be liable under the Civil FCA for submitting a false claim. Moreover, since Government contractors must certify compliance with these and other federal laws and regulations to first, obtain a Government contract and second, remain eligible to perform it, any false certification of compliance with applicable laws and regulations may also constitute a violation of the Civil FCA. Thus, for example, if a contractor falsely certifies that it pays applicable prevailing wages in accordance with the federal Davis-Bacon Act, when in fact it does not, such a false certification could form the basis for a Civil FCA violation against that contractor.

Civil penalties for FCA violations can be stiff. Under the Civil FCA, the Government can recover an amount equal to three times the actual damages sustained, plus penalties of between $5,000 and $11,000 per violation. Such penalties can multiply rapidly since each false claim, invoice, or material misstatement is counted as a separate violation. Significantly, a contractor does not escape liability under the Civil FCA even if the Government ultimately does not pay on the claim, which means that a contractor may be liable for civil monetary penalties under the Civil FCA even if the Government has suffered no damage.

Note that with the passage last year of the Fraud Enforcement and Recovery Act of 2009 (“FERA”), the scope of potential FCA liability now includes not just fraud against the Government but also fraud against Government contractors (e.g., a subcontractor submitting a false claim for payment to a prime contractor). Further, FERA has lowered the threshold for a FCA claim. Formerly, a contractor had to make a false claim or submit a false invoice with the intent to fraudulently obtain money from the Government; under FERA, a contractor need only knowingly make a false statement or submit a false claim, without the intent to fraudulently obtain monies from the Government.

- Brad Aaron