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Federal Contractor EO Clause 'Flow-Down' Requirements
The OFCCP’s regulations implementing Executive Order (“E.O.”) 11246 (for women and people of color), Section 503 (for individuals with disabilities), and VEVRAA (for protected veterans) require covered federal contractors to include in subcontracts and purchase orders certain contract clauses providing the subcontractor or vendor with notice that entering into the contract may subject them to certain equal employment opportunity (“EEO”) and affirmative action (“AA”) obligations for federal contractors.
They are called “EO clauses” and the obligation to include them in subcontracts and purchase orders is often referred to as the “flow-down” requirement, because the EEO/AA obligations “flow down” from the prime contractor, to the first-tier subcontractor, to the second-tier sub, and so on through the contracts.
OFCCP has historically enforced this requirement in audits by requesting one or two copies of contracts or purchase orders that include the EO clause. OFCCP generally does not have the wherewithal to audit all of a contractor’s contracts and purchase orders.
Quick Takeaway
Federal contractor employers can satisfy the EO flow-down requirements for E.O. 11246, Section 503, and VEVRAA by inserting the following clause, in bolt text, in contract templates and purchase orders:
This contractor and subcontractor shall abide by the requirements of 41 CFR 601.4(a), 60-300.5(a) and 60-741.5(a). These regulations prohibit discrimination against qualified individuals based on their status as protected veterans or individuals with disabilities, and prohibit discrimination against all individuals based on their race, color, religion, sex, or national origin. Moreover, these regulations require that covered prime contractors and subcontractors take affirmative action to employ and advance in employment individuals without regard to race, color, religion, sex, national origin, protected veteran status or disability.
See below for more detail and other options.
WHEN Must the EO Clause(s) Be Included
As a technical matter, the various EO clauses may not need to be included in each and every subcontract and purchase order your organization executes. As a practical matter, contractors are likely to include the EO clause (by reference) in all standard contract and purchase order templates for two reasons:
- The administrative burden of determining contract coverage is likely to be too high for organizations that execute any real volume of contracts and/or purchase orders; and
- There is no penalty or harm in including the EO clauses when it is nechnically unnecessary to do so.
Although the EO clauses read as though the contracting party is agreeing to all of its provisions (refrain from discrimination, take affirmative action, post notices, etc.) that is not necessarily the case. Penalties for “noncompliance” with the EO clause are enforced by OFCCP’s regulations, not the contracting parties. But those regulations apply only if OFCCP has jurisdiction to enforce them. So if the contract itself does not meet the threshold requirements for coverage, it does not confer OFCCP jurisdiction and there is no penalty for the subcontractor’s noncompliance.
As a result, the EO clause is simply a way of providing the subcontractor or vendor with notice that their organization might become subject to certain EEO/AA obligations for federal contractors by entering into the agreement with your organization. Whether or not they actually are is a fact-specific inquiry that is not your responsibility to determine.
In fact, many legal practitioners advise against federal contractors attempting to determine whether or not OFCCP jurisdiction will extend to their subcontractors or vendors because there could be legal liability if that determination turns out to be wrong and the subcontractor or vendor relied on that original determination. You should confer with your organization’s legal counsel for specific legal advice.
Contracts valued at $10,000 or less are exempted from the E.O. 11246 EO clause requirements, so many contractors maintain separate contract templates and purchase orders that either include the EO clause or not, depending on the contract price. However, the E.O. 11246 regulations contain a provision by which OFCCP can aggregate the value of multiple contracts in any 12-month period to establish jurisdiction (and EO clause coverage). OFCCP’s regulations are unclear, and agency guidance is silent, on whether or not it is a violation to fail to include the E.O. 11246 EO clause in smaller contracts that might later be aggregated.
Contracts valued at less than $15,000 are exempted from Section 503 requirements and the disability EO clause is not required. Contracts valued at less than $150,000 are exempted from the VEVRAA EO clause requirements.
Note that OFCCP’s regulations contain a $10,000 threshold for Section 503 and $100,000 threshold for VEVRAA. However, in 2004, Congress passed the Ronald Reagan National Defense Authorization Act which required the Federal Acquisition Regulation (“FAR”) Council to review dollar threshold amounts in federal agency procurement laws every five years and adjust those thresholds for inflation, if necessary. In 2010 the FAR Counsel adjusted the Section 503 threshold from $10,000 to $15,000. In 2015, they adjusted the VEVRAA threshold to $150,000. That means federal procurement officers are not including those EO clauses in the prime federal contract unless the FAR thresholds are met. Rather than go through the pain of updating their regulations, OFCCP simply opted to “follow the FAR” and informally adopted the adjusted thresholds.
Valuing contracts for indefinite quantities (such as “requirement-type” contracts, “call-type” contracts, purchase notice agreements, etc.) can be tricky. The EO clauses should be included unless the purchaser has reason to believe that the amount will not exceed the applicable thresholds in any year for the duration of the agreement. OFCCP’s regulations require the purchaser to make this determination when the contract is first executed, then again annually thereafter. Though the regulations are silent, presumably OFCCP expects contractors to modify contracts, if necessary, to later include the EO clause. If a contract for indefinite quantities exceeds the threshold in any year, it becomes a “qualifying” contract for OFCCP jurisdiction purposes for the remainder of the life of the contract, regardless of whether or not quantities are sufficient to trigger the EO clause thresholds in any subsequent year.
For these reasons, most contractors do not invest the time and resources necessary to accurately determine which EO clauses are required in which contracts, and which are not. Instead, they simply include the required clause in all contracts and purchase orders.
What if a Subcontractor or Vendor Objects?
From time to time, a prospective subcontractor or vendor will insist that the EO clauses be removed from the contract and may refuse to sign if they are included. OFCCP would strongly encourage you to walk away and find another sub or vendor that is willing to commit to compliance. However, that is not always a realistic option for businesses. So what can you do?
OFCCP’s regulations provide, “The contractor will take such action with respect to any subcontract or purchase order as may be directed by the Secretary of Labor as a means of enforcing such provisions including sanctions for noncompliance,” including contract cancellation, so there is the outside possibility that OFCCP could, under particular circumstances, require you to find another sub or vendor.
But the EO clauses do not actually confer any obligations on their own; their presence in the contract does not necessarily mean that the subcontractor or vendor is obligated to comply. Conversely, their absence does not necessarily mean that the contract does not require OFCCP compliance; OFCCP determines jurisdiction, not the contracting parties. Therefore the main, and arguably only purpose of the EO clauses is to provide notice to the other party that OFCCP jurisdiction might be conferred.
As a result, if a sub or vendor insists that the clauses be removed from the contract, it is reasonable to assume that is because they are fully aware of what those clauses mean, and the purpose of those clauses (notice) has been served.
In such situations, you should try explaining that removing the clause does not necessarily remove the obligations, that there is no “harm” in leaving it in, and it could actually be a violation of federal law for you to take it out. If that does not work, offer to add the words, “if applicable,” either to the front or back of the clause to clarify that the clause only applies if other criteria are met.
If the sub or vendor still won’t budge and the deal needs to get done, many contractors will create a “memo to file” memorializing that the contract clauses were initially included, the sub’s objection and reasons for it, and that the clauses were then removed because notice was sufficiently served, and the contract was a business necessity. The memo can then serve as document evidence of the contractor’s good faith effort to comply in the unlikely event that the issue should arise with OFCCP.
Such action is technically a violation of OFCCP’s regulations, but it would be unusual for OFCCP to try to withhold federal contract payments, cancel federal contracts, or debar a contractor for such a minor violation, especially in circumstances in which the contractor can demonstrate a good faith effort to comply. BCGi does not provide legal advice, however, so if you find yourself in this situation, consult with your legal counsel.
HOW Must EO Clauses be Included
Contractors have the option of including the entire text of the various EO clauses in contracts and purchase orders, but few do. The E.O. 11246 EO clause is 8 paragraphs long, the Section 503 EO clause is 7 paragraphs long, and the VEVRAA EO clause runs on for 12 paragraphs. Not only is that a lot of text to insert into a contract, but in the context of purchase orders, it may not be a realistic option. Fortunately, OFCCP’s regulations allow contractors to insert the clauses “by reference.”
“By reference” simply means shorter language that refers the reader to the full text of the clause with sufficient information allowing the reader to find that text. Here, that means providing a citation to the relevant portion of OFCCP’s regulations. For the E.O. 11246 EO clause, contractors are free to use language of their choosing, so long as it is clear. For the Section 503 and VEVRAA EO clauses, however, OFCCP has prescribed specific language and requires that language to be in bold text.
E.O. 11246 EO Clause – By Reference
Incorporating the E.O. 11246 EO clause into contracts by reference is by far the easiest. Though there are many ways to say it, federal supply and service or direct construction contractors can simply insert the following language:
The provisions of 41 C.F.R. § 60-1.4(a) are herein incorporated by reference.
Federally assisted construction contractors would simply substitute the reference to paragraph “a” with paragraph “b”:
The provisions of 41 C.F.R. § 60-1.4(b) are herein incorporated by reference.
Language such as that makes the text of the EO clause part of the contract without having to include the text of the clause itself. The reference uses standard legal citation format for the Code of Federal Regulations, allowing the reader to find the full text, read it, and be fully informed of its meaning before executing the contract.
Section 503 EO Clause - By Reference
OFCCP’s regulations require contractors to use prescribed language for incorporating the Section 503 EO clause by reference. Further, that reference must be in bold typeface, presumably in an effort to make the language stand out, increasing the likelihood that it will be noticed. Interestingly, nothing prevents contractors from using bold typeface for the entire document, though most contractors are unlikely to do so.
Standing alone, contractors can only incorporate the Section 503 EO clause by reference using the following language:
This contractor and subcontractor shall abide by the requirements of 41 CFR 60-741.5(a). This regulation prohibits discrimination against qualified individuals on the basis of disability, and requires affirmative action by covered prime contractors and subcontractors to employ and advance in employment qualified individuals with disabilities.
Combining Section 503 and E.O. 11246 EO Clauses - By Reference
If a contractor is required to incorporate the Section 503 EO clause, they will also meet the requirements for inclusion of the E.O. 11246 EO clause because the dollar threshold for the former is higher than the latter. For efficiency, contractors may opt to include a single “by reference” clause incorporating both.
Because the contract dollar thresholds requiring the inclusion of E.O. 11246 and Section 503 EO clauses are relatively low (over $10,000 and $15,000 or more, respectively), and the dollar threshold for the VEVRAA EO clause is so much higher ($150,000 or more), some contractors maintain two different contract and purchase order templates—one that includes the VEVRAA EO clause, and one that does not.
Although OFCCP has not issued guidance directly on point, the agency has provided guidance on how to combine references to the E.O. 11246, Section 503, and VEVRAA clauses (see below). Based on that guidance, OFCCP would likely allow contractors to combine just the E.O. 11246 and Section 503 EO clauses using the following language (all in bold type):
This contractor and subcontractor shall abide by the requirements of 41 CFR 60-1.4(a) and 60-741.5(a). These regulations prohibit discrimination against qualified individuals based on their status as individuals with disabilities and prohibit discrimination against all individuals based on their race, color, religion, sex, or national origin. Moreover, these regulations require that covered prime contractors and subcontractors take affirmative action to employ and advance in employment individuals without regard to race, color, religion, sex, national origin or disability status.
Note that federally assisted construction contractors should substitute the reference to 60-1.4(a) with a reference to 60-1.4(b).
VEVRAA EO Clause - By Reference
OFCCP’s regulations require contractors to use prescribed language for incorporating the VEVRAA EO clause by reference. Further, that reference must be in bold typeface, presumably in an effort to make the language stand out, increasing the likelihood that it will be noticed. Interestingly, nothing prevents contractors from using bold typeface for the entire document, though most contractors are unlikely to do so.
Standing alone, contractors can only incorporate the VEVRAA EO clause by reference using the following language:
This contractor and subcontractor shall abide by the requirements of 41 CFR 60-300.5(a). This regulation prohibits discrimination against qualified protected veterans, and requires affirmative action by covered prime contractors and subcontractors to employ and advance in employment qualified protected veterans.
Note that if a contractor is required to incorporate the VEVRAA EO clause, they will also meet the requirements for inclusion of the E.O. 11246 and Section 503 EO clauses. Contractors looking to minimize the amount of text inserted into contracts and purchase orders for these purposes have a couple of options:
- Insert a reference to E.O. 11246 and, separately, a combined reference to Section 503 and VEVRAA; or
- Insert a single reference for E.O. 11246, Section 503, and VEVRAA.
Some contractors might choose the first option becauase the E.O. 11246 reference is not required to be in bold type, they prefer to use their own language, or other reasons. Regardless, language for both options is provided below.
VEVRAA and Section 503 EO Clauses Combined - By Reference
If you opt to combine the references to the VEVRAA and Section 503 EO clauses into one statement, OFCCP guidance allows contractors to do so using the following language, in bold text:
This contractor and subcontractor shall abide by the requirements of 41 CFR 60‐300.5(a) and 60‐741.5(a). These regulations prohibit discrimination against qualified individuals on the basis of protected veteran status or disability, and require affirmative action by covered prime contractors and subcontractors to employ and advance in employment qualified protected veterans and individuals with disabilities.
E.O. 11246, VEVRAA, and Section 503 EO Clauses Combined - By Reference
If you opt to combine the references to all three EO clauses—E.O. 11246, VEVRAA, and Section 503—into one statement, OFCCP guidance allows contractors to do so using the following language, in bold text:
This contractor and subcontractor shall abide by the requirements of 41 CFR 60‐1.4(a), 60‐300.5(a) and 60‐741.5(a). These regulations prohibit discrimination against qualified individuals based on their status as protected veterans or individuals with disabilities, and prohibit discrimination against all individuals based on their race, color, religion, sex, sexual orientation, gender identity or national origin. Moreover, these regulations require that covered prime contractors and subcontractors take affirmative action to employ and advance in employment individuals without regard to race, color, religion, sex, sexual orientation, gender identity, national origin, disability or veteran status.
Note that federally assisted construction contractors should substitute the reference to 60-1.4(a) with a reference to 60-1.4(b).
Enforcement
Historically, OFCCP has enforced the EO clause flow-down requirements in audits by requesting one or two examples of contracts and/or purchase orders that contain the required clauses. OFCCP generally does not have the wherewithal to audit all of a contractor’s contracts and purchase orders.
Note that providing OFCCP with copies of executed contracts or purchase orders potentially reveals to the agency that the other party to the contract may be a qualifying federal contractor, something the other party to the contract might prefer you not do. If OFCCP demands unredacted copies of contracts or purchase orders, they are likely within their authority to do so. However, OFCCP might accept blank contract templates and blank purchase orders as sufficient proof of compliance.