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Focus on Regulation

Department of Labor Rejects Argument that Hospital is a Federal Subcontractor Subject to OFCCP Affirmative Action Requirements

Every now and then a subject comes along that seems much more complicated than it ought to be. The issue of who is a government “subcontractor” is one of those subjects. One would think that a single, straightforward definition of “subcontractor” could be consistently applied across federal contracts. If only it were that simple. Uneven interpretations of who is a federal “subcontractor” persist across federal agencies and programs, creating practical difficulties for contractors and their suppliers and services providers. Indeed, it’s now well recognized that contractors may need to apply a different standard for identifying “subcontractors” for purposes of the application of equal opportunity and affirmative action requirements than for other compliance obligations under the Federal Acquisition Regulation (FAR).

For years the Office of Federal Contract Compliance Programs (OFCCP) in the Department of Labor (DOL) has taken an expansive view of who qualifies as a government “subcontractor” for the equal opportunity and affirmative action requirements, which are administered by that agency. OFCCP has determined that nearly any supplier, vendor, or service provider to a federal contractor meeting the dollar value and employee thresholds qualifies for coverage as a subcontractor under the equal opportunity and affirmative action requirements, regardless of whether there is a written subcontract in place, and regardless of the level of separation between the supplier or vendor and the prime contractor.[1]

However, on October 19 the DOL’s Administrative Review Board (ARB) rejected OFCCP’s argument that a hospital’s participation in the Department of Defense’s TRICARE program made the hospital a subcontractor subject to OFCCP jurisdiction. Florida Hosp. of Orlando, ARB Case No. 11-011 (2012).

The issue resolved by the ARB first arose in 2008, when Florida Hospital of Orlando (Florida Hospital) refused to participate in a compliance review initiated by OFCCP under Executive Order 11246, Section 503 of the Rehabilitation Act, and Section 402 of the Vietnam Era Veterans Readjustment Assistance Act. Florida Hospital asserted it did not qualify as a federal contractor or subcontractor and OFCCP lacked jurisdiction. OFCCP initiated an action, which determined Florida Hospital was a federal subcontractor because it provided health care services for members of the military and their families pursuant to a contract it had with Humana Military Healthcare Services (HMHS), which in turn had a contract with TRICARE, the U.S. Department of Defense’s healthcare program. Florida Hospital appealed the decision to the ARB.

While the case was pending before the ARB, President Obama signed into law the National Defense Authorization Action for Fiscal Year 2012 (NDAA). A provision of the NDAA provided that for purposes of determining whether an entity is a federal subcontractor, a TRICARE managed care support contract with a requirement to provide a network of health care providers may not be considered a contract for the performance of health care services. This provision was widely read to foreclose OFCCP jurisdiction over a healthcare provider based solely on its participation in TRICARE. Yet, even after the NDAA was passed, OFCCP continued to assert jurisdiction, making a very technical argument based on an alternative definition of “subcontract” in its regulations that it did not believe was covered by the NDAA provision.

OFCCP conceded it could not rely on the part of the subcontract definition that applies if “any portion of the contractor’s obligations under any one or more contracts is performed, undertaken or assumed.” 41 C.F.R. § 60-1.3. OFCCP acknowledged that, because of the NDAA, the HMHS contract with TRICARE could not be construed as a contract to perform health care services. However, OFCCP argued that it could still rely on the alternative part of the subcontract definition that applies if an agreement to render services “is necessary to the performance of any one or more contracts.” Id. Under OFCCP’s logic, Florida Hospital’s agreement was necessary for HMHS to provide networks of health care service providers under its contract with TRICARE, even if HMHS did not have a contract to perform health care services itself.

In its October 19 decision, a plurality of judges in the ARB case found that the NDAA exception for TRICARE contracts removed OFCCP’s jurisdiction over Florida Hospital under both prongs of the subcontract definition. Because the ARB decision was a plurality decision, in which several judges wrote separate opinions suggesting that an argument based on the alternate definition could be resurrected in a future case, the door on this issue may not be entirely shut. [2] OFCCP recently asked the ARB to reconsider its decision, but the ARB has not acted on the request.

It’s therefore unlikely that this decision will deter OFCCP from continuing to take an extremely inclusive view of who qualifies as a federal “subcontractor” for purposes of equal opportunity and affirmative action requirements. As a result, contractors may be in a precarious position. For example, should contractors adopt a more expansive definition of “subcontractor” for all purposes? Should contractors include the equal opportunity and affirmative action clauses in all agreements as “flowdown clauses”? Should a contractor shift the burden to its suppliers and vendors to determine whether the clauses apply? Would general text in an agreement providing that these clauses “may apply” be acceptable? Should a contractor modify its existing agreements to account for OFCCP’s view? These and related questions will continue to be a source of consternation for those doing business with the government.


[1] See, e.g., OFCCP V. UPMC Braddock, No. 08-048, 2009 WL 1542298 (ARB, May 29, 2009) (finding hospital to be a Federal subcontractor by virtue of its accepting over $10,000 in reimbursement for services from a health insurance plan for Federal employees, without any written agreement putting hospital on notice that it was now a Federal subcontractor); OFCCP v. Monongahela Railroad Co., 85-OFC-2, 1986 WL 802025 (Apr. 2, 1986) (deeming coal transporter subject to EEO regulations as a subcontractor where it transferred coal to other carriers for ultimate delivery to the prime contractor).

[2] The aforementioned UPMC Braddock case, involving whether another hospital is a covered subcontractor for different reasons, currently is pending in federal district court. UPMC Braddock v. OFCCP, No. 1:09-cv-01210 (D.D.C. filed June 30, 2009).