The Single Entity Test: Could You Be a Federal Contractor and Not Know It?
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The Single Entity Test: Could You Be a Federal Contractor and Not Know It?

image1Many of us know that to be a direct federal contractor we must first have one or more contracts under which we do business with one or more federal government agencies by providing goods or services. We also know that in order to be subject to federal Affirmative Action requirements, we must have 50 or more full-time employees, and the value of our contract must equal or exceed $50,000 (in a one-year time period).  These criteria are often referred to as the “50-50” rule. A company that does not have any type of contract with a federal agency, or that does not meet that 50-50 rule,  might still be subject to Affirmative Action requirements, and, consequently, Office of Federal Contract Compliance Programs (OFCCP) jurisdiction.

The more commonly known scenario is the federal sub-contractor. If your company does not meet the 50-50 rule, but you have a contract with a company that does, and the services you provide that company a) are necessary for that company to perform the ultimate contract with the federal agency, OR b) fulfill a part of the direct contractor’s agreement with the federal agency, it is likely a federal sub-contractor. Here is an example: Company A contracts with the federal agency known as the General Services Administration (GSA) and agrees to supply electric and steam service from all its power plants to all federal facilities. Company A in turn enters into a contract with Company B whereby Company B will transport coal from the mines to one of Company A’s power plants. Company B is not a direct contractor. Is it a sub-contractor? The Office of Administrative Law Judges answered in the affirmative in Monongahela Railroad Company.  The OALJ reasoned that transporting coal is necessary to the direct contractor’s performance of its contract to supply electricity, even though the direct contractor continued producing and providing electricity whether or not the railroad actually transported coal to it. As you can see, the OALJ, and consequently, the OFCCP interpret “necessary services” very broadly.

Suppose you are neither a direct contractor nor a sub-contractor.  You may still end up on the OFCCP’s radar. Are you either a parent company that owns one or more subsidiaries? If so, is one or more of your subsidiaries a federal contractor or sub-contractor?  You might fall under OFCCP jurisdiction. Alternatively, what if you are a federal contractor or sub-contractor but none of your subsidiaries are? They might be on the OFCCP’s radar. Suppose your company, First Born Company, Inc, a subsidiary of Mother Company, Inc is neither a direct nor a sub-contractor, and neither is Mother Company, but another subsidiary of Mother Company, Sibling Company, Inc, is a federal contractor. Guess what?  Your company, along with Mother Company and all of Mother Company’s subsidiaries might fall under OFCCP jurisdiction under what is known as the Single-Entity Rule. Let’s explore.

Under the Single Entity Rule, separate businesses that do not themselves have a federal government contract or do business with a company that does may be treated along with affiliate, parent or subsidiary companies as a single entity that does have such a contract or sub-contract thereby falling under OFCCP jurisdiction if their relationship with each other is sufficiently integrated. What does make otherwise separate companies sufficiently integrated to warrant such treatment?  The OFCCP uses the following five-factor test:

1. Do the entities have common ownership?
2. Do the entities share common directors and/or officers?
3.Does one entity have de facto day-to-day control over the other through policies, management or supervision of operations?
4. Do the entities’ personnel policies emanate from a common or centralized source?
5.Are the entities’ operations dependent on each other? (e.g. 1 entity principally providing services for the other and/or the entities share management, offices or services)?

As you can see, each of these factors speak to interplay between entities sufficient to suggest that they act essentially as a single unit. Not all five factors have to be present for the OFCCP to deem the companies a single entity. Furthermore, centralized control over labor relations and personnel functions appears to be the most important factor. Therefore, even if the operations of two or more companies in no way depend on each other, but one of the entities is issuing and implementing personnel policies for both, the OFCCP would most likely find that they operate as a single entity. As long as one of those entities is a federal contractor or sub-contractor and they appear sufficiently intertwined, both will be subject to Affirmative Action requirements.

If you are a parent, subsidiary or affiliate of a contractor or sub-contractor, you can either gear up and get ready to comply with Affirmative Action requirements, or you can take some or all of the following steps in an endeavor to avoid a single entity finding (and stay under the OFCCP’s radar):

1. Adhere to all corporate formalities: Make sure that each entity satisfies state corporate law requirements in the state(s) where you do business and/or employ people, regarding formation, capitalization, election of officers/directors, majority vote, resolutions authorizing corporate actions, maintaining required records, and documenting such compliance in corporate minutes. You should also be sure to keep each entity’s funds separate.

2. Avoid centralized personnel and labor relations: Again, this is probably the most important measure you can take. Two or more related entities should each make their own decisions about their own personnel, and in particular, each entity should hire its own personnel.

3. Establish separate written policies regarding hiring practices and procedures for each entity, designate specific personnel who will have hiring responsibilities, whenever possible, give hiring authority to persons who are NOT common officers or directors.

4. Establish and maintain separate employee handbooks for each entity. Each company should have its own policies and procedures that address the working environment and business of the company in question.

5. Consult with in-house or competent outside employment counsel—This goes without saying, right?

 

For more information, contact Ahmed Younies at 714-426-2918, ext. 1 or ayounies@hrunlimitedinc.com.

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