The Department of Defense, General Services Administration, and NASA have published a Final Rule in the Federal Register to implement Executive Order 13494, "Economy in Government Contracting."  The Order, one of three Executive Orders issued by President Obama on January 30, 2009 regarding labor relations, declared the costs of any activities undertaken by federal contractors to persuade employees to choose or decline union representation to be ineligible for government reimbursement.  Following review of public comments, the agencies finalized the April 14, 2010 proposed rule with "just one minor editorial change" to FAR 31.205-21, the cost principle addressing labor relations costs:

To implement the requirements of the E.O., DoD, GSA, and  NASA issued a proposed rule that would amend this cost principle by adding a new paragraph addressing the handling of persuader activities–that is, activity involving the persuading of employees to exercise or not exercise their rights to organize and bargain collectively. By doing so, the proposed rule differentiated the handling of costs incurred through persuader activities, which are unallowable, from those incurred in maintaining satisfactory labor relations, which remain allowable.

In our February 2, 2009 Advisory on the President’s early set of Executive Orders, among other things, we noted: 


In 2000, the State of California passed Assembly Bill 1889, which placed similar restrictions on the use of State funds by contractors to promote or deter union organizing by employees. The California bill was expressly intended to advance the state’s policy of not “interfer[ing] with an employee’s choice about whether to be represented by a labor union.”4 Last year, in Chamber of Commerce of United States v. Brown, 554 U.S. __, No. 06-939 (June 19, 2008), the United States Supreme Court struck down AB 1889, ruling that the provision unlawfully sought to “regulate within ‘a zone protected and reserved for market freedom.’” Slip Op., at 4-5. The Court stressed that the addition of Section 8(c) of the National Labor Relations Act by the 1947 Taft-Hartley Act was intended to protect non-coercive, non-threatening speech for all parties in the context of union organizing:

From one vantage, §8(c) merely implements the First Amendment… in that it responded to particular constitutional rulings of the NLRB…But its enactment also manifested a “congressional intent to encourage free debate on issues dividing labor and management.”… It is indicative of how important Congress deemed such “free debate“ that Congress amended the NLRA rather than leaving to the courts the task of correcting the NLRB’s decisions on a case-by-case basis. We have characterized this policy judgment, which suffuses the NLRA as a whole, as “favoring uninhibited, robust, and wide-open debate in labor disputes,” stressing that “freewheeling use of the written and spoken word…has been expressly fostered by congress and approved by the NLRB." Letter Carriers v. Austin, 418 U.S. 264, 272-273 (1974)


It is clear from its express text that the White House has attempted to design this Order to avoid the issues which compelled the Supreme Court’s decision in Brown. The language of the Order’s policy statement and title — attempting to frame the federal government as a market participant and not a regulator — and the explicit protection of activity for which no reimbursement is sought are directly intended to bolster arguments the Supreme Court found lacking when advanced by the State of California in Brown. The ordered rules and regulations, yet to be developed by the FAR Council, may provide additional basis for challenge of this Order. In the meantime, however, federal contractors are faced with the prospect of accounting practices and procedures which clearly separate costs for communication with their employees in any matters arguably related to rights protected by the National Labor Relations Act.

The Final Rule published on November 2, 2011, reiterates this point expressly:

This rule does not prohibit or otherwise regulate persuader activities; it only disallows the reimbursement of the costs of these activities under Federal contracts. The purpose of the rule is to promote economy and efficiency in Government contracting by excluding certain costs from reimbursement by the Government that are not directly related to the contractors’ provision of goods and services to the Government. By doing so, the rule promotes the fiscally responsible handling of taxpayer funds. The State law at issue in Brown was rooted in “California’s policy judgment that partisan employer speech necessarily interferes with an employee’s choice about whether to join or to be represented by a union.” 554 U.S. at 69 (internal quotation omitted). By contrast here, neither the E.O. nor the rule in any way restrict the manner in which recipients of Federal funds may expend funds they receive from the Government or any other of their own funds, including funds a recipient received as a Government contractor for providing goods and services under Federal contracts.

But it undeniably adds risk and real administrative and bookkeeping burdens on contractors who wish to exercise their rights protected under the National Labor Relations Act and First Amendment to talk to their employees about union representation.  Contractors who do business with the federal government would be wise to revisit these issues, to review the Final Rule and to consider how they intend to ensure compliance.