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NAW News

Legal Updates

- January 2017

Changes Coming to the National Labor Relations Board

Fully staffed, the National Labor Relations Board (NLRB) has five members appointed by the President and confirmed by the Senate. There are 2 vacancies on the Board that are expected to be filled by the new administration, though the timing for action is uncertain. Presently there are 3 Board members (2 Democrats, 1 Republican), which is the minimum number necessary for the Board to take action.

The Board is an adjudicative agency charged with interpreting and enforcing the National Labor Relations Act. The agency conducts secret ballot union elections, investigates allegations of unfair labor practices, conducts rulemaking and reviews labor law decisions made by a network of forty administrative law judges.

In a recent letter to the President-elect’s transition team, the Coalition for a Democratic Workplace (CDW) urged Vice President-elect Michael Pence to quickly fill the two vacancies on the Board with qualified experts. NAW is a founding member of the CDW and sits on its Management Committee. The need for quick action to rein in this activist-agency was succinctly stated in CDW’s letter:

Over the last eight years, the NLRB has overturned an astounding total of 4,559 years’ worth of long-standing precedent, blurred numerous bright-line tests, and dramatically overhauled the union election process – all in an effort to benefit organized labor. The Board embarked upon this campaign with little regard as to the negative impact these policy decisions would have on workers, employers and the economy in general. CDW has opposed this regulatory overreach through litigation; both by directly challenging Board rules and through amicus briefs challenging Board decisions.

The new Administration can return balance to the NLRB by nominating new Board members who will interpret the National Labor Relations Act in a manner that is fair to workers, unions and employers alike. Moreover, returning the Board to its traditional role as a neutral arbiter of labor disputes will create a climate for economic growth by freeing employers from the unnecessary red-tape and uncertainty associated with recent Board activities. The Administration has the opportunity to do this by nominating two qualified experts to the Board upon inauguration.

Tellingly, a high percentage of the legal precedent overturned by the Board were more than 10 years old and had previously been adopted by Board members of both political parties.

“Wage-fixing” Agreements Violate Antitrust Laws

Recently the Department of Justice and Federal Trade Commission issued guidance, cautioning employers not to enter into agreements or understandings with one or more other employers to fix or limit compensation paid to its employees. In addition to these so-called “wage-fixing” agreements, an employer must avoid any agreement or understanding with one or more other employers not to solicit, “poach” or hire the others’ workers. (Antitrust Guidance for Human Resource Professionals, October 2016, see: https://www.justice.gov/atr/file/903511/download).

The federal antitrust enforcement agencies noted that, in their view, these agreements were “hardcore cartel conduct” that could result in criminal enforcement action.

The Guidance document also cautions that an employer’s participation in any survey of compensation practices (wages, bonuses, incentive plans, etc.) should be conducted by an independent third party who aggregates the data to be reported out, so that no individual company data is disclosed or identifiable. In addition, the information submitted by participating employers should be “relatively old.”

Beware of Your Liability Exposure for DBE Fraud When Selling to Government Contractors

Wholesaler-distributors often supply products and materials to contractors for use on public procurement projects that are funded, at least in part, with government funds. Under federal, state and local laws and regulations, a certain portion of that government contract may need to be awarded, or subcontracted, by the general contractor to Disadvantaged Business Enterprises, or DBEs. For example, the U.S. Department of Transportation spends about $50 billion per year on construction projects and about $5 billion goes to DBEs.

Generally, a DBE must be majority owned and controlled by socially and economically disadvantaged individuals, including minorities and women. Government certification that the business qualifies as a DBE only confirms that this business ownership requirement is met.

A number of recent Justice Department criminal and civil enforcement actions have involved a scenario where the Contractor – often after having received the Distributor’s quote and worked out product quality, quantity and logistics – asks the Distributor (who is not a DBE) to supply product on a public procurement project through a designated DBE as a conduit – rather than have the Distributor sell directly to the Contractor. The Contractor then claims credit for the DBE’s “participation” on the project toward the contract goal. For its role, the DBE receives a small fee for the use of its name and DBE certification. However, DBE utilization is lawful only if the DBE actually performs a “commercially useful function” in the product supply chain.

The Justice Department and other enforcement authorities have challenged these arrangements and charged the Distributor and Contractor with DBE fraud because the designated DBE was a mere “pass-through” entity, and did not perform any commercially useful function. The Distributor may face criminal and/or civil liability for participation in this scheme, even if the DBE has been duly certified by the government as a Disadvantaged Business Enterprise. (DBE “certification” only means the DBE has sufficient ownership and control by minority or disadvantaged individuals. Whether the DBE actually has the capability and performs a commercially useful function is a separate determination made for each contract, based on the specific facts of the transactions involved.)

What’s a Commercially Useful Function?

Generally under federal regulations a DBE performs a commercially useful function when it is responsible for execution of the contract and is carrying out its contractual responsibilities by actually performing, managing and supervising the work involved – negotiating product price with the Distributor, determining quality and quantity, placing orders, receiving, warehousing and delivering the products, paying the Distributor and invoicing the Contractor. A DBE that acts as a mere “front” or “pass-through” (i.e., an extraneous participant in the transaction through which funds are passed in order to obtain the appearance of DBE participation) will not qualify.

Enforcement Actions

Criminal DBE fraud cases involving a pass-through DBE prosecuted by the U.S. Attorney’s Office have resulted in prison sentences for individuals involved ranging from 3 years probation to 7 years in prison. The federal government and private whistleblowers (who could be a competitor of the Distributor or the DBE) may also seek substantial civil penalties in DBE fraud cases under the federal False Claims Act. Since 2011, the U.S. Department of Transportation (USDOT) has recovered over $245 million in fines, restitution and forfeitures in these cases. Penalties may include debarment from future government contract work.

A Distributor who sells product through a pass-through DBE – even if the DBE is “certified” – is a potential target for enforcement actions.

For example, in a recent federal case in New York a materials wholesaler paid nearly $5 million to settle a DBE fraud claim brought by the U.S. Department of Justice. Without admitting liability, the wholesaler acknowledged that it supplied materials to federal contractors through a DBE that the government could prove at trial served as a “pass-through” on several project contracts. In fact, the wholesaler negotiated terms directly with the contractors and used the DBE as a pass-through. Wholesaler invoices were sent to the DBE; the DBE transferred the invoice information to its own invoices and added a markup; the DBE then sent its invoices to the contactors for payment. The wholesaler’s conduct enabled the contractors to certify falsely that the DBE supplied the materials and served a commercially useful function, which all parties knew was not the case, according to the complaint. The settlement was not an admission of liability. The DBE in this case was duly certified by New York and several other states as a Native American owned DBE, but it really did no work in the transaction.

Red Flags Indicating a Pass-Through DBE

The USDOT Office of the Inspector General has issued the following “red flag” indicators of DBE fraud:

  • DBE owner lacking background, expertise, or equipment to perform subcontract work
  • Employees shuttling back and forth between Contractor and DBE payrolls
  • Business names on equipment and vehicles covered with paint or magnetic signs
  • Orders and payment for necessary supplies made by individuals not employed by DBE
  • Contractor facilitated purchase of DBE-owned business
  • DBE owner never present at job site
  • Contractor always uses the same DBE
  • Financial agreements between Contractor and DBE
  • Joint bank accounts (Contractor/DBE)
  • Absence of written contracts


Wholesaler-distributors must exercise thorough due diligence review and oversight when asked to sell products and materials for a government funded project to, or through, a DBE. An understanding of the applicable laws, rules and regulations and compliance guidance from professional advisors is essential. When a contractor-customer attempts to just insert a DBE between the contractor and a non-DBE Distributor, the tough answer must be that the Distributor will not participate in the transaction, for the Contractor’s protection, the protection of the DBE and the protection of the Distributor.

Government scrutiny, claims and prosecutions of distributors and contractors using a pass- through DBE are on the increase and penalties are severe. Most of the rules have been in force for many years, but the recent increased enforcement environment necessitates that all Distributors review their methods of operation in this area. Old practices are under heavy scrutiny by not only law enforcement but by other businesses and the media. Remember, the fact that a DBE has achieved government certification only confirms the entity’s status – the DBE must also add real value in the transaction which confirms the DBE’s performance of the necessary, required commercially useful function.