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The Need to Know Where Your Products Go: The Government Subcontractor Surprise Scenario

Do you know where all of your company’s products go? Is there a chance that some of those products are being used by a customer to fulfill that customers’ contractual obligations to the United States federal government? If you are not sure about the answers to these questions, your company could be a government subcontractor without even realizing it.

There are many employment and labor obligations on federal government contractors and subcontractors that do not apply to other employers, such as the requirement to prepare and maintain an affirmative action plan. Employers who have simply assumed that these obligations do not apply to them might want to think again.

Businesses that contract directly with the federal government (also known as “prime contractors”) are usually well aware of the contracting relationship and the obligations that arise from doing business with the federal government. However, many of the same obligations that apply to prime contractors also apply to subcontractors who supply goods or services to prime contractors or other subcontractors, if those goods or services are necessary to the performance of the federal contract or some portion of the federal contract. Whether a company is a covered subcontractor for these purposes is not always clear. It can sometimes be difficult for a company to know if the goods or services it is providing to another private enterprise are associated with a federal government contract, particularly if there are many levels of subcontractors. But companies should carry out appropriate due diligence and confirm whether the ultimate beneficiary of their goods and services is the federal government, and, if so, whether by entering into the contract they will inadvertently become federal government subcontractors and subject to an ever-increasing range of employment laws. It would also be a good idea for companies to educate their sales people and contract drafters of the importance of knowing the ultimate use of the product by the customer and, if it involves the federal government, that they need to let the human resources department know about it before the sale is made or the contract signed.

In just the last few months, new obligations that apply to federal government contractors and subcontractors include paid sick leave for employees, an increase in the minimum wage to $10.10, the addition of “gender identity” and “sexual orientation” as protected categories, and the creation of an obligation to disclosure employee compensation data (including data regarding race and sex). Compliance with these laws can be costly and burdensome, and businesses will want to consider carefully whether to assume these obligations. Rather than stumble into these obligations because of a lack of due diligence at the customer contract stage, it is better to know up front so a proper business judgment can be made of the cost/reward of being a government subcontractor.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.