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Small Subsidiary's Federal Contract Subjects Entire Company to OFCCP Jurisdiction and Audit

    Client Alerts
  • July 22, 2011

Under Executive Order 11246, employers with 50 or more employees and $50,000 in federal contracts are required to adopt an affirmative action plan. Smaller contractors that believe that are exempt from such requirements may not only fall under the AAP regulations, but may also subject their entire corporate organizations to federal contracting employment rules.

Last month in a federal administrative case, OFCCP v. Manheim Auctions Inc., the Department of Labor sent an audit request to the defendant. Manheim contended that it had no federal contracts, but conceded that it owned a small subsidiary (eight employees) that held federal contracts for auction services. The Office of Federal Contract Compliance Programs contended that the two companies were a "single entity" for purposes of E.O. 11246 compliance obligations.

The federal administrative law judge agreed, requiring both companies to comply with the audit request. The two employers met the single entity test because they (1) had common human resource policies and management; (2) employees who moved from one company to another maintained their seniority; (3) Manheim completed the subsidiary's Form EEO-1; and (4) Manheim had the power to strip the subsidiary of its federal contracting responsibilities by moving them to another entity.

Even though neither company individually met the AAP thresholds, when considered a single entity, they had the requisite number of employees and level of federal contracts. Because Manheim exercised de facto day-to-day control over its subsidiary, the entire company, including business units having nothing whatsoever to do with the federal contracts were subject to AAP requirements and OFCCP jurisdiction.

Many companies are surprised that federal contracts entered into by a division or subsidiary can cause the entire organization to become subject to AAP requirements. In order to avoid single entity status, a separately incorporated subsidiary must be run as a clearly separate organization. Common officers, directors, management, human resource functions and daily control will result in unanticipated regulatory requirements and scrutiny. Absent such clear distinctions, companies should take such obligations into account before authorizing business units to seek federal work.