Final FAR Rule: Employees’ Freedom to Report Fraud

There has been a debate for years about whether employers can, by agreement, prohibit their employees from “blowing the whistle” on them. The prudent view was this could be viewed by the courts as a violation of public policy, particularly in the context of the civil False Claims Act. Several agencies have now put the debate to rest, at least for federal contractors.

On January 13, 2017, the Department of Defense, General Services Administration, and NASA issued a Final Rule implementing Section 743 of Division E, Title VII of the Consolidated and Further Continuing Appropriations Act, 2015 (Pub. L. 113-235). The Final Rule, which amends FAR Parts 3, 4, and 52, prohibits using appropriated funds to contract with any entity that requires its employees or subcontractors to sign an internal confidentiality agreement restricting their ability to report waste fraud or abuse. The rule goes into effect on January 19, 2017, and applies to all solicitations and contracts using funding from fiscal year 2015 forward— including contracts and subcontracts in amounts less than the Simplified Acquisition Threshold and for the acquisition of commercial items, including Commercial Off the Shelf items.

There are three main action items resulting from the rule:

  • First, any provisions in existing agreements that contravene the rule are invalid, and contractors must notify their employees and subcontractors of that fact. FAR 52.203-19(c). This eliminates any need to track and trace existing agreements.
  • Second, going forward, contractors are prohibited going forward from entering into such employment agreements.
  • Third, prime contractors must flow down the prohibitions to all of its subcontractors, including small businesses and commercial subcontractors, and must include the flowdown portion of the clause as an obligation of lower-tier subcontractors as well.

Some Definitions

At FAR 52.203-19(a), the Final Rule defines the following important terms:

The Final Rule defines subcontract as any contract entered into by a prime contractor or by a subcontractor “to furnish supplies or services for performance of a prime contract or subcontract.” It includes, but is not limited to, purchase orders and changes and modifications to purchase orders.

A subcontractor is “any supplier, distributor, vendor, or firm (including a consultant) that furnishes supplies or services to or for a prime contractor or another subcontractor.”

An internal confidentiality agreement or statement is “a confidentiality agreement or any other written statement that the contractor requires any of its employees or subcontractors to sign regarding nondisclosure of contractor information, except that it does not include confidentiality agreements arising out of civil litigation or confidentiality agreements that contractor employees or subcontractors sign at the behest of a Federal agency.”

Recommendations

As a result of this rule, contractors should do the following:

  • Review their existing employment and nondisclosure agreements, as well as your policies and procedures in order to eliminate any offending clauses.
  • Develop a simple companywide approach to inform their employees and subcontractors of the change and pay close attention to addressing this communication in advance with any unionized employees.
  • Incorporate information about these prohibitions into their ethics and compliance training.
  • Ensure that future subcontracts include a reference to FAR clause 52.203-19.