When Is an Employee Not an Employee?

By Carol L. O’Riordan

We have recently discussed provisions in the Federal Acquisition Regulations (FAR) concerning the percentage of work that a small business must perform itself rather than subcontract out, in order to comply with small business self-performance mandates.

This is the so-called limitation on subcontracting rule. A contractor must ask: What percentage of the cost of contract performance is going to be derived from work done by subcontractors? If it’s more than 50 percent of the original contract amount, the prime contractor (the small business) has violated the rule. Or to put it another way, at least 50 percent of the work must be done by the prime contractor’s employees. But sometimes a tribunal must decide the issue of who is an employee.

In a recent case before the Government Accountability Office (GAO), MindPoint Group, LLC, of Springfield, Virginia, protested the Department of Justice’s award of a contract to Management Technology, Inc. (MTI), of Oxon Hill, Maryland, for information technology infrastructure support — but MindPoint, the protester, ran afoul of the 50 percent rule. MindPoint, an unsuccessful bidder, had its protest rejected by the agency, and it appealed to the GAO.

The agency “took exception to the requirement that employees of MindPoint will perform at least 50 percent of the cost of contract performance incurred for personnel,” according to the GAO, which upheld the agency’s determination.

The GAO found that “in essence, to avoid violating the limitations on subcontracting provision of the solicitation, MindPoint must include the contribution of [a particular systems administrator] in its calculation of the percentage of labor cost to be performed by MindPoint employees.”

But the GAO ruled that this systems administrator, based on his own statements and those of MindPoint, was actually an independent contractor.  Without counting the system administrator as an employee, MindPoint would only have incurred 45 percent of the costs of the work with its own employees, falling short of the 50 percent requirement imposed by the limitation on subcontracting clause.

Since the cost of this systems administrator’s work could not be counted to contribute to the 50 percent, the GAO ruled that MindPoint, since it did not present an alternative that met the terms of the solicitation, was not a qualified protester.

Many questions remain unanswered by the GAO decision:  for example, what about industries that traditionally used “leased labor”? What is clear, however, is that the distinction between an employee and an independent contractor matters a great deal when it comes to having standing to file a bid protest, and, we suppose, if your award has been protested. Small businesses need to understand clearly who is an employee and who is an independent contractor, and to act accordingly.

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