Michigan Labor & Employment Law Blog

Should Your Business Sign SBA Form 601 Requiring Non-Discriminatory Hiring Practices?

In 1965, President Lyndon Johnson issued Executive Order 11246 requiring all contractors and sub-contractors working on a project financed by more than $10,000 of federal funding (including Small Business Administration (SBA) loans) to practice affirmative action in hiring and not discriminate based on race, color, religion, sex, gender identity, sexual orientation or national origin. Prior to the issuance of EO 11246, white males held most of the jobs in the construction industry. In the 60 years since it became effective, the number of racial and ethnic minorities employed on construction projects has increased significantly.

SBA Form 601 is a certificate of agreement to ensure contractors comply with EO 11246 when working on federally assisted construction projects. A borrower or contractor seeking SBA financing of more than $10,000 must complete and submit Form 601. This requirement has led many borrowers and contractors to wonder about the consequences of entering Form 601.

When must a borrower or contractor sign SBA Form 601?

As a starting point, borrowers and contractors must sign SBA Form 601 only when they will receive financial assistance through federal funds or programs. If your company is working on projects not financed with federal assistance, Form 601 should not be required. Similarly, EO 11246 should not apply to that project.

Recall that EO 11246 applies to construction projects receiving any federal funding and is not limited to SBA financing. SBA Form 601 is essentially an agreement (and acknowledgment) to a company’s obligations under EO 11246 that generally apply to any federally funded project. Construction and building companies could therefore be subject to (violate EO 11246) even without ever signing Form 601.

In the unfortunate case where a developer may have already received federal funding without understanding its EO 11246 obligations, and not strictly complied with those requirements, it should consider the implications of executing Form 601, outlined below.

What projects or contracts are affected by Form 601?

Form 601 applies to “all” contracts entered in connection with federally assisted construction projects exceeding $10,000. It obligates contractors and subcontractors to comply with nondiscrimination and affirmative action requirements as per Executive Order 11246.

The word “all” is ambiguous; Form 601 does not expressly clarify whether Form 601 extends to (i) pre-existing contracts in connection with the project at issue, or (ii) future contracts entered in connection with separate, unrelated projects.

Regarding future contracts, future federally assisted projects may require Form 601 anyway. Whether or not required, the EO requirements will nonetheless apply. Still, Form 601 could expose a borrower to contractual liability, including fraud-based claims if an existing violation is known or apparent.

Regarding prior contracts that have been performed or terminated, entering Form 601 should not affect those contracts. In addition, if those contracts involved no federal assistance, EO 11246 should not apply.

Existing contracts pose the greatest risk to a potential borrower of SBA funds. As already noted, the EO does not apply to contracts that have not received federal assistance. As a result, projects that have not received federal assistance may not have had occasion to consider their compliance with EO’s nondiscrimination requirements. The implications for violations are discussed further below.

What if a Construction Company Fails to Comply with EO 11246?

The executive order is a federal law and if a company working on a federally financed construction project is found to have engaged in hiring discrimination in violation of EO 11246, it could face: fines (up to 10 percent of contract value); termination of contract; order to remunerate back pay and pay compensatory damages; and exclusion from participation in future federal contracts.

For this reason, entering into Form 601 and accepting accompanying SBA funds could amplify a known or potential existing violation of EO 11246, particularly if SBA funds are treated as received in connection with that existing project. Receipt of additional funds could increase the underlying contract value, thus increasing fines that are computed as a function of contract value, as well as damages that result from misuse of funds.

Takeaways

• EO 11246 has increased representation of racial and ethnic minorities in the construction industry that were historically underrepresented.
• EO 11246 applies to construction projects receiving any federal funding and is not limited to SBA financing, but Form 601 can create contractual liability, increase fines and damages, or even convert a non-federally assisted project to a federally assisted project.
• If a contractor or builder believes that any projects currently underway may not strictly comply with the non-discriminatory requirements of EO 11246, it should not sign Form 601 until it has reviewed its federally assisted projects and confirmed compliance.
• EO 11246 is not the only source of federal, state, or local protections for workers or restrictions on hiring practices, so declining to receive funds will not shield a contractor from other restrictions on discrimination.

Questions?

Foster Swift’s attorneys offer decades of experience working with contractors and builders to ensure that their contracts and other agreements comply with applicable federal, state, and local laws and regulations.

With questions or concerns regarding compliance with laws or regulations, including those relating to financing, hiring and safety, or general questions related to business, corporate, or tax law, contact Nick Stock at nstock@fosterswift.com - 616.726.2255.

Categories: Contracts, Employment