Donald Murano (dmurano@muranolaw.com) is General Counsel, and Kenneth Norris (ken.norris@ports.pppo.gov) is Attorney for Fluor-BWXT Portsmouth LLC in Piketon, Ohio, USA.
Part one of this two-part series exploring timekeeping in the private and public sectors was published in the August 2019 issue of CEP Magazine.
The issue of time card fraud in the private sector was addressed in part one of this two-part series, with an emphasis on avoiding fraud. Fraud injures a business’s reputation and its fiscal health. Fraud also may violate federal and state laws. The emphasis in this article is on the public sector, which is made up of private businesses working for the government. Different statutes make government contractors criminally liable for fraud, in addition to the fiscal harm befalling defrauded businesses.
History of government fraud
The False Claims Act,[1] enacted during the American Civil War, came about to combat the defrauding of government procurement programs. The statute also includes a qui tam provision that allows individuals who are not affiliated with the government, called “relators” under the law, to file actions on behalf of the government. This is informally called “whistleblowing,” especially when the relator is employed by the organization accused in the fraud. The government often shares an incentive (up to 25% of the recovery) with whistleblowers as a way to stop fraudulent actions through alerting other potential whistleblowers to disclose wrongdoing. (Floyd Landis, a professional bicyclist and former Tour de France winner, blew the whistle on Lance Armstrong for cheating. The United States Postal Service had financially backed Armstrong with more than $40 million in funding. After Armstrong was stripped of his medals, including eight Tour de France victories, the government subsequently recovered $5 million, and Landis was paid $1.65 million.) In 2017, the government recovered $3.4 billion in monetary penalties, with $3 billion of that sum attributable to qui tam suits. Healthcare constituted 67% of the recovered amounts, with housing and mortgage fraud at 15% and military contracting at 6%.[2]
Whistleblowers
Whistleblowers historically have led to the discovery of fraud, sometimes on a massive scale. Pharmaceutical companies and financial institutions comprise the top five recoveries by the government under the False Claims Act:
-
Abbott Labs for $1.5 billion (2012 case for unlawful drug marketing)
-
Tenet Healthcare Corporation for $900 million (2006 case for overbilling Medicare and Medicaid)
-
Bank of America for $28 billion (knowingly offering Federal Housing Administration-backed mortgages to unqualified borrowers)
-
Pfizer Corporation for $2.3 billion (2009 case for off-label marketing of four drugs)
-
GlaxoSmithKline for $3 billion (2012 case for off-label marketing of anti-depressants and diabetes drugs)[3]
There are statutes that protect whistleblowers from retaliation, including being shunned, ridiculed, demoted, failure to receive fair pay increases, or other acts that have a chilling effect on whistleblower activity and supporting the disclosure of observed wrongdoing. In addition to these laws, many companies have adopted policies that demonstrate they have zero tolerance for retaliation when individuals are willing to come forward and report illicit activity.
Whistleblower activity dates back hundreds of years and remains a contributing factor in many fraud cases that are uncovered today. Indeed, qui tam actions were lawsuits in the name of the king in medieval England and have been adapted in the United States as suits in the name of the sovereign state (the federal government). Whistleblowers contribute by drawing attention to illegal acts, thereby placing a spotlight on the wrongful acts of others. Not all whistleblowers succeed in their suits, however, even if deemed meritorious. There are statutory bars to whistleblower suits, including the public disclosure bar (i.e., knowledge of the wrongdoing is already in the public domain) and first-to-file bar (i.e., someone with the same knowledge has already filed a qui tam suit). The public disclosure bar requires that a qui tam action be dismissed if the allegations or facts in the complaint were disclosed publicly in a prior case, a government report, or the news media.
Hanford’s CH2M Hill time card fraud case
A number of timekeeping card fraud cases have been identified in recent years. One prominent case involved CH2M Hill, a former contractor for the Department of Energy at the Hanford Nuclear Reservation in eastern Washington State (discussed briefly in part one of this article). The company was implicated with employee time card fraud and paid significant fines under the False Claims Act.
In 2004, the Department of Energy advised CH2M Hill to install time-recording proxy monitors for employees to clock both in and out of the tank farm area of the reservation. According to some of CH2M Hill’s upper management, the company didn’t have the funding for these monitors, and the labor union fought the decision to install monitors. Irrespective of available funding/budget, and without monitors, time card fraud flourished with workers recording overtime in eight-hour increments but working only a fraction of that time on site. A whistleblower came forward with information stating that time card fraud was rampant. After a long investigation, more than ten managers and supervisors with CH2M Hill admitted through plea agreements to time card fraud. Some workers were indicted criminally with up to 34 counts, including submission of false claims, major fraud against the United States, document alteration, and more. Annette Cary, a reporter for The Tri-City Herald, chronicled the fraud story over several years.[4] She ultimately reported in June 2015 that:
CH2M Hill agreed earlier this month to pay $18.5 million to the federal government to settle civil and criminal allegations of defrauding taxpayers through widespread time card fraud at Hanford. The rationale for paying workers originally was that overtime for radiological control technicians was voluntary. To get the technicians to agree to evening and night overtime work, CH2M Hill offered shifts in eight-hour blocks, even though the work often could be done in less time, according to court documents. However, workers would claim a full eight hours of overtime worked on their time cards. Time card fraud also was committed on regular shifts, according to court documents. A Voluntary Protection Program report warned upper management and direct supervisors that a steady stream of workers began leaving work at 2:30 p.m. on shifts that should have lasted until 4:30 p.m.
CH2M Hill failed to control the time card charging issues and paid a penalty exceeding $18.0 million and, by extension, injury to its reputation.
Federal contract compliance: The rules of the road
The Fair Labor Standards Act (FLSA) requirement to accurately track employee time charges was reiterated in a declaration by Congress in the McNamara-O’Hara Service Contract Act (SCA)[5] that cautions federal contractors: “The hours worked by employees on an SCA-covered service contract are determined in accordance with the principles established under the FLSA,” as set forth in 29 C.F.R. § 785 and 29 C.F.R § 4.178 by the United States Department of Labor. In essence, these statutes must be complied with at all times if the company is established and operates under either statute. Thus not only do the FLSA and the SCA apply, but also several Federal Acquisition Regulation (FAR) provisions that make inaccurate timekeeping a false claim (a criminal violation) and a violation of the FAR, which can result in administrative sanctions.
FAR provisions found at 48 C.F.R. § 16 mandate how time card charging is to be conducted under what form of federal contract (e.g., time and materials, labor-hour, cost-plus fixed fee). Willful violations of time charging are not just civil violations but can also be crimes under the False Claims Act for which criminal penalties and treble damages (triple assessment of damages as a punitive measure) can be sought. Fortunately, there is guidance for federal contractors to avoid even unwittingly making a false claim to the government.
Defense Contract Audit Agency guidance
The Defense Contract Audit Agency (DCAA) audits federal contracts and closely examines contract compliance. Contractors that follow DCAA guidance obtain successful closeouts of large federal contracts and remain successfully and lawfully compliant through detailed labor and cost center tracking. DCAA Pamphlet 7641.90[6] discusses the following aspects of contract compliance, which are selectively reviewed more in depth below, as guides for federal contractors:
-
Internal control systems
-
Management policies
-
Accuracy and reasonableness of cost representations
-
Adequacy and reliability of records and accounting systems
-
Financial capability
-
Contractor compliance with federal contractual provisions having accounting or economic significance, such as the Cost Principles from Cost Accounting Standards (CAS)
Labor is often the highest expense in executing any federal contract; therefore, a robust labor management system is a requirement for any contractor that serves the government. There are many affordable time and labor cost-tracking systems that can automate the costly process of capturing and reporting contract-specific data and provide critical supporting documentation for DCAA and other agency/department audits. Labor cost accounting is also critical to making the labor costs allowable for government reimbursement and provide for accurate project controls.
Labor costs charged to the government must be in compliance with promulgated CAS, as noted above; applicable FAR provisions; generally accepted accounting principles (GAAP); and specific contract terms/clauses. DCAA, as also noted above, has refined timekeeping methods to comply with all of these mandates and recently republished a Contract Audit Manual[7] with ancillary guidance documents to advise auditors and companies how to prepare for DCAA audits and avoid False Claims Act violations. Chapter 5 (paragraphs 908 and 909) of the manual, for example, lists specific requirements DCAA looks for in timekeeping systems. DCAA auditors will look to see that the provisions of these paragraphs are both addressed and followed by contractors in close-out audits. The mandatory disclosure requirements of FAR 52.203-13 mandate that notice be provided to the Department of Energy Office of Inspector General (OIG) and the contracting officer, even if there is a de minimis time card infraction. The OIG will place upon such a violation the level of importance the infraction deserves based upon the order of magnitude of the violation, timeliness of the disclosure, the transparency displayed by the organization in the past, and other related factors. The acid test includes if there was credible evidence provided that points to a violation of time-keeping practices in the spectrum between “reasonable belief” and a “preponderance of the evidence.”
General Services Administration guidance
Another federal agency has codified timekeeping practices in a published Order (CFO 4282.1B): the General Services Administration (GSA). These practices apply strictly to GSA employees and its contractors, but the control activities cited are good benchmarks for all contractors working for government entities. Examples of control activities can include:
-
Contractor procedures that address significant increases in direct/indirect labor accounts for reasonableness and allocability.
-
Policies and procedures that address special contract terms and advance agreements relative to allowability and allocability of labor costs. (The contractor identifies all contract terms with government costing implications, such as military standards and specifications, overtime, and skill mix requirements, to ensure compliance with those terms.)
-
Direct and indirect labor costs directly associated with unallowable costs are identified and segregated. (Although this is an important control procedure during indirect cost examinations, contractors should be aware of this requirement under FAR 31.201-6 and CAS 405.)
Severity of punishment
The consequences for time card fraud by federal contractors are serious in that federal law holds both individuals, as well as businesses, liable criminally and civilly. After being charged or fined, many businesses are passed over when bidding on new federal contracts; they can even be debarred from bidding for several years for infractions. The kiss of death to any federal contractor is being debarred from bidding on federal contracts. Individuals who have been indicted or plead guilty to time card fraud-related incidents may lose their reputations as honest employees, permanently lose their security clearances, face prison time, pay restitution, and in most cases lose their jobs and destroy their careers.
To prevent claims of time card fraud or extenuate time card fraud allegations, mitigating measures need to be adopted. Many contractors, including Fluor-BWXT Portsmouth LLC (the authors’ company), have taken many steps in spreading the message about the severity of violations of ethical and accurate timekeeping through applicable training and continual reminders of the company’s code of business conduct and ethics that condemn illicit time charge practices.
Conclusion
The above discussion is a comprehensive survey of solutions employers working on government contracts should consider to prevent time card fraud and wage theft. There are some practice points to follow.
First, employers should develop a specific, written policy regarding all timekeeping tasks; the more specific, the better to guide employees. Employers also must train their supervisors and managers on timekeeping wage-and-hour laws. Each level of management should know what to expect, what to look for, and how to handle any discrepancies. Another good idea is to always have a defined review process in place so that there are more than one set of eyes to check and approve timesheets. This way, questions can be asked and documentation checked before the timesheets are submitted for payment.
Second, employers should create and implement specific processes for employees who work remotely or “on the road” to make sure timesheets are accurate and reliable. Time-and-attendance software, apps, GPS technology, and even biometric time clocks are now available that can help avoid time card abuses and mistakes. These may be worth the investment.
Time theft will continue to be a hidden cost that employers performing work for the federal government must address, both for the financial health of their business and for their reputations for good standing in the business community. Prudent employers must take away the low-hanging fruit and tighten procedures so temptations are checked. Crimes can be thwarted, as can time card fraud.
A special thanks to Matthew McAdow who aided in the initial research of material gathered for this paper while working in the capacity of a 2018 summer intern (now an employee) at the Portsmouth Project. His talents are greatly appreciated.
The opinions expressed in this article are the authors’ and do not necessarily represent those of any company or this publication.
Takeaways
-
Employers should periodically perform in-house reviews and internal audits of timekeeping procedures to maintain accurate and secure payrolls.
-
Employers should consult with legal counsel specializing in labor and employment law in difficult discipline cases (e.g., when a lawful remedy to recoup losses is unknown).
-
Workforce training is critical. If fraud is detected, it can demonstrate to regulatory authorities that the employers addressed time card fraud and similar issues in advance.
-
Educate employees about the use of company or government assets. Asset borrowing (e.g., using company computers to promote an employee’s side business) is almost undoubtedly wage theft.
-
Develop specific policy regarding all timekeeping tasks, and educate supervisors on related laws. Have a defined review process, so more than one person checks and approves timesheets.