A recently proposed amendment to the Federal Acquisition Regulation precludes Federal contractors from entering into a confidentiality agreement with an employee or subcontractor that “prohibit[s] or otherwise restrict[s]” employees or subcontractors from reporting fraud, waste, or abuse to the pertinent Federal government official.  See 81 Fed. Reg. 3763 (FAR Case 2015-012).  Notably, the proposed amendment provides little guidance about what conduct or language amounts to a “prohibition” or “restriction,” creating uncertainty for contractors.  The proposed amendment would also require contractors that have previously executed such agreements to notify employees that the agreements “are no longer in effect.”

Under the proposed amendment, Federal agencies may not use funds to “contract with an entity that requires employees or subcontractors to sign an internal confidentiality agreement that restricts such employees or subcontractors from lawfully reporting waste, fraud, or abuse to a designated Government representative authorized to receive such information.”  The prohibition applies broadly to the vast majority of Federal contracts going forward, including contracts below the simplified-acquisition threshold and contracts for commercial items.  The proposed amendment also requires that an offeror for a Federal contract certify, both at the time of proposal submission and annually, that it does not require employees or subcontractors to “sign or comply with internal confidentiality agreements or statements restricting employees or subcontractors from lawfully reporting such waste, fraud, or abuse.”

The proposed amendment was not entirely unexpected: it implements a provision of the FY 2015 appropriations bill that became law in December 2014.  It is also proposed against a backdrop of increased Government interest in confidentiality agreements and their potential for chilling whistleblowing activity, particularly among government contractors.  For example, in April 2015, the Securities and Exchange Commission announced its first ever enforcement action against a company (KBR Inc.) for using improperly restrictive language—threatening employees with discipline if they reported violations to the Government without company pre-approval—in confidentiality agreements to hinder employee whistleblowing activities.  

Of course, the rule’s final form remains to be seen.  But the absence of guidance in the proposed amendment injects additional risk into an already complex regulatory environment.  If the proposed amendment becomes final, contractors would be well served to evaluate their confidentiality agreements for compliance purposes.  At a minimum, contractors with non-compliant agreements must notify each employee that such agreements are no longer effective.  Additionally, the new certification requirements may result in possible False Claims Act liability because certification may be a condition for payment (explicitly or implicitly) under Federal contracts. 

The FAR Council published the notice of proposed rulemaking in the Federal Register on January 22, 2016; public comments are due by March 22, 2016.