05/08/2012 05:54 pm ET | Updated Jul 08, 2012

Different Ethical Strokes for Different PSC Folks

Most people assume that the PSC acronym stands for Private Security Contractor. It does but it also stands for Personal Services Contractor. You may be thinking, what is a personals services contractor and why should I care?

For the answer to that question let's look at an article which appeared earlier this year in the George Washington Law Review.

The article is "Dead Letter Prohibitions and Policy Failures: Applying Government Ethics Standards to Personal Services Contractors" by Collin D. Swan, who receives his J.D. this month. What he finds is that the increased dependence on private contractors is creating a problem of what we might call comparative ethics. Put more bluntly, it seems that outsourcing is creating a case of different strokes for different folks.

"The last two decades have been marked by numerous political efforts to reduce the size of the federal workforce and declare the end of the "era of big government." These efforts left the federal government strapped for personnel and resources and have forced many agencies to increasingly rely on service contractors in general, and personal services contractors in particular, to fulfill their mandates. According to the Federal Acquisition Regulations, a personal services contract is a contract that creates an employer-employee relationship between the contractor and the federal government. Despite a longstanding -- and, arguably, outdated -- regulatory prohibition on the use of personal services contracts, many agencies are increasingly employing personal services contractors in positions traditionally reserved for government employees. The result is an absurd situation in which government ethics laws apply differently to service contractors and federal employees who work alongside each other, perform similar discretionary tasks, and have the same potential to engage in corrupt practices."

If you want a real life example of this type of absurdity go back to November 2009 when USA Today reported on how military mentors are hired and fired outside of public scrutiny. They typically are retained by the military through contracts with third parties, which meant their names don't often surface in public records. In its investigation USA TODAY found that the military employed at least 158 senior mentors, about 80% of whom also had connections to various defense contractors, such as Northrup Grumman, Lockheed Martin, and BAE Systems.

According to Swan:

"Normally, these connections would have violated government ethics rules, which protect the government's interest by prohibiting federal employees from working on matters in which they have a financial interest. The Pentagon, however, employed its senior mentors as independent contractors, which are exempt from almost all government ethics obligations. Furthermore, senior mentors often performed similar functions as federal employees. USA Today reported that "[n]othing is illegal about the arrangements. In fact, there are no Pentagon-wide rules specific to the various mentor programs, which differ from service to service." Indeed, according to Brigadier General John R. Ranck, avoidance of government ethics rules was a major factor in the military's decision to hire mentors as independent contractors instead of as government employees."

Of course, this Catch-22 type situation has implications beyond mentors. Swan writes:

"This example is, unfortunately, emblematic of the government's increasing reliance on independent contractors. Although public and congressional scrutiny led the Defense Department to require all senior mentors to file public financial disclosures and to eventually prohibit the hiring of senior mentors through contract, independent contractors in general still remain exempt from government ethics standards. These same contractors, however, are increasingly per forming functions that are indistinguishable from those performed by their federal counterparts."

In short, as a private contractor, you may be doing the same thing as your public sector counterpart but you are subject to a different, more lax, ethical standard.

In Swan's view this situation has arisen because the existing ethics laws are outdated.

According to the Federal Acquisition Regulation ("FAR"), a personal services contract is a contract that creates an employer-employee relationship between the contractor and the federal government.

The prohibition on personal services contracts is found in FAR 37.104(b), which provides that "[a]gencies shall not award personal services contracts unless specifically authorized by statute... to do so." According to FAR 37.104(a), "[a] personal services contract is characterized by the employer-employee relationship it creates between the Government and the contractor's personnel." FAR 37.104(c) defines an "employer-employee relationship" as one in which "contractor personnel are subject to the relatively continuous supervision and control of a government officer or employee.

This prohibition thus discourages close government supervision of contractor personnel due to the risk that such supervision would create an unauthorized employment relationship. While this may be good from a legal viewpoint it is bad news from and oversight and accountability perspective.

"Discouraging close supervision of contractor personnel is especially problematic when those same contractor personnel are not subject to government ethics laws and there is no check on their personal incentives. Moreover, the practical need of many agencies to augment their dwindling workforces, the flexibility that contractors provide to these agencies in terms of hiring, firing, and compensation, and a general lack of enforcement have all but made the prohibition a dead letter."

There is a certain delicious irony here for those who savor such things. Because of the mania for reducing the size of the federal government (which in and of itself is not a bad thing) the government turns to private contractors -- which adds to the cost, if not the official size of government -- but because the government does not want to create the appearance of an employment relationship it must subject those same contractors to less governmental supervision. Hmm, better oversight through willful blindness and ignorance. Orwell, were he alive today, would love it.

Historically, the personal services prohibition was implemented at a time when the government relied on contractors primarily to procure supplies and construction. Since the late 1980s, however, federal procurement has radically shifted from a supply market to a market for services. The service contracting industry has expanded at a rate of five percent annually over the last fifteen years, from $137 billion in 1995 to $280 billion in 2009. In 2007, services accounted for over sixty percent of all procurement dollars spent by the federal government.

This dramatic increase in the use of services is due primarily to the downsizing of the government workforce. And, the government's failure to hire enough managers and acquisition officials to keep up with the increased procurement spending has exacerbated a deepening contract-management crisis and enabled contractors to exercise an incredible amount of discretion on the government's behalf.

The result is that while the practical distinctions between contractors and federal employees are eroding, the legal distinction between these two groups has yet to change. This has led to the formation of two sets of workers performing similar discretionary functions on the government's behalf but subject to two completely different legal regimes. Or, to borrow from the language of civil rights, two separate but unequal regimes.

By definition, public sector employees have the power to exercise discretion on the government's behalf. Such people may be inclined to make decision that benefit themselves or third parties but are not in the government's best interest. To reduce this risk, the government imposes numerous regulations on its federal employees by requiring disclosure -- and sometimes disgorgement -- of an employee's personal financial interest, prohibiting bribery and illegal gratuities, restricting the ability to obtain outside income, and limiting post-government employment.

But these regulations do not apply to contractors. Currently, very few regulations exist that govern personal conflicts of interest of individual contractor employees.

This made sense in the past when the government marketplace consisted of supplies, equipment, and construction. In such a marketplace, the government primarily dealt with contractors as organizations such as construction or manufacturing companies and had little concern over the personal interests of individual contractor employees. Individuals working under a supply contract generally had neither significant access to government resources nor the ability to exercise discretion on the government's behalf. As a result, individual contractor employees were not in a position to significantly harm the government's interest, and very few regulations were promulgated to govern personal conflicts of contractor employees.

But as the government becomes more dependent on service contractors, however, the potential for personal conflicts of interest among individual contractor employees begins to grow. Although ethics obligations have been proposed for certain contractors, particularly those employed in contract management and oversight positions, the government has yet to actually implement a systematic contractor ethics regime. This requires many agencies to address personal conflicts among contractors on an ad hoc basis.

"The GAO has reported that even the Department of Defense, despite being the government's largest procuring agency, 'lacks a departmentwide policy requiring safeguards against personal conflicts of interest for contractor employees... [and] fails to require that contractor employees be free from conflicts of interest...'"

Given the lack of such a policy is it any wonder that "fraud, waste, and abuse" is so frequently used when discussing private contractor issues?

What is the solution? Swan concludes:

"That additional protections are needed to ensure personal services contractors act in the best interests of the government. Currently, contractor employees and civil servants are governed by two different legal regimes even though they perform similar work. Additionally, the personal services prohibition unnecessarily limits the ability of agencies to supervise their con-tractor employees and creates a disincentive for the government to manage its contractors. Therefore, Congress should explicitly repeal FAR 37.104(b) through legislation and apply current government ethics laws to all personal services contractors employed by federal agencies. This would enable the government to better manage and supervise its contractor personnel and ensure that these personnel are free from damaging conflicts of interest."