OPINION NUMBER - 177
ADOPTED - 1997/07/18
SUBJECT - Conflicts of Interest/interest in a Contract
REQUESTED BY: Tim O'Neill, Attorney, on behalf of Jerry Prange, LaVern Goens, and J & L Consulting, Inc.
QUESTION: (1) Can a state agency enter into a contract with a company owned and operated by the spouses of employees of the agency? (2) Can the such a contract be entered into using the agency's current procedure?
As to question #1, yes, but see analysis. As to question #2, see analysis.
Central Data Processing (CDP) is a division of the Nebraska Department of Administrative Services. CDP uses independent contractors in application development work. That is, CDP seeks independent contractors to perform certain services. Typically, CDP sends out requests for proposals to about fifty different companies which may respond with a proposal to meet the specifications of CDP. Ultimately, a company is selected and a contract is entered into by the company and CDP. The independent contractor provided by the company begins work with CDP on the assignment for a set number of months.
J & L Consulting, Inc. is a Nebraska corporation. Initially, it was formed with Mr. Goens and Mr. Prange being the shareholders, the directors and the officers. Mr. Goens and Mr. Prange are also employees of CDP. Mr. Goens is a lead applications analyst and Mr. Prange is a senior applications analyst for CDP. In the course of their employment with CDP, neither make any decision regarding the selection, hiring, or retention of contractors with CDP.
J & L Consulting, Inc. is in the process of reorganizing. Upon completion of this reorganization, the officers and directors of the company will be Kathy Goens and Jamie Prange, the spouses of Messrs. Goens and Prange. Mrs. Goens and Mrs. Prange will also serve as the sole shareholders.
Section 49-14,102 of the Nebraska Political Accountability and Disclosure Act provides in part as follows:
No public official or public employee, a member of the individual's immediate family, or a business with which that individual is associated shall enter into a contract valued at $2,000 or more, in any one year, with a governmental body unless the contract is awarded through an open and public process which includes prior public notice and subsequent availability for public inspection during the regular business hours of the contracting governmental body of the proposals considered and the contract awarded ... This section shall not apply to a contract when the public official does not in any way represent either party to the transaction.
Section 49-1424 defines the term government body as follows:
Government body shall mean an authority, department, commission, committee, council, board, bureau, division, office, legislative body, or other agency in the executive, legislative, or judicial branch of state government...
Central Data Processing is a division of the Department of Administrative Services which in turn is an agency of the State of Nebraska. Central Data Processing is a government body.
Section 49-1442 defines the term public employee as "an employee of the state or a political subdivision thereof." An employee of CDP is a public employee.
Section 49-1407 defines the term business as "any corporation, partnership, limited liability company, sole proprietorship, firm, enterprise, franchise, association, organization, self employed individual, holding company, joint stock company, receivership, trust, activity or entity." J & L Consulting, Inc. is a business as defined.
Section 49-1408 of the Act defines "business with which the individual is associated" as a business:
(1) In which the individual is a partner ' limited liability company member, director, or officer, or (2) in which the individual or a member of the individual's immediate family is a stockholder of closed corporation stock worth one thousand dollars or more at fair market value or which represents more than a five percent equity interest or is a stockholder of publicly traded stock worth ten
thousand dollars or more at fair market value or which represents more than ten percent equity interest.
The term immediate family member is defined in §49-1425 as "a child residing in the individual's household, a spouse of an individual, or an individual claimed by that individual or that individual's spouse as a dependent for federal income tax purposes."
Based upon sections 49-1408 and 49-1425, Messrs. Prange and Goens currently have a business association with J & L Consulting, Inc. and will continue to have a business association with J & L Consulting, Inc. after the reorganization as described.
The Nebraska Political Accountability and Disclosure Act does not prohibit a company with which a state employee has a business association from doing business with the state agency for which the employee works as long as the statutory procedures are followed. As stated above, §49-14,102 permits a public employee to have an interest in a contract through a business association as long as the contract is entered into through an open and public process which includes prior public notice. These procedures need not be followed if the contract is valued at less than $2,000 in any one year or if the employee does not represent either party to the transaction. For the purpose of this opinion, we are assuming that the contracts in question are valued at $2,000 or more in a year.
In Advisory Opinions #154, #168 and #169, the Commission addressed the concept of an open and public process. The Commission has taken the position that a bidding process is an open and public process. The Commission has also stated that an open and public process includes a process in which the matter of awarding a contract is an agenda item for a meeting of a governing body if the meeting is publicized in the normal manner of the governing body.
A review of the process followed by CDP when it sends out requests for proposals discloses that the process does not meet the open and public process requirement established by the statute. The bids are not part of a bidding process in the usual sense of the term. That is, there is no published notice that bids are being accepted for a specific project with established specifications. The process followed by CDP would generally be unknown to anyone other than the fifty companies which receive a request for proposal. While certain agencies governed by boards or commissions might have the opportunity to consider a contract at an open and public meeting with the contract being an agenda item, the structure of CDP does not permit this.
We now examine that portion of §49-14,102 which provides that the section does not apply if "the public official or public employee does not in any way represent either party to the transaction." We take the position that the use of the term "in any way" indicates that the word "represent" should be broadly interpreted.
In Advisory Opinion #168, the Commission took the position that the president and CEO of a for-profit corporation "necessarily represents a party to the transaction". In a small corporation in which two individuals are the officers, directors and holders of all stock, we take the position that the two necessarily represent the corporation in a transaction with the state. Thus, under the current corporate structure of J & L Consulting, Inc., the two state employees would be representing a party to the transaction. Section 49-14,102 would apply and the company could not enter into a contract with CDP through its current request for proposals process.
While the change in corporate structure eliminates the presumption that the two state employees represent the company, the change is not dispositive of the issue.
If an employee of J & L Consulting, Inc. or a person associated with the company reviews a CDP request for proposals and prepares or assists in preparing a proposal, that person is representing the company in the transaction. If an employee of J & L Consulting, Inc. is performing the duties of an officer or director even if he does not hold the actual title, that person is representing the company in the transaction. This is so even if the name of that individual does not appear on any document or is not in any way transmitted to CDP. It is for the company to show that the two state employees had no role in the preparation of the proposal, that they are not functioning as officers or directors, and that they in no way represent the company in the transaction.
The application development work which CDP contracts to have done by independent contractors is much the same as the work that a state employed applications analyst does for CDP. It is conceivable, therefore, that one or both of the state employees could be working with an independent contractor doing applications work. That is, one or both could, under certain circumstances, represent the state in a transaction between CDP and the company. Under these circumstances, §49-14,102 would apply and the company could not enter into a contract with CDP through its current request for proposals process.
Compliance with the provisions of §49-14,102, when applicable, is important for the simple reason that a contract entered into in violation of §49-14,102 is voidable. See §49-14,103. Violations of §49-14,102 potentially subject public employees to civil penalties.
We note the provisions of §49-14,103(2) which state that the provisions of §49-14,102 do not apply to a contract for labor which is negotiated or is being negotiated pursuant to the laws of this state. We do not consider this section applicable to the situation under review for two reasons. First, it is not a contract for labor in the sense of collective bargaining by a union. Second, the work typically done under an applications work contract is not the hiring of an employee for an hourly wage or salary. It is a contract for an independent contractor to provide a certain service.
In order to insure that a contract between CDP and J & L Consulting, Inc. for applications work does not violate §49-14,102, there should either be a change in the process by which CDP enters into to these contracts, or CDP should determine to its satisfaction as to each contemplated contract that its two employees represent neither CDP nor J & L Consulting, Inc. in the transaction, which may include accepting an affidavit from each employee disclaiming representation of either CDP or J & L Consulting, Inc. in the transaction.
Finally, we note the provisions of §49-14,101(3). This section prohibits a public official or public employee from using his or her public office or any confidential information received through the holding of ' a public office for personal financial gain, that of an immediate family member, or that of a business association. A full discussion of this section is found in Advisory Opinion #173.
It is permissible under the Nebraska Political Accountability and Disclosure Act for a corporation to enter into a contract with a state agency even if two employees of that agency have a business association with the corporation. However, the requirements of §49-14,102 must be met. That is, the contract must be entered into through an open and public process. If the employees do not in any way represent either party to the transaction, §49-14,102 does not apply. Section 49-14,101(3) prohibits a public employee from using his or her public office or confidential information received through the holding of a public office for personal financial gain, that of an immediate family member, or a business with which the individual is associated.