| Date: | 10/06/1986 |
|---|---|
| Organization: | State Ethics Commission |
A state vendor subcontract employee is a state employee under §1(q) of the conflict of interest law because his services are specifically contemplated in a state contract. He does not violate § 7 of the law by owning more than 1% of the vendor subcontract company. His brother, who also owns more than 1% of the subcontract company, is not a state employee because his services in connection with the state contract are not required.
Several years ago, a state agency awarded a contract to XYZ Engineering Co. to provide architectural and engineering services. By mid-1984, the agency was dissatisfied with XYZ's performance on the interior design and finish work and requested that XYZ subcontract its work as to this aspect of the project. Following an interview process, the agency selected as a substitute ABC (ABC), an architectural firm, on the basis of ABC's experience in the interior design of large spaces. The choice, which became effective in September, 1984, was acceptable to XYZ.
ABC initially subcontracted with XYZ in the traditional way. That is, the scope of ABC's subcontract was based upon XYZ's work and was limited to preliminary design tasks for the improvement of design quality. Based on the agency's acceptance of ABC's subsequent recommendations, ABC's scope of work developed and increased. In November 1985, ABC wrote directly to the agency for an amendment to the scope and value of the contract. The agency then consulted with XYZ before approval. The amendment increased the scope of services and requested additional compensation. Further, ABC also requested compensation for the design of artwork to be done by Mr. X. The cost of fabrication and installation of the finished product would be separately bid. The amended agreement between the agency and ABC specifically contemplated Mr. X's services. The allocation for Mr. X's professional services has been approved by the agency pending a resolution of the potential conflict of interest issues.
Mr. X's brother is an employee, officer, director and owner of more than 1% of the stock of ABC. He manages the project for ABC, although his services have not been specifically requested in the ABC/XYZ sub-contract. Mr. X's brother's responsibilities have included the preparation of the initial proposal to XYZ discussing ABC's scope of work and compensation directly with the agency attending meetings with the agency and submitting material for the agency's review. Mr. X also owns more than 1% of the stock of ABC.[1]
In a technical sense, ABC is the subcontractor; XYZ, the principal contractor; and the agency the contracting agency. However, because of XYZ's previous performance and other facts, the agency has interacted directly with ABC regarding the amended items. The direct contact has included negotiation and decision making, as well as the exchange of information and consultation. The agency views XYZ's role in a real sense, if not legal one, as being limited to consulting and deferral to the relationship between ABC and the agency.
A. Contractual Relationship between ABC and the Agency
The first issue is whether ABC has a contractual relationship with the agency. If ABC has no contractual rights or responsibilities to the agency but owes its loyalty to XYZ as a subcontractor, then it cannot fairly be concluded that employees or officers of ABC are performing services for a state agency.
In the circumstances of this case, to characterize ABC's relationship to the agency as a subcontractor would be to elevate form over substance and we decline to do so. ABC and the agency have a direct contractual relationship. Although initially ABC had a subcontract which was limited in scope by the confines of XYZ's contract, this relationship was short-lived. Within a short time, ABC was negotiating directly with the agency for an amendment to the scope and value of a substantial part of the contract. XYZ's role in this direct negotiation was limited to consultation and had become secondary, if not pro forma, given the agency's previous dissatisfaction with XYZ's performance on the interior design. The direct contact between the agency and ABC resulted in important decisions as to costs and services. For practical purposes, XYZ did not retain authority over the interior design work or coordination. Although ABC built upon earlier XYZ plans, ABC was substituted for XYZ as to $159,000 of amended work, including specialty items of an interior design nature.
B. Jurisdictional Status of Mr. X
We conclude that Mr. X performs the artwork design for the agency and is a "state employee" within the meaning of G.L. c. 268A, § 1(q).[2]
Although the definition of state employee does not customarily cover an employee of a corporation or vendor which contracts with the state, such an employee is covered by the definition if the terms of the contract indicate that his specific services are being contracted for. In Attorney Conflict Opinion No. 852, a 50% stockholder in a corporation was specifically named in a contract between that corporation and a state agency. In that case, the state agency could cancel the contract if the stockholder failed to perform the duties designated. The Attorney General concluded that under these circumstances the individual was a state employee for the purposes of G.L. c. 268A. See also, EC-COI-80-84, where the Commission concluded that the partners in a law firm were "state employees" because the contracting state agency specifically contemplated that each of the firm's partners would work on the project for the state. By similar reasoning, Mr. X is also a state employee. Mr. X's services were specifically bargained for on November 25,1985. Not only was he specifically named, but also a cost for his specific art work design services was agreed upon. The agency's interest in the final art work design contemplates Mr. X's specialized services.
C. Application of G.L. c. 268A, § 7 to Mr. X
As a state employee, Mr. X will be subject to the restrictions of G.L. c. 268A, § 7. Section 7 generally prohibits a state employee from having a direct or indirect financial interest in any contract made by a state agency. The agency is a state agency. The language of § 7 literally applies to Mr. X who, as an owner of more than 1% of the stock of ABC, has an indirect financial interest in ABC's contractual relationship with the agency.
It is necessary, however, to give § 7 a workable and common sense reading. It has long been recognized, for example, that § 7 cannot be reasonably interpreted to prohibit a state employee from receipt of his own paycheck, Buss, The Massachusetts Conflict of Interest Statute: An Analysis, 45 B.U. Law Review 299(1965). Similarly, there is no policy advanced by prohibiting an owner of a company from performing services as a specifically named individual (and thus as a state employee) while at the same time receiving financial benefit as an investor in the same company. In such a case, the contract which creates state employee status is the same contract which results in the financial interest. Therefore, there is no opportunity to gain an inside track on a second state contract. On the other hand, a state employee may generally not own a company which has a second independent contract with the state. See, EC-COI-83-129. In light of the above discussion, we must determine whether the professional fee for Mr. X's services is reasonably part and parcel of, an extension of, an amendment to, or integrally related to ABC's original contract with XYZ; or whether the fee is, in reality, a separate contract for a distinct service. Normally, the Commission will defer to an agency's own determination on this issue. Thus, if the agency considers the matters sufficiently connected so that it determines that it may amend the original contract to include Mr. X's services as an artist/graphic designer, the Commission will defer to this determination absent an obvious abuse or sham. If, on the other hand, the agency is unwilling to consider Mr. X's service as part of the original contract, § 7 applies.
In this case, the agency has concluded that the contract for Mr. X's art services was under the authorization of the vote for the implementation of a program for the purchase of various artwork as a component of the project. The determination that the artwork was a component of the project and that Mr. X's services were authorized, appears reasonable. We therefore conclude that the specialized services of Mr. X may reasonably be regarded as an extension of the original contract between the agency and XYZ, and as subsequently substituted, ABC.
D. Jurisdictional Status of Mr. X's Brother
We conclude that Mr. X's brother is not a state employee for the purposes of G.L. c. 268A. In selecting ABC, the agency did not seek Mr. X's brother's services, nor has Mr. X's brother been expected to perform the services called for in the contract. Rather, the agency selected ABC based upon the company's ability to combine architectural and design disciplines. Unlike the contractual arrangement between the agency and Mr. X, the agency has made no specific allocation of money for Mr. X's brother's management services. Mr. X's brother's status as project manager, without more, does not make him a state employee for G.L. c. 268A purposes. Compare, EC-COI-83-129.
