Federal Contractors Must Consider What Crosses Pay-to-Play Line

Federal contractors and investors who operate in the government‑facing space frequently ask if their company can make political contributions. If the answer is no, the next question is how then are some of the largest government contractors and their executives frequently identified as major political donors?

We increasingly live in a political landscape shaped by corporate contributions. Major companies spend considerable sums to shape the regulatory landscape, and many executives who have become household names are commonly found on donor lists.

It might be surprising then to know that, in addition to general restrictions on corporate contributions, companies that receive federal government contracts are strictly prohibited by the Federal Election Campaign Act of 1971 from making federal campaign contributions.

Whatever the perception, the federal contractor ban remains firm even as many campaign finance restrictions have eroded in the post–Citizens United era. Regulators and courts continue to enforce the ban strictly and political activity that appears commonplace in other industries can expose a contractor to significant risk.

FECA draws careful distinctions between contractor entities and individuals, between contributions and independent spending, and between prohibited and permitted political activity. Understanding those distinctions explains why political giving by people associated with government contractors is both common and often lawful, but also where compliance traps lie.

Federal Contractor Ban

FECA makes it unlawful for any person who “enters into any contract with the United States” to contribute “money or other thing of value” to a federal candidate, political party, or committee, or to any person “for any political purpose or use.” The prohibition doesn’t extend to state or local races.

A common pitfall is an assumption that the ban runs for the life of the contract. It actually runs from the start of negotiations for a federal contract through the completion or termination of the contract. Even bidders who never receive a contract may be covered during the negotiation period. Federal law also prohibits knowingly soliciting contributions from covered contractors during that time.

Federal contractors repeatedly have tried, and failed, to challenge the statute on First Amendment grounds. In the 2015 case of Wagner v. FEC, the US Court of Appeals for the DC Circuit upheld the contractor contribution ban, emphasizing the government’s compelling interest in preventing pay‑to‑play corruption and protecting the integrity of the federal procurement process.

The enbanc court rejected the argument that changes in campaign‑finance law or procurement practices had undermined the statute’s rationale. The takeaway we emphasize to clients is that the contractor ban isn’t being applied loosely or symbolically.

Clients often ask whether super PACs represent a practical workaround or loophole for federal contractors. The US Supreme Court’s decision in Citizens United v. Federal Election Commission reshaped campaign‑finance law by allowing corporations to engage in unlimited “independent expenditures,” which accelerated the rise of super PACs. However, the perception that Citizens United loosened the rules for all corporations is misguided. Citizens United didn’t repeal the federal contractor ban and the FEC has made clear that super PACs may not accept contributions from federal contractors.

Attempts to push the boundaries here tend to create more risk than reward, particularly given the reputational sensitivity around procurement integrity.

The Lawful Path

Although a government contractor may not contribute directly, federal law expressly permits a federal contractor to establish and administer a separate segregated fund, the technical term for a corporate PAC.

Corporate PACs frequently a reviewed, fairly or not, as a way for government contractors to remain politically influential while complying with the letter of the law. That perception has fueled criticism that contractors are pushing up against the spirit of the pay‑to‑play restrictions without technically violating them.

This criticism means more scrutiny on the creation and administration of corporate contractor PACs.

To comply, the PACs must be legally distinct from the contractor that sponsors them. The contractor may use general treasury funds to pay the costs of establishing, administering, and soliciting contributions for the PAC, but the PAC’s political contributions must come solely from voluntary contributions made by a limited “restricted class,” typically senior executives and eligible employees. Those funds must be kept in a separate account.

This structure requires careful compliance, particularly around solicitation, attribution, and separation of funds. The risk lies not in the existence of the PAC, but in lax controls or shortcuts that blur the separation between corporate resources and individual contributions. Given ongoing scrutiny of contractor political activity, this is an area where conservative compliance, not creative structuring, is the advisable course.

Who Can Contribute

The FEC repeatedly has stated that the federal contractor prohibition doesn’t “prohibit the stockholders, officers, or employees of a corporation” from making contributions from their personal assets (although this exception doesn’t apply to sole proprietors). In many cases, this explains the perception that certain major government contractors are making political contributions when, legally, the money is coming from individuals.

That is why executives and owners of major government contractors frequently appear as individual donors. So long as the contribution is personal, within ordinary limits, and not reimbursed or funneled through corporate accounts, it is typically lawful.

Here, too, the perception that “everyone does it” can be misleading. While personal contributions by executives are permitted, enforcement actions often turn on whether those donations were truly personal in substance as well as form.

Even modest coordination, administrative involvement, reimbursement,or use of corporate resources can collapse the distinction and trigger a finding that the company itself crossed the line.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Llewelyn Engel is a partner at McDermott Will & Schulte who focuses her practice on government investigations, government contracts, lobbying, political contributions, government ethics, and public policy matters.

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