#1 - No Flash:
Odd that you chose manual focus - that was intentional, was it not?
Consider that the lighting is harsh and the sun is almost directly overhead (must be noon in the great Southwestern US). In fact, the shadows look like the sun may actually be a bit behind you. Not a good choice, but in this case did not do any noticeable damage. Harsh shadows in the eye sockets, exactly as one would expect. Sky is featureless - probably due to slight overexposure. I know, the faces are too dark. Besides, if you were metering off of the skin tones, then you are automatically guaranteed to be one stop too dark - right? Everyone knows facial tones should be placed on Zone VI, not Zone V, right?
# 2, with flash:
Two things got better using the flash. The sky was considerably darkened, giving it some texture and interest. (That's a natural result of the exposure now being a full stop less than in #1.)
The other beneficial effect is the faces are now lighted up with no ugly shadows in the eye sockets.
I don't consider that the faces got blown but even if they did, that's not what really got blown away for sure, and that's the young lady's jacket. It's gone - goodbye!
So, easily corrected by adusting the flash output to one stop less. There's a control for that somewhere on your 20D.
For the future - if you jockey around with the primary variables (f-stop, shutter and amount of flash) by putting your camera in manual you might be able to obtain a better compromise between the exposure for the background and the fill flash. Just reducing the flash alone may have some effect on the background - I'm not sure how these cameras decide what aperture to use when in flash mode, and that's one of the drawbacks of being in a programmed mode.
In this particular shot, I think you could have benefited from more lens opening to lighten the background (realizing that the sky will probably go bald at the same time), keep the 1/250th shutter and reduce the flash. Those are all things to have done at the time. I think you would have a tough time manipulating the background in software, although it can be done. Since this is a people shot, you can forget about holding still long enough to use a bracket shot for use in a later merge. However, a bracket shot would have been useful just for purposes of having more selections to choose from at print time.