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New Regulations to Push Federal Contract Minimum Wage to $15 Per Hour by 2022

July 27, 2021

By Anthony Kaylin, courtesy of SBAM Approved Partner ASE

On April 27, 2021, President Biden signed an Executive Order (EO 14026), “Increasing the Minimum Wage for Federal Contractors.” The EO would set the hourly minimum wage paid to workers performing work on or in connection with covered federal contracts to $15.00 per hour, beginning January 30, 2022.  In order to do so, implementing regulations would have to be promulgated.

The EO would:

  • Increase the minimum wage for workers performing work on or in connection with covered federal contracts to $15 per hour beginning January 30, 2022;
  • Continue to index the federal contract minimum wage in future years to an inflation measure;
  • Eliminate the tipped minimum wage for federal contract workers by 2024;
  • Ensure a $15 minimum wage for workers with disabilities performing work on or in connection with covered contracts; and
  • Restore minimum wage protections to outfitters and guides operating on federal lands.

The justification for this EO claims that raising the minimum wage “enhances worker productivity and generates higher-quality work by boosting workers’ health, morale, and effort; reducing absenteeism and turnover; and lowering supervisory and training costs.” The Executive Order also contends that these savings and quality improvements will lead to improved economy and efficiency in government procurement.  

Whether the justification is true or not, this approach is a continuation of the Obama era increase of minimum wage for federal contractors and subcontractors.  On the other hand, many jurisdictions, including Michigan, are pushing the minimum wage up to $15 per hour as a living wage. 

On July 21, 2021, the U.S. Department of Labor issued a notice of proposed rulemaking that was published in the Federal Register on July 22nd.  These proposed regulations would apply to the following types of contracts:

  • Procurement contracts for construction covered by the Davis-Bacon Act, but not the Davis-Bacon Related Acts
  • Service Contract Act (“SCA”) covered contracts
  • Concessions contracts
    • Concessions contract means a contract under which the federal government grants a right to use federal property, including land or facilities, for furnishing services. The term concessions contract includes but is not limited to a contract the principal purpose of which is to furnish food, lodging, automobile fuel, souvenirs, newspaper stands, and/or recreational equipment, regardless of whether the services are of direct benefit to the Government, its personnel, or the general public
  • Contracts related to federal property and the offering of services the general public, Federal employees, and their dependents

Contracts include contracts performed in U.S. territories.  On the other hand, the Executive Order does not apply to:

  • Contracts for the manufacturing or furnishing of materials, supplies, articles, or equipment to the Federal Government
  • Grants
  • Contracts or agreements with Indian Tribes under the Indian Self-Determination and Education Assistance Act
  • Contracts excluded from coverage under the SCA or DBA specifically excluded in the implementing regulations
  • Other contracts specifically excluded.  See NPRM Section 23.40

The Order applies to “new contracts” after January 30, 2022, but that term is more expansive than appears.  “New Contracts” include extensions or renewals of existing contracts or contract-like instruments and exercises of options on existing contracts or contract-like instruments on or after January 30, 2022.  Thus, the federal government may unilaterally exercise an option in an “old” contract not subject to the $15 rate and make the contract subject to the new $15 wage requirement.

Workers (and not just employees) who would be subject to the $15 per hour minimum wage include all who perform the work covered by the contract and whose wages are already covered by the FLSA, the SCA, or the DBA.  This means “service workers” under the SCA , construction workers under the DBA, and workers whose wages are covered by the FLSA except for workers in a bona fide executive, administrative, or professional capacity, as those terms are defined in the FLSA at 29 C.F.R. Part 541, who are exempt from the FLSA’s minimum wage and overtime requirements

Further, the Executive Order specifically applies to workers with disabilities whose wages are based on special certificates issued pursuant to section 14(c) of the Fair Labor Standards Act.

Only workers performing work “on or in connection with” a covered contract must be paid $15 per hour and only for such work performed on or in connection with the contract.  A worker performs “on” a contract if the worker directly performs the specific services called for by the contract. A worker performs “in connection with” a contract if the worker’s work activities are necessary to the performance of a contract but are not the specific services called for by the contract.

Tipped workers are also covered. 

  • Beginning January 30, 2022, a cash wage of $10.50, provided the employees receive sufficient tips to equal the EO’s minimum wage when combined with the cash wage;
  • Beginning January 1, 2023, 85% of the EO’s minimum wage, rounded to the nearest multiple of $0.05; and
  • For subsequent years, beginning January 1, 2024, 100% of the EO’s minimum wage in effect, eliminating a contractor’s ability to claim a tip credit under EO 14026.

When a contractor is using a tip credit to meet a portion of its wage obligations under the EO, the amount of tips received by the employee would be required to equal at least the difference between the required cash wage paid and the EO’s minimum wage. If the employee does not receive enough tips, the contractor would be required to increase the cash wage paid so that the cash wage in combination with the tips received equals the EO’s minimum wage.

For larger federal contractors, this Executive Order will not likely impact them.  For smaller federal contractors and hospital systems who do not have a $15 an hour wage base, the timing of the increase will likely disrupt both the compensation structure and pricing of products and services.  Given there is only six months for implementation, contractors need to be diligent in updating all affected by this increase.  The comment period on the proposed rule closes August 23, 2021.

Source:  Jackson Lewis 7/21/21, Constangy 7/22/21, CCH

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