“ Inflation is taxation without legislation.” 

- Milton Friedman

One of the few Obama-era Executive Orders (“EOs”) that President Trump hasn’t pulled is the Government Contractor Minimum Wage. That probably is because most Federal Government contract personnel are already covered by even higher prevailing wages like those specified in the Service Contract Act (“SCA”) or the Davis-Bacon Act (“DBA”), or are exempt from Executive Order 13658, like workers on U.S. Government supply contracts. Thus, Executive Order 13658 is not especially consequential except for limited groups of workers.

Executive Order 13658 provides for annual increases in the minimum wage based on the annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers.  Thus, once a year in advance of January 1st, the U.S. Department of Labor (“DOL”) publishes a new rule setting forth any increased minimum wage, and that time of year has rolled around again. Effective January 1, 2021, Federal Government contractors will be required to pay certain employees working on or in connection with a Government contract at least $10.95 an hour. This is a 15 cent an hour jump from the 2020 minimum wage.  Of course, that is only a 1.4% inflation rate. But note that any fringe benefits furnished workers are not credited towards the minimum wage.

Executive Order 13658 applies to the following kinds of government contracts: construction work covered by the DBA; service work covered by the SCA; concession contracts; and contracts in connection with federal property or land where services are offered to federal employees, their dependents, or the general public. Thus, as noted above, it doesn’t apply to supply contracts covered by the Walsh-Healey Public Contracts Act. The impact of this is that the scope of the Executive Order is most potent when it is applied to concession or other work exempted from the SCA and otherwise only subjected to the Fair Labor Standards Act (“FLSA”) minimum wage of $7.25 an hour. The Executive Order then kicks in to require the higher Contractor Minimum Wage. Of course, the same can happen when the SCA or DBA survey data shows lower prevailing wages. The Contractor Minimum Wage becomes the floor.  

There is also a class of workers who may find the Executive Order can plug a gap in the existing SCA coverage. The Contractor Minimum Wage requirement is more expansive than the SCA or DBA coverage. The SCA sometimes only provides for the application of the FLSA $7.25 an hour to service workers who are not engaged directly on the federal contract. And the DBA applies only workers engaged at the site of the construction. The Executive Order 13658 reach, however, is broader. It covers  workers performing “in connection” with covered contracts.  An employee is considered to be performing in connection with a covered contract if the employee performs duties “necessary to” the performance of the contract, even if the employee is not directly performing the specific contract specified scope of work. This impact accordingly tends to fall on indirect workers whose labor costs are accumulated in an overhead or general and administrative account, and otherwise are not directly charged to the Government. There is a safe harbor exception if the indirect employees perform less than 20% of their hours in a work week in connected to a covered contract.  As DOL notes on its poster, “Some workers who provide support ‘in connection with’ covered contracts for less than 20 percent of their hours worked in a week may not be entitled to the EO minimum wage.” https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/mw-contractors.pdf (old $10.80 poster).

Thus, it is time to review your payroll. If you have workers subject to Executive Order 13658, and they earn less than $10.95 an hour, get ready effective January 1, 2021 to pay them more. And review your contracts and consult with counsel as to whether you can recover the increased cost.

For more information, see 85 Federal Register 53850 (Aug. 31, 2020).  https://www.federalregister.gov/documents/2020/08/31/2020-19037/establishing-a-minimum-wage-for-contractors-notice-of-rate-change-in-effect-as-of-january-1-2021.