“The best way out is always through.” – Robert Frost

During the pandemic, much ado has been made about the federal minimum wage. Most, but notably not all, of the Democrats in the House of Representatives and the Senate have been pushing for an overhaul to bring the county’s $7.25 minimum wage up to $15.00. While that is likely an action that can only be accomplished through the legislative process, President Biden signed an Executive Order (“EO”) on April 27, 2021 increasing the hourly minimum wage to $15.00 for most parties (but not all) that contract with the Federal Government. This EO increases the contractor minimum wage from the current $10.95 to a new $15.00 an hour, and from $7.65 for tipped employees to a new $10.50 per hour effective in 2022.

The EO contains several particulars that are important to federal contractors. The first is that this EO will be effective on January 30, 2022. In addition, the order “strongly recommends” that agency solicitations within 60 date of the January 30 date adhere to the new minimum wage and that the agencies ensure, to the extent permitted by law, that all contracts issued between April 27, 2021 and January 30, 2022 consistent with this new minimum wage. In other words, the President is encouraging agencies to follow this EO before its effective date if they are able.

Furthermore, the $15.00 minimum wage will not stay at $15.00. The President has tied this new minimum wage to the Consumer Price Index for Urban Wage Earners and Clerical Workers. The EO looks to avoid a situation where the cost of living outpaces the minimum wage because so much time has passed since the minimum wage was updated. This is the problem with the Fair Labor Standards Act $7.25 minimum wage, which is caught up in political gridlock and requires congressional action to increase the wages. While a laudable move, the automatic escalation will be variable and this may cause cost adjustment issues for federal contractors who will have to estimate the increased costs on multi-year contracts. In addition, as a failsafe, the minimum wage may not go lower than the current amount at the determination of the annual percentage increase to ensure that it does not decrease.

The implementation of the EO is as follows. This EO covers a wide variety of federal contracts if the wages of workers under the contract are governed by the Fair Labor Standards Act (“FLSA”), the Service Contract Act (“SCA”), or the Davis-Bacon Act (“DBA”). It covers not just procurement contracts but also “contract like” agreements. This likely means the $15 minimum wage is expanded to cover most government service and construction work, even if not SCA/DBA covered, since the FLSA covers a larger variety of federal contract work. The exclusions are for supply contracts, grant funding, certain Indian tribe work, or any contracts expressly excluded by future regulations. It is entirely clear why supply contracts are excluded other than the Obama Administration excluded them for the prior Contractor Minimum Wage EO, which gets superseded eventually by this EO. And while grants are excluded, the EO doesn’t expressly exclude cooperative agreements, although they are presumably excluded because the funding is grant monies. So what does this mean, for example, if you have professional service contracts, 80% to 90% exempt services? Presumably, they are likely still covered because they are covered by the FLSA even though most of the workers are exempt. Accordingly, the reach of this new EO is similar to the sick leave EO and greater than older EOs.

One question is whether the EO is self-implementing. The answer is probably no. The operative clause has to be placed into the contract or subcontract and made to make the EO binding and effective. However, the EO states that the procurement agency shall include a clause in the contract stating that the contract and contractor must pay this minimum wage to its workers in order to be paid by the federal government under the contract. This is mandatory language. It also states that the EO shall apply to new contracts, contract like instruments and new solicitations which muddies the water a bit and suggests that the EO minimum wage may apply to contracts independent of the required clause.

Either way, this is a wage boost for individuals working on on the low end of Federal contracts. It will cause some wage compression in the middle ranks. Laborers on residential construction contracts and food service workers on service contracts, for example, are likely to be impacted. While many contracts are subject to Service Contract Act and Davis-Bacon Act wage determination which already may require the payment of wages in excess of $15.00 an hour, there are several holes in the regulatory scheme where all that is required is the FLSA minimum wage. And some localities have depressed prevailing wages for low skilled workers. The cost of this minimum wage increase will likely be borne by the federal government as contractors will have to increase their estimated bid prices to comply and will get a price adjustment if the EO is added to existing contracts during the option periods. The Economic Policy institute estimates that close to 400,000 federal contract workers will see a raise under this policy. Those workers that are already paid in excess of the new minimum wage will possibly also see an increase in wages in order for their employers to retain their more skilled workers and to deal with morale issues.

Presumably, some of the ambiguities of the EO will be worked out by DOL in its implementing regulations. Stand by.

To view the Executive Order, visit the White House’s website here: https://www.whitehouse.gov/briefing-room/presidential-actions/2021/04/27/executive-order-on-increasing-the-minimum-wage-for-federal-contractors/.