Hobson's Choice: The New Federal Contractor Minimum Wage Puts Federal Contractors into a Tough Position When Bidding on Eligible Contracts.

“A pessimist, confronted with two bad choices, chooses both.” – Unknown

Last month Abrahams Wolf-Rodda published an article on the new Contractor Minimum Wage signed by President Joe Biden. The Executive Order institutes a new minimum wage for federal contractors working under eligible contracts. For more information on what contracts are eligible, and for the particulars about the EO, please visit our blog here: https://www.awrcounsel.com/blog/2021/4/28/a-rising-tide-lifts-all-boats-president-joe-biden-signs-an-executive-order-raising-the-federal-contractor-minimum-wage. On its face, the executive order is straight forward in terms of its application. However, as a practical matter, the Executive Order will cause several issues for the Federal Contractors working on eligible contracts. Complying with the order is not as simple as just paying each employee $15.00 per hour. This blog will explore some of the difficulties that contractors will face before and after the January 30, 2022 start date of the executive order.

Chronologically, one of the first problems contractors will face is in bidding on these contracts. Contractors estimate the costs of their labor when bidding on every type of contract, whether they are for services, or supplies. Usually, they know what each of their employees on the contract is paid and that the Federal Contractor Minimum Wage increase pursuant to the previous EO will be incremental. Additionally, most contractors already paid higher than the $10.95 previously required by EO 13658. Now, these contractors have to consider what kind of wage compression the new EO will cause, and whether it will cause wage increases beyond those making less than $15.00 an hour down the road. This could be an issue for contractors. When bidding, do they assume that higher skilled and better paid workers will also require a raise, even though they already make more than the EO mandated minimum? If they estimate that cost and bake it into their bid, they run the risk of being underbid by other contractors. Alternatively, if a contractor decides not to account the rising cost of labor and wait until the government provides a price adjustment, they run the risk of the contracting agency rejecting the request for adjustment as a foreseeable risk. Then they risk non or poor performance

This brings us to the next issue; what type of price adjustment will the government allow for yearly changes to the EO Contractor Minimum Wage? The previous iteration of this executive order under President Obama only allowed for the increased cost of labor and for associated labor costs. FAR 52.222(b)(3). This means that overhead and profit could not be included for the price adjustment. Additionally, any increase for wages paid as a result of wage compression (i.e. incentives for employees already making above the federal contractor minimum wage) also could not be included. So, the contractor from before who decided to wait for the price adjustment may be out of luck and stuck holding the bag for those costs. They can always not increase the wages of those employees, but this will likely lead to morale issues and trouble recruiting. The contractors who already baked those costs into the contract will be able to offer a higher wage and better benefits. On the other hand, they may not have won the contract because they submitted a significantly higher bid. Of course, these issues are more or less likely to happen depending on the type of contract. A Cost-Plus type of contract allows for the direct cost of labor to be reimbursed, but a fixed fee contract requires the contractor to request a price adjustment for additional monies spent. Therefore, there will be additional risk for fixed-fee type contracts. Additionally, the EO will be added to existing contracts when an option is exercised after the EO takes effect. It is not clear what mechanism the agency will use to include the new EO clauses in the existing contracts and how the contractors are compensated for it.

Finally, and we did touch on it above, how will the Executive Order affect wage compression? Wage compression occurs when employees of different skill levels or experience have small differences in pay. For example, as a result of the almost $5.00 wage increase, a line cook with only 1 year of experience now might make the same as a line cook with 10 years of experience. This presents an issue for the contractor, not because they have to pay the lower skilled employees more (because this cost will be borne by the government), but because this might lead the more experienced line cook to feel undervalued. This will eventually resolve itself. Once the “market” for more experienced or higher skilled employees is set, it will be easier to estimate how the contractor should bid on contracts as well. However, the first few months or years of this new Executive Order will see inconsistencies in the labor market with some contractors paying more for mid-range positions to combat the morale effects of wage compression than others.

Many of these questions will be resolved when the Department of Labor publishes their rules and regulations interpreting the Executive Order. However, considering the astronomical cost that this Executive Order will place on the different agencies, it is very possible that they do their best to shift the burden for some of these ambiguities onto the contactor. Of course, this will encourage underbidding and for contractors to ignore the wage compression issue until it manifests itself in high employee turnover rates. But that is a policy decision the new administration is going to have to make.