Catch-22: No Contractor Price Adjustments for State Minimum Wage Increases

"There was only one catch and that was Catch-22, which specified that a concern for one's own safety in the face of dangers that were real and immediate was the process of a rational mind. Orr was crazy and could be grounded. All he had to do was ask; and as soon as he did, he would no longer be crazy and would have to fly more missions. Or would be crazy to fly more missions and sane if he didn't, but if he was sane he had to fly them. If he flew them he was crazy and didn't have to, but if he didn't want to he was sane and had to. Yossarian was moved very deeply by the absolute simplicity of this clause of Catch-22 and let out a respectful whistle. 'That's some catch, that catch-22,' he observed. “

--Joseph Heller, Catch-22.

Conventional thinking says that the Service Contract Act (“SCA”) or Davis-Bacon Act (“DBA”) price adjustment provisions of the Federal Acquisition Regulations (“FAR”) provide for an adjustment for any increase in the Fair Labor Standards Act (“FLSA”) minimum wage. There is no automatic FLSA escalator. The  FLSA is only changed as a result of an act of Congress. And the result of intractable partisan deadlock and the filibuster, is that no change in the FLSA minimum wage rate has come to pass since early in the Obama Administration. That has left the FLSA minimum wage stuck at $7.25 an hour.

Meanwhile, market pressures as well as higher state law minimum wages have become the proverbial laboratory of American democracy. The majority of states have adopted  a minimum wage in excess of the FLSA.

As a result, state minimum wages exceed the FLSA and continue to head higher while the FLSA rate stagnates. As the states push their minimum wages up, they tend to even exceed the lagging prevailing wages being surveyed by the US Department of Labor (“DOL”). There is generally no automatic federal preemption of state wage laws. Thus, when the state rate overtakes the federal rate of pay, the contractor must comply and pay the state rate unless the employee is working in a federal enclave or is otherwise exempt from state law. This increased wage expense can lead contractors to ask whether they can get a price adjustment for state law required minimum wage increases.

In Parsons Government Services, Inc., ASBCA No. 61630, 20-1 BCA ¶ 37,655 (2020) the Armed Services Board of Contract Appeals (“ASBCA”) squarely answered that question when it held that nothing in FAR 52.222-43(c) requires the Government to give a contract price adjustment covering higher contractor labor expenses resulting from increased state wage orders or from a state appellate court decision requiring the contractor to pay for additional hours under state law. The general rule in fixed price contracting is that the contractor bears the risk of rising costs and sovereign acts of state and local governments.

Accordingly, caveat venditor (i.e., seller beware) is the rule. When bidding on and pricing US government extended term fixed price contracts, contractors need to price in the possibility that state minimum wages will exceed the SCA or DBA wage levels thereby effectively requiring an escalation be paid because the contracting agency will not adjust the contract price for that occurrence. So, what happens when both the state minimum wage and , say, the Contractor Minimum Wage under Executive Orders 13658 and 14026 increase. Well, that is not crystal clear.

Surely, we will see a dispute over these conflicting rates soon enough since new increases required by the EOs take place January 1, 2021, and January 31, 2021, respectively. In fact, EO 14026 will increase the Contractor Minimum Wage to $15.00. In certain jurisdictions with high state and local minimum wages, like California, New York, or the District of Columbia, it is already increasingly the case that the state minimum wages can equal or exceed the lowest wages set for prevailing wage determinations under the SCA and DBA thus calling into question any price adjustment for those state mandated wage increases. Local governments may push that floor even higher, like Portland, Maine with its $18.00 minimum wage. In short, state, local, federal prevailing and/or minimum wages are apt to leapfrog each other creating considerable confusion under the price adjustment clauses.

This indeed is some catch, that Catch-22.