DOL Issues Proposed Rule on Contractor Minimum Wages: What’s New?

Earlier this year, President Biden issued an Executive Order (“EO 14026”) calling for the adoption of a new minimum wage of $15 per hour that must be paid to “workers performing on or in connection with covered contracts with the Federal Government.” We fully expect this to affect many, many contracts in the coming years because the $15 rate exceeds the prevailing wages for a number of employee classifications in federal contracts around the country.

On July 21, the Department of Labor (“DOL”) published proposed regulations in the Federal Register. DOL’s next step is to receive public comments that are due by August 27 (note this is an updated deadline). From there, DOL has to fast track the review process such that it issues its regulations in final form by November 24, 2021.

Once the regulations go into effect on January 30, 2022, the initial minimum wage will be $15 an hour. It will increase thereafter on January 1 of succeeding years by a percentage determined from the Consumer Price Index for Urban Wage Earners and Clerical Workers. The wage increases applicable to tipped employees will play out a bit differently. Initially, tipped worker wages will increase to $10.50 per hour. However, unlike the Obama EO’s limitation of minimum tipped wages to 70% of the general minimum wage, the new regulations provide that tipped workers will receive the same minimum wage as all other workers by January 1, 2024.

When we blogged about the order when it came out, we noted some potential ambiguities about its application and implementation. Now that the proposed rule has come out, we have a clearer sense of how DOL is going to roll this out. The short answer is that, except for the minimum wage rate, the regulations are in many respects identical to the existing regulations that implemented the Obama Administration’s contractor minimum wage requirements.

For example, like the Obama EO regulations, the proposed EO 14026 regulations continue to apply 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. There are no additions of entire classes of contracts. Notably, the Trump Administration excluded concession contracts from the list; the new EO brings them back into the fold.

The new minimum wage requirement will be rolled out much more quickly than the Obama EO. This is because “new contracts” solicited or awarded after January 31, 2022 will now include the exercise of options under existing contracts. Thus, the grandfather period for most contracts will be relatively modest.

Otherwise, for those contractors who have been coping with the existing Obama EO requirement, there will be few surprises, if any. In other words, what was clear before remains clear today. What was ambiguous before remains ambiguous today. One of the biggest areas of confusion is determining what workers are covered. While the Obama EO called for the minimum wage to be paid to workers who perform work on or in connection with a federal contract, the proposed regulations flesh out the notion of “on or in connection with” through the definition of “worker,” which states that:

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.

Many workers are easy to figure out. If you have a janitorial contract for a federal building, the janitors who work in that building are working “on” the contract. Payroll employees who process the janitors’ paychecks likely are considered “necessary to the performance of a contract” because the janitors won’t be paid if there aren’t any payroll clerks. However, would home office help desk personnel who assist the payroll clerks be working in connection with the contract?

These gray areas further complicate the process of defining which workers are covered for those employees whose work on or in connection with a covered contract is less than 20 percent of their working time who need not be paid the minimum wage at all. And even if their contract work exceeds 20 percent, they may be paid less than the contractor minimum wage when their work is not related to the contract. While a contractor can implement a time tracking system to document time on and time off working on a contract to avail itself of this exclusion, training workers to know when they are and are not working in connection with a contract is difficult to say the least. DOL will impose the highest applicable wage rate unless contemporaneous, well-maintained records prove that workers are properly paid varying hourly rates.

Within 60 days of DOL’s issuance of its final rule (expected to be January 24, 2022 at this point), the Federal Acquisition Regulatory Council must issue new provisions and a contract clause to be added to the Federal Acquisition Regulation (“FAR”). There are existing FAR provisions and a contract clause that implement the Obama EO. FAR 52.222-55 Minimum Wages under Executive Order 13658 (DEC 2015). Given the similarity between the new and old EOs, we have every reason to expect that the FAR provisions will not change appreciably.

Among other features, the existing FAR clause makes the minimum wage and increases essentially self executing. See FAR 52.222-55(b)(1)-(2). It further provides for price adjustments for fixed price contracts to account for the increased costs incurred by contractors to comply with the wage increases. Id. at 52.222-55(b)(3). While the adjustment process resembles that applicable to the SCA (FAR 52.222-43), the time to submit requests for adjustment is not specified. We expect a flurry of wage increases in the coming year because there are many existing wage determinations that call for prevailing wages below $15 per hour. Hence, all contractors must be prepared to submit an extra batch of price adjustments in the coming year. And you should keep track of which increases arise from the EO requirements so as to distinguish them from SCA increases and avoid overlap.

Speaking of the contract… Contractors are not required to comply with the new EO requirement until it is added to their contracts. So, for now, most contractors’ minimum wage obligations are set forth in the Obama EO clause that should be in their contracts. That clause will continue to govern until a new FAR clause is promulgated and made part of the contract.

In our experience, there are many opportunities to get tripped up on the myriad pay requirements applicable to federal contractors. As just one example of the interplay of these mandates, contractors must provide fringe benefits or cash equivalents under the SCA and the Davis-Bacon Act. Under the DBA, contractors can combine wages and cash-equivalent payments into a single rate of pay. Under the SCA, a contractor will not receive credit for providing cash equivalent benefits unless they are separately accounted for. Under the Minimum Wage EO, cash equivalent benefits cannot be credited to compliance with the minimum wage requirement. Contractors must keep careful track of how they allocate the compensation paid to their workers.

The risk of being wrong is high. Contractors who are deemed to have “disregarded” the minimum wage requirement are subject to debarment making them ineligible for federal contracts for three years. Therefore, take great care and seek guidance when you’re feeling adrift.