On July 22, 2021, the U.S. Department of Labor’s proposed rule to implement and enforce Executive Order 14026, “Increasing the Minimum Wage for Federal Contractors,” was published in the Federal Register.  Executive Order 14026, which President Biden signed on April 27, 2021, generally requires federal contractors to pay their workers at least $15 per hour and increases the minimum wage for tipped federal contractors to $10.50 per hour, starting January 30, 2022. The DOL’s proposed rule will have no direct impact on minimum wage requirements for non-federal contractors.

Interplay with Prior Executive Orders

The new Executive Order 14026 claims that increasing the minimum wage paid by federal contractors will lead to improved economy and efficiency in federal procurement. It also builds on the foundation established by Executive Order 13658, “Establishing a Minimum Wage for Contractors,” which President Obama signed on February 12, 2014.  A separate executive order (Executive Order 13838) issued during the Trump administration, however, established several exemptions for complying with Executive Order 13658. Under Obama’s executive order, the amount of the minimum wage increases every year effective on January 1.  For those contractors subject to that order, the minimum wage increased effective January 1, 2021 to $10.95 per hour for covered hourly employees and $7.65 per hour for covered tipped employees. Note, however, that some contractors that were previously subject to Executive Order 13658 are no longer subject to this requirement based on the exemptions to the requirement established by Trump’s Executive Order 13838. The period of transition before full implementation of the latest executive order will therefore be complicated for those federal contractors that might have different contracts subject to different rules.

Scope of DOL Proposed Rule

The proposed rule sets forth detailed standards and procedures for implementing and enforcing Executive Order 14026, which are to be codified by adding a new part 23 to Title 29 of the Code of Federal Regulations.  The proposed rule also amends the existing rules relating to President Obama’s Executive Order 13658 (codified at 29 CFR part 10) to make it clear that the existing rules will continue to apply to covered contracts that are entered into, extended, or renewed through January 29, 2022.  For contracts entered into, extended, or renewed on or after January 30, 2022, the new rule will apply.  The same is true if an option on an existing contract is exercised on or after January 30, 2022.

Pursuant to the proposal, Executive Order 14026 applies to new contracts, new contract-like instruments, new solicitations, and extensions or renewals of existing contracts (pursuant to an exercised option or otherwise) governed by the Fair Labor Standards Act (FLSA), Service Contract Act (SCA), and Davis Bacon Act (DBA)² on or after January 30, 2022.  This scope is more expansive than that under Executive Order 13658 because the renewal or extension of a contract pursuant to the exercise of an option period on or after January 30, 2022 will qualify as a “new contract” for purposes of Executive Order 14026, whereas under Executive Order 13658, coverage was not triggered by the government’s unilateral exercise of a pre-negotiated option to renew an existing contract. The DOL recognizes this and even “anticipates that, in the relatively near future, essentially all covered contracts with the Federal Government will qualify as ‘new contracts’ [] and thus will be subject to the higher Executive Order 14026 minimum wage rate.” The regulations fail to address how federal contractors would get reimbursed for the increased costs when options are exercised on an existing contract, especially under a fixed-price contract.  

New Minimum Hourly Rates

The proposed rule provides that Executive Order 14026 revokes Executive Order 13838 as of January 30, 2022. Accordingly, as of January 30, 2022, contracts entered into with the federal government in connection with seasonal recreational services or seasonal recreational equipment rental for the general public on federal lands will be subject to the minimum wage requirements of either Executive Order 13658 or Executive Order 14026, depending on the date that the relevant contract was entered into, renewed, or extended. Under the proposed rule, beginning January 30, 2022, the standard minimum wage for covered federal contractors will be $15.00 per hour, effectively raising the minimum wage for federal contractors by $4.05. And beginning January 1, 2023, the secretary of labor will determine the minimum wage on an annual basis based on the Consumer Price Index at least 90 days before any new minimum wage is to take effect.

For tipped federal contractors, the proposed rule provides that beginning January 30, 2022, the standard hourly cash wage will be $10.50 per hour and beginning January 1, 2023, the standard hourly cash wage for tipped federal contractors will be 85% of the standard minimum wage for federal contractors. Beginning January 1, 2024, however, the standard hourly cash wage for tipped federal contractors will be 100% of the standard minimum wage for federal contractors – effectively eliminating a contractor’s ability to claim a tip credit.  When a federal contractor is using a tip credit to meet a portion of its wage obligations prior to January 1, 2024, the amount of tips received must equal at least the difference between the required cash wage paid and standard minimum wage for federal contractors. If the employee does not receive sufficient tips, the contractor must increase the cash wage paid so that the cash wage in combination with the tips received equals the standard minimum wage for federal contractors. Similarly, if the SCA or another law or regulation provides for a higher wage, the employer must pay additional cash wages to meet those requirements.

Geographic Scope & Covered Workers

The proposed rule is also more expansive in geographic scope than the regulations implementing Executive Order 13658. Pursuant to the proposal, covered contracts are those requiring performance in whole or in part within the United States, which is defined as the 50 states, the District of Columbia, Puerto Rico, the Virgin Islands, Outer Continental Shelf lands as defined in the Outer Continental Shelf Lands Act, American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, Wake Island, and Johnston Island.  In contrast, Executive Order 13658 applied only to contracts performed in the 50 states and the District of Columbia.   

The proposed rule defines “worker” as any person engaged in performing work on or in connection with a contract covered by the executive order, and whose wages under such contract are governed by the FLSA, the SCA, or the DBA, regardless of the contractual relationship alleged to exist between the individual and the employer. The proposed rule expressly provides that the new minimum wage requirements extend to workers with disabilities whose rates are calculated pursuant to special certificates, as well as individuals registered in a bona fide apprenticeship or training program. Furthermore, the definition provides that a worker performs “on” a contract if the worker directly performs the specific services called for by the contract and that a worker performs “in connection with” a contract if the work activities are necessary to the performance of a contract but are not the specific services called for by the contract. However, FLSA-covered workers performing work “in connection” with covered contracts for less than 20% of their work hours in a given workweek would not be covered. This proposed exclusion based on 20% of hours does not apply to any worker performing “on” a covered contract whose wages are governed by the FLSA, SCA, or DBA. Thus, in order to apply this exclusion correctly, contractors must accurately distinguish between workers performing “on” a covered contract and those workers performing “in connection with” a covered contract, and keep and maintain records segregating non-covered work from the work performed on or in connection with a covered contract.

Under the proposed rule, the minimum wage requirements would also not apply to (a) grants, (b) contracts with Indian Tribes under the Indian Self-Determination and Education Assistance Act, (c) procurement contracts for construction that are excluded from coverage of the DBA, (d) contracts for services that are exempted from coverage under the SCA, (e) employees who are exempt from minimum wage requirements of the FLSA, and (f) contracts that result from a solicitation issued before January 30, 2022, and that are entered into on or between January 30, 2022 and March 30, 2022 (if subsequently extended or renewed, however, then the regulations would apply).

Enforcement

The proposed rule provides that workers may file a complaint with the DOL’s Wage and Hour Division. The administrator may investigate possible violations either as the result of a complaint or at any time on their own initiative. Where a violation is found, the administrator will notify the contractor to remedy the violation. If it is not remedied, the administrator may direct that payments due on the contract or any other contract between the federal contractor and the government be withheld as necessary to pay unpaid wages. If the administrator determines a worker was retaliated against, they may provide for any relief as deemed appropriate, including employment, reinstatement, promotion, and the payment of lost wages.

The Biden administration asserts it has legal authority to increase pay for federal contractors under the federal government’s procurement power, which allows the president to promote “economy and efficiency.” Questions remain, however, as to whether the president has the legal authority to mandate a minimum wage higher than the wage determinations imposed by the SCA and DBA. While this issue was never litigated under President Obama’s Executive Order 13658 because the minimum wage was set low enough that it affected few government contractors, the increased minimum wage under Executive Order 14026 will affect more contractors, and therefore could be subject to challenge.

The DOL has given the public only 30 days to file comments from the date of publication in the Federal Register, meaning all comments must be submitted by August 23, 2021 for consideration in the rulemaking.² Interested parties will be able to file comments electronically through the federal eRulemaking Portal at http://regulation.gov.  The regulations will not go into effect until after the DOL reviews the submitted comments and publishes a final rule. Pursuant to the Executive Order 14026, the DOL must, however, issue final regulations by November 24, 2021.