As he promised to do in his State of the Union address, President Obama today signed an Executive Order establishing a minimum wage for federal contractors. 

The Executive Order states that its purpose is to “increase efficiency and cost savings in the work performed by parties who contract with the Federal Government by increasing to $10.10 the hourly minimum wage.”  The Order contends that “[R]aising the pay of low-wage workers increases their morale and the productivity and quality of their work, lowers turnover and its accompanying costs, and reduces supervisory costs.  These savings and quality improvements will lead to improved economy and efficiency in Government procurement.”

Most immediately, the Executive Order requires executive departments and agencies to begin including in their “new contracts, contract-like instruments, and solicitations” (referred to collectively in the Order as “contracts”) a clause requiring the payment of a minimum wage.  This minimum wage is set at $10.10 per hour beginning January 1, 2015, and will be increased annually to reflect changes in the Consumer Price Index.  Contractors, in turn, are required to incorporate this same clause in their lower-tier subcontracts. 

The new minimum wage for contractors will apply only to covered contracts and contract-like instruments that are the result of solicitations issued on or after January 1, 2015.  What the Order means by the term “contract-like instruments” is unclear. 

Based on the language of the Executive Order and by analogy to other federal laws establishing minimum wages for certain government work (such as the Davis-Bacon Act), it seems reasonable to assume that this new minimum wage will apply only to those employees actually performing work in connection with a covered contract or subcontract.  However, the Executive Order does not indicate how contractors are to determine what work is “covered.”  

Answers to such practical questions regarding the interpretation of this Executive Order will have to await the promulgation of implementing regulations by the Secretary of Labor.  The Order requires the Secretary of Labor to issue such regulations by October 1, 2014.

The Executive Order also includes provisions regarding minimum wages for tipped employees and appears to specifically bar contractors from paying reduced wages to covered “handicapped workers” pursuant to the existing Fair Labor Standard Act exception that permits the Department of Labor to authorize the employment of “handicapped workers” under special certificates in order to promote employment opportunities for the disabled.

Companies deciding whether to do business with the federal government often struggle with this decision because of the significant costs of complying with existing federal regulations, including the affirmative action requirements enforced by the Office of Federal Contract Compliance Programs.  Depending upon what the implementing regulations actually require, this new Executive Order may be a game changer as it could substantially impact costs in industries that rely on unskilled workers.