U.S. Department of Labor Issues Final Rule Implementing Minimum Wage Increase for Federal Contractors

On November 22, 2021, the U.S. Department of Labor (DOL) published a final rule implementing Executive Order (EO) 14026, which mandates an increase in the minimum wage for many federal contractors and subcontractors. The final rule, issued after a four-month public comment period that followed a notice of proposed rulemaking issued on July 22, 2021, raises the federal contractor minimum wage to $15 per hour (representing a $4.05 increase from the current minimum wage for federal contractors of $10.95 per hour) and permits the Secretary of Labor to increase the minimum wage annually beginning in 2023.

Although the final rule in many respects serves as an update to Executive Order 13658 issued in 2014 by President Obama, which initially raised the minimum wage for federal contractors, there are a few key differences. Among them, the final rule phases out the tipped minimum wage for federal contractors (which is currently set at $7.65 per hour and will increase to $7.90 on January 1, 2022) by 2024, and the minimum wage requirement applies to covered workers with disabilities whose wages previously were calculated pursuant to special certificates issued under Section 14(c) of the Fair Labor Standards Act (FLSA).

Which Federal Contractors Are Required to Increase the Minimum Wage?

The final rule does not apply to all federal contractors and does not apply immediately to any existing federal government contract or subcontract. To trigger coverage, a contractor must enter into a federal government "contract or contract-like instrument" on or after January 30, 2022, and that falls into one of the following four categories of federal contracts:

1. Service Contract Act covered contracts;
2. Procurement contracts for construction covered by the Davis-Bacon Act, including contracts awarded pursuant to Federal Acquisition Regulation Part 12 for commercial items and commercial services, but not contracts covered by the Davis-Bacon "related acts" (e.g., the Federal Aid Highway Acts, the Housing and Community Development Act of 1974, the Federal Water Pollution Control Act);
3. Concessions contracts, e.g., contracts under which the federal government grants a right to use federal property, including land or facilities, for furnishing services; and
4. Contracts related to federal property and the offering of services to the general public or federal employees and their dependents.

Notably, the term "contract-like instrument" is defined broadly to include not only "bilateral instruments" but also, without limitation:

[A]wards and notices of awards; job orders or task letters issued under basic ordering agreements; letter contracts; orders, such as purchase orders, under which the contract becomes effective by written acceptance or performance; exercised contract options; and bilateral contract modifications.

The final rule does not apply to other contracts or other funding instruments, such as:

• Grants;
• Contracts or agreements with Indian tribes under the Indian Self-Determination and Education Assistance Act;
• Contracts for the manufacturing or furnishing of materials, supplies, articles or equipment to the federal government;
• Contracts excluded from coverage under the Service Contracts Act or Davis-Bacon Act and specifically excluded in the implementing regulations; and
• 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.

Covered Employees

The final rule applies to employees working "on or in connection with" covered contracts that are performed in the United States and the following U.S. territories: 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. The U.S. territories included under EO 14026 expand upon the covered territories under EO 13658.

Under the final rule, an employee is performing work "on" a federal contract and thus subject to the minimum wage requirement when "the worker directly performs the specific services called for by the contract." Work performed "in connection with" a covered federal contract is defined as work where the "worker's work activities are necessary to the performance of a contract but are not the specific services called for by the contract."

Although the final rule's reach to include work performed "in connection with" a covered contract is broad, it contains an exclusion for such work where the employee "spend[s] less than 20 percent of their hours worked in a particular workweek performing in connection with such contracts."

Tipped Employees

The final rule phases out lower wages and tip credits for tipped employees performing work on covered contracts. The higher minimum wage for tipped employees is phased as follows: (i) $10.50 an hour, beginning on January 30, 2022; (ii) beginning January 1, 2023, 85 percent of the minimum wage in effect, rounded to the nearest multiple of $0.05; and (iii) beginning January 1, 2024, and for each subsequent year, 100 percent of the minimum wage in effect.

Effective Date

The new minimum wage requirement will apply to (1) new contracts; (2) new contract-like instruments; (3) new solicitations; (4) extensions or renewals of existing contracts or contract-like instruments; and (5) exercises of options on existing contracts or contract-like instruments on or after January 30, 2022.

Furthermore, in line with the language in EO 14026, the final rule strongly encourages federal agencies to incorporate the minimum wage requirements in existing contracts and solicitations issued prior to the effective date of January 30, 2022, and to require the new wage where they have issued a solicitation prior to January 30, 2022, but entered into a new contract within 60 days of the effective date.

While it is unclear how aggressively federal agencies might look to include the minimum wage requirement in existing contracts, if the approach that many agencies took with respect to EO 14042 (federal contractor vaccine mandate) is any indication, contractors soon may begin to receive contract modifications from agencies seeking to incorporate the requirements of EO 14026 in existing contracts.

Contract Clause Requirements

The final rule requires a "Minimum Wage" contract clause appear in covered contracts, with the exception of procurement contracts subject to the Federal Acquisition Regulation (FAR), as the FAR Council will develop an applicable FAR clause providing notice of the wage requirement.

The minimum wage contract clause also must be included in covered subcontracts, and procurement contractors and subcontractors will be required to include the FAR clause in covered subcontracts. This "flow down" requirement must be a condition of payment to subcontractors, and the final rule makes clear that the "prime contractor and any upper-tier contractor shall be responsible for the compliance by any subcontractor or lower-tier subcontractor with the Executive Order minimum wage requirements, whether or not the contract clause was included in the subcontract."

Complaints related to violations of the final rule will be investigated by the DOL, and violators could be subject to contract termination, suspension and debarment.

What This Means for Employers

Companies that contract with the federal government, either as a prime contractor or a subcontractor at any tier, should carefully review their existing contracts to determine whether they may be subject to the new minimum wage requirement, with a particular eye toward the possibility for extensions and renewals. Contractors also should carefully review any bid solicitations and any new awards to determine whether the new minimum wage requirement will apply.

Covered contractors should promptly take steps to come into compliance with the new minimum wage requirements and adjust the applicable minimum wage annually for covered employees. In determining the scope of their obligations under the final rule, covered contractors should consult with legal counsel, particularly in determining which of their employees are performing work on or in connection with a covered contract and thus subject to the increased minimum wage requirements.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.