It has been a challenging month for federal government contractors. First came the Biden administration’s pronouncement on mandatory vaccinations. Unlike the Department of Labor’s (DOL) Occupational Safety and Health Administration emergency standard, the courts have not to this point stepped in and stayed implementation of this vaccination mandate for government contractors. Now, finalizing the administration’s Executive Order 14026 issued earlier this year, the DOL’s Wage and Hour Division has promulgated new regulations that will require many, if not most, government contractors to pay a minimum wage of $15 per hour beginning on or after Jan. 30. The DOL estimates that the minimum wage of over 325,000 employees will be impacted and increased by this new final rule, which was published in the Federal Register on Wednesday, Nov. 24.
As promulgated by the DOL, the new rule affects new and renewed contracts as well as contracts with options that are exercised after Jan. 30, with contracting agencies being encouraged to apply the new minimum wage to existing contracts as expeditiously as possible. Based upon our experience under the Obama administration’s rule increasing the minimum wage, contracting offices will look for any reason to apply the new minimum wage to existing contracts, such as, for example, potentially in a multiyear contract in which the only change made is the addition of a new wage determination. There is no question that exercised options in a government contract will constitute a new contract that triggers the application of the higher minimum wage.
The regulatory history of the new rule makes it clear that existing collective bargaining agreements where the prevailing wage is less than $15 per hour will be superseded by the new minimum wage once applicable. In a similar vein, payment of fringe benefits under federal prevailing wage statutes such as the Service Contract Act and the Davis Bacon Act cannot be allocated or counted toward the new minimum wage requirement. Not just employees directly performing work on the government contract are covered; services performed “in connection with a contract” such as by office employees performing administrative functions to facilitate performance under the contract may also be covered. This latter point is much the same as it is under the mandatory vaccination edict for coverage of government contractors.
The final rule makes inextricably clear that the minimum wage will be indexed and will continue to increase on an annual basis so that it does not fall behind inflation. By 2024, the rule will also eliminate the lower minimum wage for tipped employees. Stated another way, federal government contactors covered by the rule will lose their ability to apply a tip credit against the requisite minimum wage for all tips an employee may earn. Individuals with disabilities working on covered contracts will also need to be paid the $15-per-hour minimum wage.
Employees working on federal contracts thus will enjoy greater wage and hour protections. Contractors are urged to come into compliance by the Jan. 30 effective date for any new, covered, renewed or exercised contract option. Contractual amendments to existing government contracts during the next few months should be scrutinized. The Wage and Hour Division likely will be pursuing claims of noncompliance with increased vigor and enforcement authority. Litigation to curb the more pernicious elements of this rule is possible, but if the past is precedent, timely judicial intervention blocking this rule is unlikely.
Baker & Hostetler’s Labor and Employment Practice Group and Government Contracts Practice team will continue to monitor any guidance and other developments that may follow publication of this final rule. If you have any questions in the meantime, please reach out to David Grant (firstname.lastname@example.org), Marc Antonetti (email@example.com) or Barron Avery (firstname.lastname@example.org).