The rule would set the wage at $10.10 for covered contracts beginning in 2015.

On June 17, the U.S. Department of Labor (DOL) formally proposed a new rule^[1] to implement Executive Order 13658^,[2] which, in February 2014, mandated the creation of a higher minimum wage for federal contractors. The primary purpose of the proposed rule—29 C.F.R. part 10—is to establish (1) a $10.10 minimum wage for all employees working on certain covered government contracts or subcontracts (described below) after January 1, 2015 and (2) a formula for mandatory annual increases to that minimum wage based on inflation. The proposed rule also establishes a $4.90 minimum wage for tipped employees and a formula for increasing that minimum wage until it reaches 70% of the rate for nontipped employees. To accomplish these objectives, the proposed rule also explains the scope of coverage for the new minimum wages, creates new recordkeeping requirements and other obligations for federal contractors, and gives the Administrator of the Wage and Hour Division of the DOL (the Administrator) the power to enforce the rule. Comments on the proposed rulemaking must be submitted by July 17, 2014.

Purpose and Impact

The stated purpose of Executive Order 13658 is to “increase efficiency and cost savings in the work performed by parties that contract with the Federal Government by raising the hourly minimum wage paid by those contractors to workers performing on covered Federal contracts[.]” The Executive Order states that paying employees a higher wage increases morale and decreases turnover, resulting in greater efficiency.

In analyzing the potential effect of the proposed rule on the economy, the DOL estimated that the rule would apply to nearly 200,000 workers. The DOL estimated the average wage of these workers as $8.79, meaning that the effect of the rule will be to raise the average wage for approximately 183,814 workers by $1.31. Based on these assumptions, the DOL calculated the total annual effect of the proposed rule in 2015 as $100.2 million and in 2019 (when the DOL assumes all federal contracts will be covered by the rule) as $501 million.

Scope of Coverage and Exclusions

The proposed rule requires the insertion of a minimum wage clause in all new government contracts that fall within certain parameters explained below. A “new” contract is any contract (including a renewal of an expiring contract) “provided that such a contract results from a solicitation issued on or after January 1, 2015 or is awarded outside the solicitation process on or after January 1, 2015.”

Employers will need to carefully assess whether any contracts are covered under the specific terms of the rule, but, in broad strokes, the proposed rule covers all workers who provide services on contracts (and subcontracts thereunder) that meet two separate criteria. First, the contract must be (1) a procurement contract for construction covered by the Davis-Bacon Act (DBA), (2) a service contract covered by the Service Contract Act (SCA), (3) a concessions contract, or (4) a contract in connection with federal property or lands and related to offering services for federal employees, their dependents, or the general public.[3]Second, the wages of the workers in question must be governed by the Fair Labor Standards Act (FLSA) or the wage provisions of the DBA or the SCA.

The proposed rule does not apply to workers who are properly classified as exempt executive, administrative, or professional workers under the FLSA (although they already presumably are paid a salary that effectively exceeds this new minimum wage in order to satisfy the salary-basis test) or to other individuals who are not entitled to the minimum wage set forth by the FLSA. The proposed rule does apply, however, to individuals whom contractors would otherwise have been allowed to pay subminimum wages pursuant to a special certificate issued under 29 U.S.C. 214(c).^[4] Federal contractors must pay such individuals the greater of the new minimum rate or the rate specified on the certificate.

The New Minimum Wage and Related Provisions

Under the proposed rule, work on covered contracts must be compensated at $10.10 per hour in 2015, and that rate will continue to increase in the future. In every year after 2015, the Secretary of Labor will increase the rate proportionate to any increase in the Consumer Price Index and then round to the nearest $0.05. The rate cannot go down, even if the Consumer Price Index declines.

The proposed rule also contains an antikickback provision, a ban on employee waivers of rights under the proposed rule, and limitations on employer deductions from the newly mandated wages. Federal contractors may not satisfy their new minimum wage obligations by providing fringe benefits, but they may take credit for the fair value of “board, lodging, or other facilities” as defined at 29 U.S.C. 203(m).

Tipped Employees

The proposed rule provides that federal contractors must pay tipped employees at a rate of at least $4.90 per hour in 2015, in contrast to the current $2.13 per hour rate for tipped employees under the FLSA, and that rate will continue to increase over time. In every year after 2015, the Secretary of Labor will set a tipped minimum wage according to a two-part formula. If the tipped minimum rate is less than 70% of the nontipped minimum rate, the tipped minimum rate will be increased by $0.95. When the tipped minimum rate eventually reaches 70% of the nontipped minimum rate, it will then increase annually in lockstep with the nontipped minimum rate.

To the extent that an employee does not earn enough tips to make up the difference between the tipped minimum rate and the nontipped minimum rate, the employer must make up the difference by increasing the employee’s cash wage for the workweek in question. For example, if a tipped employee worked 10 hours in a workweek and earned only $50.00 in tips plus $49.00 in wages ($4.90 X 10 hours), the employer would have to increase the tipped employee’s wages for that week by $2.00 to reach $101.00 (the minimum nontipped rate of $10.10 X 10 hours).

Enforcement Mechanisms

The proposed rule explicitly states that it does not create any private right of action or any rights under the Contract Disputes Act. Individual workers, however, are not without some recourse because the proposed rule (1) specifically states that it is not intended to preclude civil actions under the False Claims Act, (2) allows all covered workers and other persons and entities to file complaints with the DOL’s Wage and Hour Division, and (3) forbids retaliation against anyone who files such a complaint and provides for remedies, including reinstatement. The proposed rule does not appear to allow, however, employees to bring private suits to enforce its terms, including the antiretaliation provision.

Subject to the caveats above, the proposed rule’s enforcement is the exclusive responsibility of the Administrator of the Wage and Hour Division of the DOL. The Administrator has the right to investigate employers, including requiring production of documents and other evidence beyond the basic records employers are required to keep^.[5]

When the Administrator finds that an employer has failed to pay the applicable minimum wage, he or she has largely the same enforcement powers that exist under the FLSA, with one important addition. If an employer refuses to remedy a violation, the Administrator has the power to direct the withholding of any payments that the government owes to the employer on the contract in question or any other contract to cover the unpaid wages.

Failure to comply with the proposed rule would have serious consequences for an employer’s business. When the Administrator determines that an employer has “disregarded its obligations under the Executive Order” or the proposed rule, he or she can order debarment of the contractor and its responsible officers for a period of up to three years. During this time period, the contractor and its responsible officers will be included on a public list of individuals and entities ineligible to enter into contracts or subcontracts with the federal government.

The proposed rule also gives the Administrator the power to enforce its antiretaliation provisions by providing “any relief to the worker as may be appropriate, including employment, reinstatement, promotion, and the payment of lost wages.” The preamble to the proposed rule makes clear that the retaliation provision applies broadly to (1) current, former, and prospective employers; (2) oral and written complaints; and (3) internal and external complaints, as well as testifying at administrative proceedings under the proposed rule.

Although the proposed rule provides clear processes for appealing an Administrator’s order to debar an employer or withhold funds, the same processes do not explicitly apply to an Administrator’s order providing relief under the antiretaliation provision. This is because subpart E of the proposed rule, which provides for administrative proceedings, applies only to disputes concerning a contractor’s compliance with subpart C of the proposed rule. The antiretaliation provisions fall outside of subpart C, so it is not clear that, for example, an order from the Administrator reinstating an employee based on a finding of retaliation would be open to administrative review under the terms of the proposed rule. This is one area where employers submitting comments may want to seek clarification from the DOL to avoid a situation where employees are awarded relief, potentially including reinstatement, based on administrative fiat.

Conclusion

The DOL’s proposed rule has major implications for any employer whose employees will perform work under covered federal contracts or subcontracts. The rule not only substantially increases the cost of doing business with the federal government, but it also imposes serious penalties, including debarment and the withholding of monies due under contracts, for employers that do not comply. Concerned employers should be mindful of the July 17, 2014 deadline to provide comments in response to the proposed rule.

_{[1]. Establishing a Minimum Wage for Contractors, 79 Fed. Reg. 34,568 (proposed June 17, 2014) (to be codified at 29 C.F.R. pt. 10), available here.}  

_{[2]. View the Executive Order here.} 

_{[3]. The proposed rule exempts some specific types of contract and contracts whose values fall under certain thresholds.}

_{[4]. Under 29 U.S.C. 214(c), employers can obtain special certificates from the DOL’s Wage and Hour Division allowing them to pay disabled workers at rates below the minimum wage where certain criteria are met.}

_{[5]. The proposed rule also contains recordkeeping requirements that are less stringent than the records employers are already required to keep under the FLSA. Employers should be careful, however, to keep records that allow them to demonstrate workers were paid at above the minimum rate for all hours worked on a covered contract, especially where workers are also performing noncovered work and/or being paid on something other than a purely hourly basis.}