As prior blog entries (see here and here) have explained, on February 12, 2014, President Obama signed Executive Order 13658 to increase the hourly minimum wage for employees of federal contractors and subcontractors to $10.10 an hour.  The Executive Order also established that, beginning January 1, 2016, the Department of Labor (“DOL”) would adjust the minimum wage annually.  The DOL issued a Notice of Proposed Rulemaking to implement the President’s Executive Order for all new and replacement federal contracts signed on or after January 1, 2015.  This post will describe the contents of the proposed rule, which was published in the Federal Register yesterday.

Federal Contracts Covered

The Proposed Rule clarifies those contracts that will be covered by the Executive Order.  According to the DOL’s proposal, the Executive Order’s minimum wage provisions will apply to:

1. Procurement contracts for construction covered by the Davis-Bacon Act (“DBA”) and its implementing regulations.  However, the proposed rule will not apply to contracts subject only to the Davis-Bacon Related Acts (e.g., Federal Highway Administration grants for road reconstruction or Housing and Urban Development-funded construction by local housing authorities);
2. Service contracts exceeding $2,500 covered by the Service Contract Act (“SCA”) and its implementing regulations;
3. Concessions contracts with the federal government, including those contracts excluded from SCA coverage by regulations (e.g., contracts to furnish food, lodging, automobile fuel, souvenirs, newspaper stands, and/or recreational equipment on federal property); and
4. Contracts to provide services (e.g., child care centers, credit unions, gift shops, barber shops, or fitness centers) to federal employees, their dependents, or the general public on federal property or lands.

Federal Contracts Exempted/Excluded

The DOL’s Proposed Rule excludes certain federal contracts from coverage, including (1) grants; (2) procurement contracts for construction that are not subject to the DBA (i.e. procurement contracts for construction under $2,000); (3) certain contracts with Indian Tribes; and (4) service contracts, unless expressly covered by the Proposed Rule, that are exempted from coverage under the SCA or its implementing regulations (e.g. the SCA exempts contracts for public utility services, including electric light and power, water, steam, and gas, from its coverage).

The Proposed Rule also does not apply to federal contracts for the manufacturing or furnishing of materials, supplies, articles, or equipment (contracts subject to the Walsh-Healey Public Contracts Act).

Employees Covered

Employees whose wages are subject to the Fair Labor Standards Act (“FLSA”), the DBA, or the SCA are entitled to the $10.10 per hour minimum wage requirement for all time spent working on a covered contract.  Additionally, employees who provide support work necessary for DBA- or SCA-covered contracts are entitled to the new minimum wage rate, even if those workers are not covered by the DBA or SCA.  Similarly, the minimum wage rate will apply to workers with disabilities who are otherwise eligible for a subminimum wage under 29 U.S.C. § 214(c).

Under the Proposed Rule, the Executive Order’s minimum wage requirements will also impact tipped employees.  Beginning in January 2015, employers must pay tipped workers a minimum hourly wage of $4.90—more than double the current federal tipped employee minimum wage rate of $2.13 an hour—in addition to the amount earned in tips.  If the combination of a worker’s tips and hourly wages does not total at least $10.10 an hour, the employer must contribute the balance.  Beginning in 2016, the $4.90 an hour minimum wage for tipped workers will increase 95 cents each year until the tipped minimum wage equals 70 percent of the minimum wage for non-tipped workers under government contracts.

Impact on Employers

The DOL’s Proposed Rule provides not only that federal agencies must include a minimum wage clause in all covered contracts, but also that covered contractors and subcontractors must include that clause in all lower-tier subcontracts.  The Proposed Rule also strictly limits the deductions that employers may make from the minimum wage requirements, mandates that pay periods may not be longer than semi-monthly, and requires covered contractors and subcontractors to maintain certain wage records relating to covered workers.

The DOL’s Wage and Hour Division (“WHD”) will enforce this Proposed Rule.  The Proposed Rule contains a mechanism for WHD investigations and informal complaint resolution as well as remedies for violations, including payment of back wages and debarment from performing future federal contracts.

Cost-Benefit Analysis

The Proposed Rule includes an economic analysis in which the DOL anticipates that federal contractors will increase their employees’ pay by approximately $100.2 million by the end of 2015 and $501 million by the end of 2019.  DOL Secretary Thomas Perez explained that the minimum wage increase will ensure that “anyone doing work on behalf of the American people receives a fair wage” and will improve the private sector services that agencies receive.  In a blog post that announced the Proposed Rule, Secretary Perez stated that “I meet with employers all the time who have raised wages for their workers because they know it reduces turnover and training costs, improves morale and boosts productivity.”

However, under the Proposed Rule, federal contractors and subcontractors may expect to incur additional labor costs and administrative obligations under future contracts.

Next Steps

Contractors should review the Proposed Rule to determine what contracts, subcontracts and which employees will be covered under the Proposed Rule.  Contractors should also assess how the increased wages will affect future bids and whether the increased wages would be considered a cost reimbursement under their respective contracts.