New Executive Order to Increase Minimum Wage Under Future U.S. Government Service Contracts and Subcontracts

As promised in his recent State of the Union Address on February 12, 2014, President Obama signed an executive order to increase to $10.10 the hourly minimum wage paid to federal contractors and subcontractors. The Executive Order should not affect current contracts or solicitations for new contracts issued prior to January 1, 2015. Because the new requirement will apply to new contracts solicited beginning in 2015, contractors will likely be able to pass the increased labor costs arising from the higher minimum wage along to the federal government in the form of higher prices. The following is a brief summary of the key provisions of the Executive Order.

The Executive Order does not automatically apply to current solicitations or contracts. Instead, mandatory application begins with solicitations for covered contracts issued on or after January 1, 2015, pursuant to regulations to be issued by Secretary of Labor by October 1, 2014 and Federal Acquisition Regulation (FAR) provisions to be issued thereafter.

For solicitations issued for covered contracts in 2014, agencies are "strongly encouraged" to take all steps that are reasonable and legally permissible to ensure that workers are paid an hourly wage of at least $10.10. However, because agency budgets remain tight and the cost of requiring the new higher wage under pre-2015 solicitations will likely be passed along to agencies, agencies do not have a strong incentive to respond to this "strong encouragement."

The Executive Order does not appear to be self-executing. Rather, the obligation to pay the new minimum wage will require insertion of a clause in new federal contracts, which will, in turn, require prime contractors to include a similar clause in lower-tier subcontracts. Presumably this new clause will not be available until the FAR Council issues regulations, which are required to follow within 60 days after the issuance of the Labor Department's regulations. \

Moreover, the new requirement does not appear to apply to supply contracts. Rather, the Executive Order specifies that the minimum wage clause will only apply to the following service contracts, provided the wages of workers are governed by the Fair Labor Standards Act (FLSA), the Service Contract Act (SCA), or the Davis-Bacon Act (D-BA):

• Procurement contracts for services or construction;
• Contracts or contract-like instruments for services covered by the Service Contract Act;
• Contracts or contract-like instruments for concessions, including any concessions contract excluded by Department of Labor regulations at 29 C.F.R. 4.133(b); and
• Contracts or contract-like instruments entered into with the Federal Government in connection with Federal property or lands and related to offering services for Federal employees, their dependents, or the general public.

The minimum wage will increase each year after 2015. The Executive Order authorizes the Secretary of Labor to annually increase the minimum wage by the annual percentage increase in the Consumer Price Index for Urban Wage Earners and clerical works and rounded to the nearest multiple of $0.05.

The Executive Order provides for an enforcement mechanism much like other wage requirements applicable to federal contractors. The Executive Order provides that the regulations issued by the Labor Department and FAR Council shall incorporate, to the extent practicable, existing procedures, remedies, and enforcement processes under the FLSA, SCA, and the D-BA. The Executive Order grants the Secretary of Labor authority to investigate potential violations and obtaining compliance with the minimum wage requirement. The Executive Order expressly does not create any rights under the Contract Disputes Act or any other right or cause of action enforceable in court against the U.S. Government.

It is worth noting that the Executive Order does not trump or preempt any other applicable federal, state, or local minimum wage law providing for a minimum wage higher than the wage established by the Executive Order. Instead, the Executive Order expressly provides that contractors must still comply with any applicable minimum wage laws that are more generous and pay the higher wage.