Coming (Mostly) Soon: The $15 Per Hour Minimum Wage for Government Contractor Service Employees
The U.S. Department of Labor (DOL) has issued the final rule implementing President Joe Biden's Executive Order, "Increasing the Minimum Wage for Federal Contractors," imposing a $15 minimum wage for a wide swath of contractor employees. As Holland & Knight noted in a previous blog post, DOL anticipates that 327,300 workers will be impacted by the new minimum wage. (See Holland & Knight's Government Contracts Blog, "DOL Releases Proposed Rules to Implement $15 Minimum Wage for Federal Contractors," July 29, 2021.) This final rule applies to non-FAR-based contracts, while a rule covering FAR-based contracts is in the drafting process by the Federal Acquisition Regulatory Council (FARC).1
No matter when the FARC releases its rule, as discussed below, contractors will be expected to pay the new minimum wage when the appropriate clause is added to their contracts. So contractors should prepare for implementation of the requirement in accordance with the final DOL rule and seek price adjustments as allowed by the rule once it is released.
Below are answers to some common questions we have received about the new minimum wage:
When Does the $15/Hour Requirement Kick In?
The final rule's effective date is Jan. 30, 2022.2 The FAR Council will almost certainly amend the FAR before then to ensure the clause's inclusion in covered contracts and solicitations.3 That does not mean that federal contractors will need to start paying $15/hour for all their covered employees on Jan. 30. The timing depends on where a contract is in its life cycle and when the new clause is included in relevant contracts.
"New" contracts. The $15/hour requirement applies to all "new" contracts beginning Jan. 30, 2022.4 This includes brand new contracts, of course, but also renewals, extensions and exercised options.5 Specifically, contractors will need to comply with the $15/hour requirement for:
- a brand new contract that is entered into on or after Jan. 30, 2022
- a pre-existing contract, once it is renewed on or after Jan. 30, 2022
- a pre-existing contract, once it is extended on or after Jan. 30, 2022
- a pre-existing contract, once an option is exercised on or after Jan. 30, 2022
The fourth of these bullet points is new. Under the rules implementing the 2014 contractor minimum wage, the exercise of an option was not an occasion to insert the minimum-wage clause.6
Special 60-day window for recent solicitations. The $15/hour requirement does not apply to a narrow band of contracts. In particular, the requirement does not apply to contracts when (1) the solicitation is issued before Jan. 30, 2022, and (2) the resulting contract is entered into by March 30, 2022.7 To be clear, this means contracts that fit this scenario do not have the $15/hour requirement, period – not that the $15/hour requirement applies on March 30, 2022. The $15/hour requirement will apply, however, if the contract is renewed or extended or an option is exercised. And according to DOL, the $15/hour requirement will also apply to contracts made in this 60-day window if they are "awarded outside the solicitation process."8
This 60-day window for new contracts may seem odd. There is no similar window for contract extensions, even though those contractors are already locked into their relationship with the government. Addressing this point in the final rule's preamble, DOL noted that the contours of this exception came from the Executive Order.9
What about MACs? The rule's preamble addresses task orders under multiple-award contracts (MACs), such as GSA schedules, government-wide acquisition contracts and other indefinite-delivery, indefinite-quantity vehicles.10 Task orders under existing MACs do not alone trigger the $15/hour requirement. Instead, the MAC itself must be issued, renewed or extended, or an option exercised, on or after Jan. 30, 2022: "[T]ask orders placed or issued under existing MACs (i.e., MACs entered into prior to Jan. 30, 2022) will only be covered by Executive Order 14026 if and when the MAC itself becomes subject to Executive Order 14026."11 Thus, for instance, coverage will apply to GSA schedule holders who enter contracts on or after Jan. 30 to add new covered services (as opposed to filling task orders under their existing contracts).12 In past iterations, however, GSA issued a mass modification to all of its GSA schedule contractors. GSA may take the same course here.
"Strongly encouraged" bilateral modifications. For many contractors, especially those with MACs, the phase-in rules above may prove irrelevant. The Executive Order and preamble to the DOL rule "strongly encourage" contracting officers to modify contracts to include the $15/hour requirement on or after Jan. 30, regardless of the phase-in rules.13 There is precedent for this approach. When implementing the 2014 minimum-wage requirement, the FAR Council "strongly encouraged" contracting officers to modify indefinite-delivery, indefinite-quantity contracts that had six more months of life and substantial expected orders.14 The FAR Council may say something similar here when it issues its companion rule. And DOL has represented that it "will work with the FARC and contracting agencies to ensure compliance with and awareness of the provisions of Executive Order 14026 to the greatest extent possible."15
A reminder about the pre-existing minimum wage. As a final note, contractors must continue paying covered employees the current contractor minimum wage ($10.95/hour in 2021 and $11.25/hour in 2022) until their contracts incorporate the $15/hour step-up.16 There is no step-down in between.
How Will the $15/Hour Requirement Be Enforced?
The procedures and penalties for enforcement of the new requirement are essentially the same as those in place already for the pre-existing minimum-wage requirement and are similar to those for Davis-Bacon Act and Service Contract Act violations. That is to say, the procedures are byzantine and the penalties are harsh.
Likely any underpayment found by DOL, even if inadvertent or excusable, will require the contractor to remedy the violation voluntarily, or else money will be withheld from the contract – or any other contract held by the contractor – to make it up.17 If that is still insufficient to remedy the underpayment, then DOL can sue in court to recover the remaining underpayments.18 This would be in addition to the federal government's other powers to collect its debts.
Additional penalties apply if DOL finds that the contractor "disregarded its obligations" to pay the minimum wage. In this situation, the contractor can be debarred for up to three years.19 It is difficult to determine in advance what conduct meets the "disregard" threshold. According to DOL, "disregard" means "some form of culpability beyond mere negligence," but not necessarily "knowing or reckless" action.20
Thus, the best answer to the "disregard" question is probably not to ask it in the first place. As with most things pertaining to business with the government, it's better to be safe than litigating for one's livelihood. Contractors should be prepared to show their good-faith, reasonable compliance efforts so as to avoid the grey zone "beyond mere negligence."
Time will tell, too, how much enforcement actually occurs. Much will depend on contracting agencies' appetites for referring potential violations to DOL. And from there, enforcement will also depend on the priorities and resources of the Department's Wage & Hour Division and its attorney contingent in the Solicitor's Office. But given that Executive Order 14026 was issued very early in the current administration's tenure, and given the national political attention devoted to a potential $15/hour minimum wage, it seems likely that the Department will pursue vigorously any and all perceived violations of this new rule.
1 See FAR Case 2021-014.
2 See Increasing the Minimum Wage for Federal Contractors, 86 Fed. Reg. 67126, 67126 (Nov. 24, 2021); see also Exec. Order 14026 § 4(b), 86 Fed. Reg. 22835, 22836 (April 30, 2021) (setting agency deadline of Jan. 30, 2022, consistent with final rule's effective date).
3 See Exec. Order 14026 § 4(a) (FAR Council must amend the FAR within 60 days of the Department of Labor's final rule); FAR Case 2021-014, Increasing the Minimum Wage for Contractors (Nov. 1, 2021) ("Case on hold pending publication of Department of Labor regulations.").
4 86 Fed. Reg. at 67227 (to be codified at 29 C.F.R. § 23.30(a)).
5 Id. at 67226 (to be codified at 29 C.F.R. § 23.20 (definition of new contract)).
6 See id. at 67137.
7 See id. at 67227 (to be codified at 29 C.F.R. § 23.40(g)); see also id. at 67167.
8 Id. at 67167.
9 Id.; see Exec. Order 14026 § 9(b).
10 See 86 Fed. Reg. at 67143–44.
11 Id. at 67143.
13 See Exec. Order 14026 § 9(c); 86 Fed. Reg. at 67143; see also 48 C.F.R. § 1.108(d)(3).
14 See 86 Fed. Reg. at 67143.
15 Id. at 67188.
16 See 86 Fed. Reg. at 67145.
17 See 86 Fed. Reg. at 67231 (to be codified at 29 C.F.R. § 23.440(a).
18 See id. (to be codified at 29 C.F.R. § 23.440(d)).
19 See id. (to be codified at 29 C.F.R. § 23.440(c)).
20 See id. at 67183.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.