As of January 30, 2022, thousands of federal contractors and subcontractors will be required to raise the minimum wage for employees who work on or in connection with a covered federal contract.

Specifically, pursuant to Executive Order 14026 federal contractors will be required as of the effective date to increase their minimum wage to $15 per hour for employees subject to the Fair Labor Standards Act (FLSA) and $10.50 for tipped employees.

While at first blush EO 14026’s requirement seem straightforward, this is not the case, as evidenced by the lengthy implementing Final Rule and FAQs issued by the U.S. Department of Labor to assist contractors and subcontractors in understanding their obligations.

EO 14026’s requirements apply to contracts, subcontracts or contract-like instruments if the agreement is:

• a procurement for services or construction
• for services covered by the Service Contract Act (SCA)
• for concessions, including any concessions excluded by the Department of Labor Regulations at 29 C.F.R. § 4.133(b)
• entered into with the Federal Government in connection with federal property or lands and related to offering services for federal employees, their dependents and the general public

To be covered, the wages of the workers under one of the above agreements must be governed by the Fair Labor Standards Act (FLSA), the SCA or the Davis-Bacon Act (DBA).

However, EO 14026’s minimum wage requirements do not apply to prime contracts covered by the DBA that do not exceed $2,000, prime contracts covered by the SCA that do not exceed $2,500 or procurement contracts where workers’ wages are governed by the FLSA if the contracts do not exceed $10,000.

There is no value threshold requirements for subcontracts awarded under such prime contracts. Moreover, the following are NOT subject to EO 14026’s requirements:

• grants
• contracts, contract-like instruments or agreements with Indian Tribes under the Indian Self-Determination and Education Assistance Act
• any contracts expressly excluded by EO 14026’s regulations

The FAQ’s further provide that contracts resulting from a solicitation issued prior to January 30, 2022 and that are entered into on or between January 30, 2022 and March 30, 2022 are not covered.

Renewed Contracts Are 'New' Contracts

Significantly, the Final Rule and FAQs provide that only those employees who work on or in connection with new covered contracts that are entered into on or after the effective date – not existing contracts – will be entitled to the wage increases. However, as existing contracts are renewed, extended or have an option to extend exercised, those contracts will be considered “new” for purposes of the Final Rule, so long as the other threshold requirements are satisfied.

Additionally, the Final Rule and FAQs provide that EO 14026’s requirements flow down to all of a covered contractor’s subcontractors regardless of the tier of the subcontractor. As such, subcontractors are covered so long as:

• the subcontract qualifies as a contract or contract-like instrument;
• it is one of the enumerated types of covered contracts; and
• the wages of the workers under the contract are governed by the DBA, SCA, or FLSA.

Also included are apprentices who belong to a program registered with the Labor Department’s Employment and Training Administration, Office of Apprenticeship, or other agency recognized by the Office of Apprenticeship and are performing work via a covered contract.

However, EO 14026 does not apply to full-time students whose wages are calculated based on FLSA special certificates unless they are otherwise covered by the DBA or SCA. This exclusion also applies to workers employed by seasonal and recreational entities and other employees who are exempt from the minimum wage requirements under the FLSA such as bona fide executive, administrative or professional employees. Finally, FLSA covered workers performing in connection with a covered contract for less than 20% of their work hours in a given workweek are likewise not covered by EO 14026.

Unlike many other executive orders that apply to federal contractors, EO 14026’s requirements apply to federal contracts performed in American territories. As such, contracts performed in Puerto Rico, the Virgin Islands, Outer Continental Shelf, American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, Wake Island and Johnston Island are subject to the minimum wage requirements.

Built-In Future Increases

Significantly, the Final Rule builds in future wage increases of both the minimum wage for FLSA covered employees and the wages for tipped employees beginning on January 1, 2023. Specifically, the minimum wage for covered employees will increase annually based on the Consumer Price Index for Urban Wage Earners and Clerical Workers to adjust for inflation. For tipped workers, EO 14026 provides that 85% of the wage guaranteed to covered federal contractor employees will be the floor for tipped workers starting January 1, 2023. Thereafter, effective 2024, the minimum wage of tipped workers will increase to the minimum wage of all other federal contractor employees covered by the Final Rule. As an additional safeguard, the Final Rules provide that if a tipped worker does not receive sufficient tips to reach the minimum wage threshold, the federal contractor must make up the difference.

Finally, to ensure that employees are aware of their rights under EO 14026, the Final Rule requires covered contractors to post a notice titled “Worker Rights Under Executive Order 14026 – Federal Minimum Wage for Contractors – $15.00 Per Hour.” This notice must be posted on the contractor’s bulletin boards where other employment posters are maintained.

Takeaways

EO 14026’s requirements take effect soon after the new year. Considering the technicalities of the Final Rules and the length of the interpretative FAQs, federal contractors and subcontractors should take steps immediately to determine whether they hold a covered contract or subcontract. Where they are covered, they should implement the new minimum wage requirements as of the effective date as the penalties for noncompliance can be severe. Indeed, failing to comply with EO 14026’s requirements can result in significant monetary backpay awards, having contract payments withheld and/or being debarred from working on future federal contracts.

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