Executive Order Increases the Minimum Wage for Federal Contractors—What Is the Impact?

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Legal developments aimed at government contractors do not always make headline news in mainstream media, but last week’s Executive Order on Increasing the Minimum Wage for Federal Contractors, April 27, 2021 (“Executive Order”), did get widespread attention, perhaps because it is viewed by some in political circles as the next best thing for an administration that sees substantial congressional hurdles for more broadly applicable minimum wage increase legislation. So you have probably heard about about the Executive Order, but how will it impact government contractors?

What does the Executive Order do?

The Executive Order will increase the hourly minimum wage for workers working on or in connection with federal government contracts to $15.00, effective January 30, 2022. This will be a substantial increase from the current minimum wage of $10.95 applicable to most federal contracts pursuant Executive Order 13658. (EO 13658 originally set a federal contractor minimum wage of $10.10, effective January 1, 2015, when it was issued by President Obama in early 2014. That minimum wage has since increased annually.)

How will the increase be implemented?

The Secretary of Labor is to issue implementing regulations by November 24, 2021, and the Federal Acquisition Regulatory Council is to amend the FAR to provide the new minimum wage provisions in federal procurement solicitations, contracts, and contract-like instruments within 60 days after issuance of the Labor Department’s implementing regulations.

Does this mean that the new hourly minimum wage for federal contracts will not be imposed until early next year?

Not necessarily. The Executive Order states in Section 9(c) that with respect to contracts that are already existing, or that are entered into between April 27, 2021, and January 30, 2022, “agencies are strongly encouraged, to the extent permitted by law, to ensure that the hourly wages paid under such contracts” are “consistent with” the minimum wages that do not actually go into effect until January 30, 2022. To the extent agencies heed this encouragement, the Executive Order will have an impact on wages federal contractors must pay prior to 2022.

Will the Executive Order impose other hourly minimum wage changes for federal contractors?

Yes. With regard to workers who are “tipped employees” pursuant to the Fair Labor Standards Act, the minimum wage will increase to $10.50 beginning January 30, 2022, and then the difference between the minimum wage for tipped employees and non-tipped employees will be phased out over the next two years, so that by January 1, 2024, there will be no lower minimum wage for tipped employees working on or in connection with federal contracts. Also, in each subsequent year after the new minimum wage goes into effect in 2022, the minimum wage will be subject to Consumer Price Index based-increases that will be published by the Secretary of Labor at least 90 days before they are to go into effect.

Will the Executive Order have an impact on wages that must be paid under current contracts?

Yes, this is possible. First, as noted above, the Executive Order “strongly encourages” agencies to require the higher minimum wages in existing federal contracts even before the new minimum wages must go into effect on January 30, 2022. While it remains to be seen how many agencies actually do so, some may.

Second, while the Executive Order expressly applies to solicitations issued and contracts awarded on or after January 30, 2022, the Executive Order also expressly applies to extensions or renewals of, and options exercised under, previously awarded contracts. To the extent any of these scenarios result in contractors needing to pay higher wages than lawfully required when the contract was originally bid and awarded, contractors may wish to consider pursuing requests for equitable adjustments.

Will the Executive Order apply to subcontractors?

Yes, the Executive Order expressly states in Section 2 that subcontractors will be covered. While it remains to be seen exactly how application of the new minimum wage to subcontractors will be implemented, it is likely that this will be done through a flowdown provision similar to the one in FAR 52.222-55, which implements the current federal minimum wage required under EO 13658 issued by the Obama Administration.

Stay tuned as we track the regulatory implementation of the Executive Order.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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