White House Seeks to Raise Minimum Wage for Federal Contractors

Jones Day

In Short

The Situation: President Biden signed an executive order ("Minimum Wage EO" or "EO") seeking to raise the federal minimum wage for government contractor employees, beyond the statutory minimum wage provided by Congress, to $15 an hour. If fully implemented, the new minimum wage will eventually be required for certain types of solicitations, contracts, and "contract-like instruments" (including extensions, renewals, and options on existing contracts).

The Result: Under the EO, the Secretary of Labor has until November 24, 2021, to issue implementing regulations, and the Federal Acquisition Regulation ("FAR") Council must then amend the FAR to provide for inclusion of the clause in solicitations, contracts, and contract-like instruments within 60 days thereafter. The new minimum wage will be applicable where the solicitation is issued, or contract or instrument is entered into, extended, renewed, or the option exercised on or after January 30, 2022. For contracts entered into prior to January 30, 2022, the EO states that agencies are "strongly encouraged" to ensure that the hourly wages paid under such contracts are consistent with the new minimum wage.

Looking Ahead: The minimum wage hike will unfold in stages; business and trade associations should be attuned to these limits.

First, although the new minimum wage will not be a mandatory contract requirement until 2022, the EO "strongly encourages" agencies, to the extent permitted by law, to begin including the new minimum wage for solicitations, contracts, and contract-like instruments issued between the effective date of the EO and the forthcoming regulations.

Second, interested stakeholders should actively engage by commenting on the rulemaking the Department of Labor ("DOL") and FAR Council propose. Comments should address procedural and substantive issues, as any new regulations will be tested based upon the administrative record. The procedural validity of these regulations may rest on whether the government adequately considered and responded to the public's input.

Third, presidents of both parties have sought to use the Procurement Act to advance a variety of policy aims and, while they have discretion, must act within statutory and constitutional limits. Courts have enjoined exercises of authority under the Procurement Act by Presidents Clinton, Obama, and Trump.

On April 27, 2021, President Biden signed an EO entitled "Executive Order on Increasing the Minimum Wage for Federal Contractors." The Minimum Wage EO raises the rate paid to employees working "on or in connection with a Federal Government contract" to $15 an hour (the current minimum is $10.95 pursuant to President Obama's February 12, 2014, Minimum Wage for Contractors Executive Order). The EO will require that government contracts include a clause requiring that the contractor and covered subcontractors must pay workers the new minimum wage. Payment of the minimum wage will be considered "a condition of payment" under the government contract.

The Minimum Wage

  • Will be set at $15 an hour ($10.50 an hour for tipped employees) beginning on January 30, 2022, and will annually increase based on the Consumer Price Index.
  • Will phase out the minimum wage for tipped employees by 2024, at which point tipped employees will earn the same minimum wage as other employees on federal contracts.
  • Will also apply to outfitters and guides operating on federal lands (through revocation of the exemption in President Trump's Executive Order 13838).

Applicability

The types of contracts and contract-like instruments to which the Minimum Wage EO will apply include:

  • 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 certain concession contracts entered into by the National Park Service).
  • Contracts or contract-like instruments with the government related to offering services for federal employees, their dependents, or the general public involving federal property or lands.

Significantly, the EO does not define "contract-like instruments." The EO instructs the Secretary of Labor to define this term in the implementing regulations. However, it seems likely that the new regulations will adopt a definition that mirrors the regulatory definition under President Obama's Minimum Wage EO. In response to industry criticism that the definition was both ambiguous and overbroad, the DOL noted in its 2014 final rule implementing President Obama's Minimum Wage EO that its "proposed definition is intentionally all-encompassing. The proposed definition of these terms could indeed be applied to an expansive range of different types of legal arrangements…; the use of the term "contract-like instrument" … underscores that the Order was intended to be of potential applicability to virtually any type of agreement with the Federal Government that is contractual in nature."

Companies should be prepared to challenge issues that arise as a result of an overbroad definition—for example, defining "contract-like instruments" to include loans could potentially cause the EO to impact or conflict with financial laws. Similarly, an attempt to use the FAR to implement regulations in the context of nonprocurement contracts could also provide an opening for a successful challenge.

The EO states that the minimum wage will not apply to grants; however, there is no explicit exclusion of cooperative agreements or other transaction agreements.

Two Key Takeaways

  1. Contractors will need to be especially diligent in reviewing the treatment of contracts, subcontracts, and supply agreements for commercial items to determine whether (and to what extent) the minimum wage is applicable to contracts for commercial items.
  2. Because paying workers the minimum wage is considered to be a "condition of payment" under the government contract, companies should be aware of the potential for False Claims Act allegations arising out of a company's (or its subcontractor's) failure to comply.

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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