$15 Federal Contractor Minimum Wage Implementation & Concerns

On April 27, 2021, President Biden issued a new executive order that will raise the federal contractor minimum wage to $15 per hour from the current $10.95 per hour, starting Jan. 30, 2022.

Biden’s new executive order is similar to the Obama administration’s Executive Order 13658 (originally setting a $10.10 federal contractor minimum wage), with some notable exceptions:

• The federal contractor minimum wage is raised to $15 per hour starting
Jan. 30, 2022.

• The current tipped worker federal contractor minimum wage, setting a lower hourly minimum wage just for tipped workers, is phased out by
Jan. 1, 2024.

• The Trump administration exemption for certain “recreational services on federal lands” (Executive Order 13838) is revoked.

The following remains the same:

• The new federal contractor minimum wage will be phased in, starting with new contracts issued on or after
Jan. 30, 2022, and any existing contracts that are subsequently extended or renewed or an option are exercised after Jan. 30, 2022.

• The new federal contractor minimum wage applies to “any new contract; new contract-like instrument; new solicitation; extension or renewal of an existing contract or contract-like instrument; and exercise of an option on an existing contract or contract-like instrument.”

• The new minimum wage applies to concessions “contracts” and “contracts” covered by the Fair Labor Standards Act, the Service Contract Act or the Davis-Bacon Act.

• The $15 minimum wage applies to prime contractors and subcontractors.

• The new $15 minimum wage does not apply to grants, or any contracts, contract-like instruments or agreements with American Indian Tribes or any other contracts or contract-like instruments expressly excluded by subsequent regulations.

• The secretary of labor will increase the federal contractor minimum wage each January, by increments of
5 cents, based on the annual increase in the consumer price index.

• Wage determinations under both the Service Contract Act and the Davis-Bacon Act will have a new $15 per hour wage floor that will likely rise each successive year.

The last two points are particularly worthy of elaboration. As the federal contractor minimum wage is raised each year, lower-wage job classifications on each wage determination may see an “automatic” rise in wages each year, particularly to the extent the previously established prevailing wage was below or close to the new rising federal contractor minimum wage floor. This means that contractors will need to review the wages paid to employees working on federal contracts annually, to make sure that the appropriate federal contractor minimum wage is paid. Simply relying on the applicable wage determination — without a more thorough analysis of the federal contractor minimum wage as adjusted each year — will not be sufficient to ensure federal compliance.

While the new Biden administration executive order contains mostly the same language as Executive Order 13658, it remains to be seen whether the secretary of labor and the Federal Acquisition Regulatory Council simply amend the existing federal contractor minimum wage regulations to reflect the new $15 per hour starting point, or whether more extensive and substantive revisions will be made. As we wait for new regulations to be promulgated and in anticipation of
the Jan. 30, 2022, start of the new
$15 per hour federal contractor minimum wage, federal contractors and subcontractors subject to the new minimum wage requirements should:

• Start planning now to price all new 2022 federal contract work using the new $15 per hour minimum wage;

• Prepare for making Requests for Equitable Adjustment and seeking other appropriate contract price adjustments when the new federal minimum wage is applied to contact extensions or renewals, or when options are exercised; and

• Prepare for an internal review process and methodology to ensure that the wages for lower wage workers are appropriately adjusted each year (in January) to reflect the new year’s federal contractor minimum wage.

Because the cost of the rise in the federal contractor minimum wage should largely — if not entirely — be absorbed into contractor pricing models and fully compensated by the federal government, perhaps the biggest concern arising from the new federal contractor minimum wage is the impact the new wage floor will have on employer/employee relations and a contractor’s ability to attract and retain skilled labor. The new $15 minimum wage will cause a rise in the wage rates for unskilled labor. Over time, the rising wage floor for unskilled labor will erode the wage differential between unskilled and skilled labor and may start to approach the hourly rates for certain categories of semi-skilled and skilled labor. This has the potential to cause some discontent among skilled trade workers and create otherwise unanticipated upward pressure by unions and skilled journeymen to increase skilled wages to match the rise in unskilled labor wage rates. How contractors address this risk of wage compression will be key, and the potential solutions will vary by industry and based on the nature of each contractor’s workforce.

This wage compression issue has the potential to become more acute depending on to what extent the Biden infrastructure plan is rolled out by Congress. It is possible that Congress may seek to apply the Davis-Bacon Act not only to direct federal construction projects, but also to federally financed or federally insured construction activities, in a manner akin to the 2009 American Recovery and Reinvestment Act from the early days of the Obama administration. If Congress were to expand the Davis-Bacon Act’s coverage, as the administration is signaling, then a larger proportion of construction work would be covered by the Davis-Bacon Act and the federal contractor minimum wage requirements. The more workers covered by the federal contractor minimum wage requirements, the more likely it will be that higher skilled trade employees may push for comparable annual wage increases to keep pace with the Department of Labor instituted annual raises at the bottom of the pay scale.