

McCarter & English Blog: Government Contracts & Export Controls

In the months since President Biden took office, legislators have tried—and thus far failed—to pass legislation raising the federal minimum wage to $15 per hour. While the debate rages on, the Biden-Harris administration has taken executive action to ensure that some workers receive a higher wage for work under federal contracts. On April 27, 2021, President Biden issued the Executive Order on Increasing the Minimum Wage for Federal Contractors, which will have a (relatively) short-term impact on thousands of contractors and their employees. The Executive Order aims to “promote economy and efficiency in procurement by contracting with sources that adequately compensate their workers.” It would increase the minimum wage paid by federal contractors from $10.95 per hour to $15 per hour. The increased minimum wage will begin appearing in solicitations and contracts, and thereby subcontracts, in early 2022, and contractors should begin preparing now to meet the increased minimum wage requirements.

The Executive Order provides that agencies ensure that contracts (and “contract-like instruments”) include a clause specifying that, as a condition of payment, the minimum wage to be paid to workers employed in performance of the contract (or any covered subcontract) shall be at least $15 per hour beginning January 30, 2022. This minimum wage will be automatically adjusted every year beginning January 1, 2023, to reflect changes in the cost of living based on inflation (i.e., the annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers or its successor publication). The $15 minimum wage requirement also applies to workers with disabilities, whose wages are calculated pursuant to special certificates issued under Section 14(c) of the Fair Labor Standards Act. The Executive Order also gradually eliminates the subminimum wage for tipped workers. Tipped workers must be paid at least $10.50 per hour (up from the current minimum wage for tipped workers of $7.65 per hour) beginning January 30, 2022. That wage increases to 85 percent of the wage in effect for non-tipped workers as of January 1, 2023. Then, beginning January 1, 2024, tipped workers must be paid 100 percent of the wage in effect for non-tipped workers. Notably, the order also directs agencies to implement the higher wage into existing contracts when the parties exercise their option to extend such contracts. Finally, like many of the Executive Orders issued in the early days of the Biden administration, this Executive Order also includes a rewind of actions taken by the Trump administration to exclude outfitters and guides working on federal lands from the minimum wage requirements. Under the new Executive Order, those contractors will also be subject to the $15 minimum wage requirement.

While the quantum of this minimum wage increase is quite significant, conceptually, these new requirements likely will be similar to those previously incorporated into the Federal Acquisition Regulation (FAR) as FAR 52.222-55, Minimum Wages Under Executive Order 13658. As such, we suspect the FAR Council will likely either revise FAR 52.222-55 to incorporate the requirements of the new Executive Order or revoke the clause and issue a new, similar clause for inclusion in contracts and subcontracts that complies with the increased wage requirements of the Executive Order.

This minimum wage increase will be welcome news for the workers impacted; however, many employers may understandably be concerned about the impact the higher minimum wage will have on their financial health. The extent to which this minimum wage increase will impact contractors will depend in large part on their location—the minimum wage in many states and localities has increased to close to $15 (or even above) in recent years; thus, contractors in those areas are less likely to be heavily impacted by this change to the minimum wage for federal contractors. However, in certain areas, the $15 per hour wage may well be higher not only than the state/local minimum wage but also the wage determinations contractors are required to follow under other laws, such as the Service Contract Act, which may complicate price adjustments to affected contracts. And, while in some cases contractors may be able to recoup some of the cost of the increased minimum wage for federal contractors through increased contract pricing, increased wages for one category of workers are likely to impact wages for other categories of workers—a $4 per hour wage increase for less-skilled employees, for example, may lead more skilled employees to demand commensurate increases to their compensation.

The Biden-Harris administration is confident that the minimum wage increase dictated by the Executive Order will ultimately provide value for taxpayers by enhancing worker productivity and generating higher-quality work by boosting workers’ health, morale, and effort; reducing turnover and absenteeism; and reducing supervisory costs. Time will tell whether the administration is correct, but regardless of the ultimate outcome, in the short term, the minimum wage increases will soon be a contract requirement with which all affected contractors need to comply. Contractors should begin planning now for the impact of the increased minimum wage on their finances, as well as on their employee relationships.

Key Dates in the Executive Order

November 24, 2021: Secretary of Labor to issue regulations implementing the order.
January 23, 2022: Date by which the FAR Council is to update the FAR to provide for inclusion of the requirements in federal procurement solicitations, contracts, and “contract-like instruments.”
January 30, 2022: All agencies required to incorporate a $15 minimum wage in new contract solicitations.
March 30, 2022: All agencies required to implement the increased minimum wage into new contracts.

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McCarter & English Blog: Government Contracts & Export Controls

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