Government Contracts Monitor

Federal Contracts Just Got More Expensive – The Minimum Wage Hits $10.10

October 21, 2014

On October 10, 2014, the Department of Labor (DOL) issued its final rule, raising the minimum wage for employees of covered federal government contractors. The rule implements Executive Order 13658 which was announced by the president in February and published as a proposed rule by the DOL in June. While not all of the thousands of comments led to changes in the final rule, the DOL did address the most troublesome aspects of the proposed rule.

The rule requires the payment of a wage of at least $10.10 beginning January 1, 2015 for employees of federal contractors and subcontractors and requires that executive departments and agencies must, to the extent permitted by law, ensure that new covered contracts, contract-like instruments, and solicitations include a clause which the contractor and any subcontractors must incorporate into lower-tier subcontracts, specifying, as a condition of payment, the new minimum wage requirements. Under the Executive Order and the rule, the Secretary of Labor is tasked with determining the wage rate yearly beginning January 1, 2016, and publishing this wage rate at least 90 days before the wage is to take effect.

The final rule was amended from the proposed rule to define a “contractor” as including only a company awarded a covered government contract (and not former or prospective contractors). The final rule applies to four major categories of contracts: (1) Procurement contracts for construction covered by the Davis-Bacon Act (DBA); (2) Service contracts covered by the Service Contract Act (SCA); (3) Concessions contracts; and (4) Contracts in connection with Federal property or lands and related to offering services for Federal employees, their dependents, or the general public.

In addition, the final rule makes clear that the proposed rule’s provision extending coverage to FLSA-covered workers performing support services “in connection with a covered contract” does not apply to such workers if they spend fewer than 20% of their hours in a work week providing such support services.

Under the new rule, the minimum wage requirements apply only to “new contracts” with the Federal Government. A “new contract” is defined as a contract that results from a solicitation issued on or after January 1, 2015, or a contract that is awarded outside the solicitation process on or after January 1, 2015. The term includes both new contracts and replacements for expiring contracts. Existing contracts that were entered into prior to January 1, 2015 will constitute a “new contract” if, through bilateral negotiation, on or after January 1, 2015 the contract is renewed, extended (unless the extension is made pursuant to a term in the contract as of December 31, 2014 providing for a short-term limited extension), or amended pursuant to a modification that is outside the scope of the existing contract. Procurements through the AbilityOne program are covered in the same manner as any other contract under the rule.

Notably, the new minimum wage requirements do not apply to the unilateral exercise of a pre-negotiated option to renew an existing contract by the Government on or after January 1, 2015. Also the final rule clarifies that workers performing support services in connection with a covered contract who perform less than 20 percent of their work week hours to support a covered contract are not required to be paid $10.10 per hour.

There are, of course, exclusions from coverage of the Executive Order and the new rule. Contracts not subject to the minimum wage requirement are: (1) Grants, within the meaning of the Federal Grant and Cooperative Agreement Act; (2) Contracts and agreements with and grants to Indian Tribes under the Indian Self-Determination and Education Assistance Act; (3) Procurement contracts for construction that are excluded from coverage of the DBA; (4) Some contracts for service that are exempted from coverage under the SCA; and (5) some contracts for the manufacturing or furnishing of materials, supplies, articles, or equipment to the Government.

Contractors should be mindful of these changes in the law and consider whether and to what extent any current contracts up for renewal, extension or amendment during the remainder of this year and after January 1, 2015 may be subject to the Order and the new rule. Even though the number of potentially impacted contracts may be relatively low, contractors who may be affected need to be ready to take necessary steps to ensure they are properly compensated by the government to cover the increased labor expenses.