The U.S. Department of Labor (DOL) rule that updates the overtime regulations for executive, administrative and professional employees (the "white collar exemptions") under the Fair Labor Standards Act (FLSA) is set to take effect on December 1, 2016. The rule more than doubles the minimum salary level required for an employee qualify as exempt from FLSA's overtime requirements, raising it from $23,660 per year to $47,476 per year. As such, many employees who are currently classified as "exempt" under the regulations will be classified as "non-exempt" as of December 1.
This change, and the resulting reclassification of employees under the FLSA, has special implications for government contractors who hold contracts covered by the Service Contract Act (SCA). Only those employees who are classified as non-exempt under the FLSA are subject to the SCA's prevailing wage and fringe benefit requirements. An increase in the number of non-exempt employees will necessarily result in an increase in the number of employees that must be paid prevailing wages and fringe benefits pursuant to the SCA.
Covered contractors with employees who are reclassified as non-exempt must consider the implications for SCA compliance. At the present time, and in the absence of DOL guidance, there are a number of open questions regarding contractors' compliance options and obligations.
The DOL may reinterpret existing wage determinations to include employees that are newly subject to SCA requirements, or may issue new wage determinations that apply to these employees. If reinterpreted or new wage determinations are incorporated into existing contracts, contractors generally have a strong argument in favor of equitable adjustments under standard SCA price adjustment clauses.
However, in the absence of, or while waiting for, DOL action, contractors with employees newly subject to SCA requirements as a result of their reclassification as non-exempt from the white collar exemptions will need to decide whether they want to take action to conform the newly covered employees. Generally, under Federal Acquisition Regulation (FAR) clause 52.222-41, conformance requests should be submitted to contracting officers "no later than 30 days" after a class of employees that is unlisted in a contract wage determination begins performing contract work. The Government has argued that increases in wages and fringe benefits resulting from a conformance request typically do not support a price adjustment under standard SCA price adjustment clauses, based on the rationale that the contractor should have been aware that a classification for the contract work was not contained in the wage determination. Arguably, this rationale does not apply when conformance procedures are initiated due to reclassification of contract workers only as result of changes in applicable federal law. However, the DOL has yet to provide any definitive guidance on whether contractors requesting conformances under such circumstances will be eligible to obtain an equitable adjustment for the resulting increased costs.
Affected contractors may need to make difficult decisions about how to proceed, taking into account a number of business considerations and the contractor's own risk tolerance. Holland & Knight's Government Contracts and Labor, Employment and Benefits attorneys are available to assist contractors with evaluating options and determining the most prudent course of action going forward.