On July 22, 2021, the Department of Labor (“DoL”) issued a proposed rule that will implement Executive Order 14026, “Increasing the Minimum Wage for Federal Contractors” (“E.O. 14026”), which President Biden signed on April 27, 2021, fulfilling a campaign-platform promise. E.O. 14026 builds on Executive Order 13658, “Establishing a Minimum Wage for Contractors,” which President Obama signed in 2014 (“Obama Order”) establishing a $10.10/hour Federal contractor minimum wage that would increase annually.

E.O. 14026 directed that implementing regulations generally should “incorporate existing definitions, principles, procedures, remedies, and enforcement processes under” the Fair Labor Standards Act (“FLSA”), Service Contract Act (“SCA”), the Davis-Bacon Act, and the Obama Order (and regulations issued implementing that order.) Although the DoL rule is not yet final, much of the rule is significantly rooted in E.O. 14026 itself and the referenced statutes and regulations, so there may be few changes made prior to the final rule, which must be issued by November 24, 2021.

Thus, companies that are questioning whether the requirements will apply to them and how to prepare for the final rule have some early guidance and can start making plans to address the E.O. 14026 obligations before they take effect in January. As companies begin that planning, this article breaks down the answers to some of the most-common questions on what to expect as the rulemaking enters the final stages.

If our company has a contract with the Federal Government or with a prime contractor, do we have to pay all employees the required minimum wage? No, not necessarily. The proposed rule confirms that “it is not the case that because a contractor has one or more Federal contracts, all of its workers or projects are covered by the order” (emphasis added). In fact, the requirements only apply to the hours covered workers perform on or in connection with covered contracts, which are addressed further below.

What contracts are covered? The proposed rule has interpreted E.O. 14026 to apply to an agreement if it: (a) meets the definition of a “contract” (or contract-like instrument), which is a broad definition that includes (among others) lease agreements, cooperative agreements, licenses, and permits; (b) is a “new” contract, which includes renewals, extensions, and other types of options; and (c) falls under one of four types identified in E.O. 14026:

  1. Procurement contract for construction covered by the Davis-Bacon Act;
  2. Contract for services covered by the SCA;
  3. Contract for concessions (regardless of whether covered by SCA); or
  4. Contract “entered into with the Federal Government in connection with Federal property or lands and related to offering services for Federal employees, their dependents, or the general public.”

Notably, unlike the Obama Order and the regulations implementing that order, E.O. 14026 and the proposed rule include extensions, renewals, and other options in the covered contract actions.

Further notable covered contracts include: contracts for “seasonal recreational services or seasonal recreational equipment rental for the general public on Federal lands,” which had been exempt under a President Trump executive order, and contracts with independent establishments/agencies, which had been excluded from the Obama Order.

What agreements are not covered? E.O. 14026 and the proposed rule specifically notes that the requirements do not apply to the following:

  • Grants; and
  • Contracts with Indian Tribes under the Indian Self-Determination and Education Assistance Act, as amended.

DoL has included language in the proposed rule to clarify its position (unless changed for the final rule) that the requirements do not apply to the manufacturing or furnishing (to the Government or a prime contractor) of materials, supplies, articles, or equipment.

Further, there are some exemptions for very low-dollar-value contracts, and those exemptions vary based on the type of contract.

What about subcontracts? Must subcontractors pay the required minimum wage? Yes. The requirements apply to subcontractors and their lower-tier subcontractors. Further, subcontracts have no exemptions due to the size/value of the subcontract.

When do the requirements take effect? Although the order “strongly” encouraged agencies to require payment of the newly established minimum wage and to include the requirement in solicitations issued after April 27, 2021, most requirements take effect on January 30, 2022.

To whom must contractors pay the minimum wage? E.O. 14026 and the proposed rule require that “those workers working on or in connection with” a covered contract whose wages are governed by FLSA, SCA, or DBA must be paid the minimum wage. The proposed rule, which generally follows the existing regulations, explains that a worker performs “on” a contract if they “directly perform the specific services called for by the contract” and explains that a worker performs “in connection with” a contract if their “work activities are necessary to the performance of a contract but are not the specific services called for by the contract.”

Notable employee coverage of this rule includes:

  • Tipped employees. These employees had previously had some exemptions under the Obama Order. E.O. 14026 increases the cash minimum wage that must be paid to them starting on January 30, 2022, and phases in the requirement that employers pay these employees the full cash minimum wage by 2024.
  • Employees with disabilities whose wages are calculated pursuant to special certificates issued under section 14(c) of the FLSA (29 USC 214(c)). Like under the Obama Order, they were expressly included in E.O. 14026.

Are there any exclusions or exemptions for covered workers? The proposed rule excludes workers who are entitled to the FLSA minimum wage and are performing in connection with a contract for less than 20% of their work hours in a given workweek. This had been an exclusion in the Obama Order regulations but has been difficult to determine and comply with in practice, particularly given that DoL commentary has explained that contractors must have “affirmative proof” to use the exclusion. Notably, though, because the exclusion was not part of E.O. 14026, it is possible that the exclusion may be removed or changed and that the requirements necessary to use it will change in the final rule.

When do we have to pay covered workers the required minimum wage? Does it apply to all of their work? No. The proposed rule makes clear that the requirements only apply for work performed on or in connection with a covered contract.

Does this requirement apply everywhere or only in certain locales? In general, the proposed rule limits application to workers performing on or in connection with contracts in the “United States,” but “United States” includes the 50 states, the District of Columbia, Puerto Rico, the Virgin Islands, Outer Continental Shelf lands, American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, Wake Island, and Johnston Island. This definition is broader than the geographic limitation/definition in the regulations implementing the Obama Order. Because this definition was not part of E.O. 14026, it is possible that it will change in the final rule.

How much will we have to pay under these rules in the future? Is this a set figure? No, this is not a set figure. E.O. 14026 mandates that the minimum wage be increased annually.

How can we prepare for this? There are many ways that your company can start preparing now, even as the relevant rule is finalized.

  1. Identify affected employees. If your company will have a covered contract, determine which employees are or will be covered and are not currently receiving a $15 wage. This means making affirmative determinations of which non-exempt employees are working in connection with the covered contract. Given that the DoL rule proposed excluding employees who work less than 20% of their work-week hours in connection with a covered contract, companies should also assess how much time those covered workers spend, or are expected to spend, working in connection with covered contracts for each week of performance.
  2. Review employment record systems. If you will be segregating employees’ hours so that they are only paid the minimum wage when working on or in connection with covered contracts, make sure you have a system that will allow you to show affirmative proof of the hours worked on or in connection with covered contracts and other work.
  3. Calculate increased costs. For companies with covered options, assess what costs your company will incur for paying covered workers the required wage and be prepared to start a conversation with your contracting officer or agency contact as soon as appropriate. If necessary, be prepared to submit a request for equitable adjustment or claim.
  4. Prepare for future contracts. If your company will be submitting an offer for a covered contract in the near future, you may need to consider whether the Government will later need to add the requirement and how your company will respond to that addition. Given the fast-approaching timelines and the slow speed in which some contracts are awarded, the rule (when finalized) could result in a number of events that may catch companies off guard, including a late addition to the solicitation, an opportunity for all offerors to revise proposals, and a host of protest grounds.
  5. Prepare for the impact. Start to consider how and whether you will have indirect impacts as a result of paying a $15 minimum wage and how you will address those impacts, which may include:
  • Wage compression (for example, the possibility of little to no variance between previously distinguished positions or between supervisors and those that they supervise);
  • Employee frustrations that some work is paid at a higher rate even though all work is the same in substance (if hours are segregated and/or if only certain employees work on covered contracts and receive the higher pay);
  • A decrease in profit; and
  • An increase in payroll taxes and workers’ compensation insurance premiums.

Can we submit comments on this rule? Yes. Comments must be submitted on or before August 23, 2021, but DoL suggests submitting comments as soon as possible. Given the E.O. 14026 mandates, prospective commenters should anticipate that DoL will likely pay more attention to comments rooted in reasoning related to E.O. 14026 and the relevant laws, Obama Order and implementing regulations.