Effective January 30, 2022, the minimum hourly wage that federal contractors and subcontractors must pay their workers increased to $15, implementing President Biden’s Executive Order 14026 (“the Order”), dated April 27, 2021. Soon thereafter, eight states, including Texas and Arizona, brought suits challenging the legality of the wage increase as explained below. President Biden’s rationale for raising the minimum wage is that it “enhances worker productivity and generates higher-quality work by boosting workers’ health, morale, and effort; reducing absenteeism and turnover; and lowering supervisory and training costs.” Starting on January 1, 2023, the Secretary of Labor (“the Secretary”) will annually review and set the minimum wage rate to no less than the existing rate and, in accordance with the Order, to account for inflation.
To implement the Order, the Department of Labor (“the Department”) issued the final rule (“the Final Rule”), which includes the definitions of relevant terms and exclusions from the requirements of the Order.1 Additionally, the Federal Acquisition Regulatory Council issued Federal Acquisition Regulation Clause 52.222-55 – Minimum Wages for Contractor Workers Under Executive Order 14026 for inclusion in solicitations, contracts and contract-like instruments2 (“The Clause”). The Clause requires federal contractors to flow down the $15 minimum wage obligation to subcontractors. Contactors are responsible for subcontractor compliance and may be held liable for unpaid wages due subcontractor workers. This Legal Update will discuss what contracts are covered by the Order and its implementing regulations, exclusions and the workers covered by the same.
Contracts Covered by the Order and Implementing Regulations
The Order applies to procurement contracts or contract-like instruments of the following categories (i.e., covered contracts):
- Contracts for services or construction
- Service Contract Act (“SCA”) covered service contracts
- Concessions contracts
- Contracts in connection with federal property or lands and related to offering services for federal employees, their dependents or the general public
- When the “wages of workers under such contract or contract-like instrument are governed by the Fair Labor Standards Act [“FLSA”], the SCA, or the Davis-Bacon Act [“DBA”]”
Moreover, the Order and implementing regulations apply to “any new contract,” defined as either a contract entered into on or after January 30, 2022, or “a contract that is renewed or extended (pursuant to an exercised option or otherwise) on or after January 30, 2022.”3 The Final Rule’s “new contract” definition is broader than that in President Obama’s Executive Order 13658, which did not include the government’s unilateral exercise of an option period for existing contracts. The Final Rule does not apply to contracts that result from a solicitation issued prior to January 30, 2022, and entered into no later than March 30, 2022. However, the Order and the Final Rule still “strongly encourage” federal agencies to include the $15 minimum wage in such contracts.4
Exclusions by the Order and Implementing Regulations
The Order and its implementing regulations specifically exclude the following from the $15 minimum wage requirement:
- Contracts with Indian Tribes
- Contracts for construction that are excluded from DBA coverage
- Contracts for services that are exempted from the SCA coverage5
The Order and its implementing regulations also do not apply to contracts “for the manufacturing or furnishing of materials, supplies, articles, or equipment to the Federal Government, including those that are subject to the Walsh-Healey Public Contracts Act (“PCA”), 41 U.S.C. 6501 et seq.”67 (i.e., supply contracts).
However, contractors and subcontractors should carefully analyze those contracts that provide for both services and supplies. The regulations implementing the SCA provide guidance in such hybrid cases by determining the principal purpose of the contract:
If the principal purpose is to furnish services in the performance of which service employees will be used, the Act will apply to the contract, in the absence of an exemption, even though the use or furnishing of nonlabor items may be an important element in the furnishing of the services called for by its terms.8
Likewise, with respect to work subject to the requirements of the PCA:
[I]f the principal purpose of the contract is the manufacture or furnishing of such materials etc., rather than the furnishing of services of the character referred to in the Service Contract Act, for such a contract is not within the general coverage of the Service Contract Act.9
Moreover, in the discussion section of the Final Rule, with respect to the PCA, the Department proposed to follow FAR 22.402(b):
[W]here a PCA-covered contract involves a substantial and segregable amount of construction work that is subject to the DBA, workers whose wages are governed by the DBA or FLSA would be covered by the Executive order for the hours that they spend performing on such DBA-covered construction work.10
Accordingly, if the contract is a supply contract that contains some services, the Order and regulations most likely will not apply. However, a close examination is important to make that determination.
Workers Covered by the Order
The Order and implementing regulations cover workers who are performing “on or in connection with” a covered contract in the United States.11 A worker performs “on” a contract “if the worker directly performs the specific services called for by the contract.” A worker performs “in connection with” a contract “if the worker’s work activities are necessary to the performance of a contract but are not the specific services called for by the contract.”12 The Final Rule provides examples of workers performing “on or in connection with a covered contract; for example, “the laborers and mechanics performing the construction work” on a DBA-covered contract are performing “on” a contract, whereas “the construction contractor’s off-site fabrication shop workers” are performing “in connection with” a covered contract.13
The Final Rule and the Clause both require contractors to notify their workers of the Order’s minimum wage rate and how to meet this notice requirement.
The Department of Labor Fact sheet summarizes the notice requirements as follows:
For service employees on contracts covered by the SCA and laborers and mechanics on contracts covered by the DBA, the contractor may meet the Executive Order notification requirement by posting, in a prominent and accessible place at the worksite, the applicable wage determination (SAM.gov | Home).
With respect to workers performing work on or in connection with a covered contract whose wages are governed by the FLSA, the contractor may meet this requirement by posting, in a prominent and accessible place at the worksite, the poster provided by the Department. Contractors that customarily post notices to workers electronically may post the notice electronically, provided such electronic posting is displayed prominently on any Web site that is maintained by the contractor and customarily used for notices to workers about terms and conditions of employment.14
State Attorneys General Challenge Legality of the Order
On February 8 and 10, 2022, several state attorneys general challenged the legality of the Order in the United States District Court of Arizona and the Southern District of Texas. The two suits request both declaratory relief that the Order and Final Rule are unlawful and injunctive relief prohibiting enforcement of the Order and Final Rule. Specifically, the complaints alleges that Congress, through the Federal Property and Administrative Services Act, 40 U.S.C. § 101 et seq. (“the Procurement Act”), did not provide the requisite authority for which the Order and Final Rule relies on to mandate a minimum wage.15 The courts have not yet set a hearing date.
States’ attorneys general successfully used this same argument for preliminary injunctive relief against President Biden’s Executive Order 14042, which required federal contractors to be vaccinated against COVID-19.16
What the Order Means for Contractors
While the states’ attorneys general legal challenge matures, contractors must still comply with the minimum wage increase. Contractors are responsible for subcontractor compliance and may be held liable for unpaid wages due subcontractor workers. The Final Rule warns contractors of the cost of noncompliance with the Order and implementing regulations on the $15 minimum wage through the debarment process. Contractors found “to have disregarded its obligations to workers or subcontractors” under the Order “shall be ineligible for a period up to three years to receive any contracts or subcontracts subject to the Executive Order 14026.”17 In addition, a contractor’s noncompliance could result in the government withholding contract funds to reimburse workers and terminating the contract.
Accordingly, federal contractors and subcontractors should thoroughly review their contracts to assess whether the $15 minimum wage applies to their workers and prepare accordingly to comply with the Order and implementing regulations. Again, the Order and implementing regulations do not apply to contracts for the provision of supplies but to services and construction contracts as described above. Additionally, the $15 minimum wage only applies to “new contracts,” which includes those contracts in existence prior to January 30, 2022, where such contracts are “renewed or extended (pursuant to an exercised option or otherwise) on or after January 30, 2022.”