As we noted previously, on October 7, 2014, the Department of Labor’s Wage & Hour Division (WHD) issued a Final Rule implementing a $10.10 minimum wage for federal contractor employees pursuant to Executive Order 13658.

Executive Order 13658 generally requires that the hourly minimum wage paid by contractors to workers performing “on or in connection with” covered contracts with the Federal Government shall be at least $10.10 per hour, beginning January 1, 2015, and an amount determined by the Secretary of Labor, beginning January 1, 2016, and annually thereafter.

A number of the key provisions are discussed in detail below.  Highlights include:

  • The minimum wage applies to contracts that results from a solicitation issued on or after or awarded outside the solicitation process on or after January 1, 2015.
  • The minimum wage applies to four general categories of contracts:  Davis-Bacon construction; Service Contract Act contracts; concession contracts; and certain contracts in connection with Federal property or lands.
  • Subcontracts should be analyzed in the same way as the prime contract, except that the dollar thresholds for coverage of the prime contract do not apply to subcontracts.
  • Workers performing on or in connection with covered Federal contracts are generally entitled to receive the minimum wage for all time spent performing on or in connection with covered Federal contracts.
  • Workers who are employed in a bona fide executive, administrative, or professional capacity and exempt from the FLSA’s minimum wage and overtime requirements are not entitled to receive the Executive Order minimum wage.
  • Workers performing “in connection with” covered contracts are also excluded from coverage of the Executive Order if they spend less than 20% of their work hours in a particular workweek performing in connection with covered contracts.

When Does the Minimum Wage Obligation Begin?

The Executive Order minimum wage requirement applies to a “new contract,” which 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.

It includes both new contracts and replacements for expiring contracts, but does not apply to the unilateral exercise of a pre-negotiated option to renew an existing contract by the Federal Government.  A contract that is entered into prior to January 1, 2015, will constitute a new contract if, through bilateral negotiation, on or after January 1, 2015:  (1) the contract is renewed; (2) the contract is 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 (3) the contract is amended pursuant to a modification that is outside the scope of the contract.

What Categories of Contracts Are Covered?

Executive Order 13658 applies to four categories of contractual agreements:

  • procurement contracts for construction covered by the Davis-Bacon Act (DBA), except for those DBA-covered contracts with the District of Columbia;
  • service contracts covered by the Service Contract Act (SCA), except for those SCA-covered contracts with the District of Columbia;
  • concessions contracts, including any concessions contract excluded from the SCA by the Department of Labor’s regulations at 29 CFR 4.133(b); and
  • contracts in connection with Federal property or lands and related to offering services for Federal employees, their dependents, or the general public.

Procurement Contracts for Construction

Under the Final Rule, any contract covered by the DBA and its implementing regulations is subject to the Executive Order minimum wage requirement.  This includes contracts in excess of $2,000 to which the Federal Government is a party, for the construction, alteration, or repair, including painting and decorating, of public buildings and public works of the Federal Government and which require or involve the employment of mechanics or laborers.

The Executive Order does not apply, however, to contracts that are subject only to the Davis-Bacon Related Acts, such as the National Housing Act, the Housing Act of 1950, the Housing Act of 1959, the Federal-Aid Highway Acts, the Housing and Urban Development Act of 1965, and other grant, loan, and assistance programs.

Service Contracts

Both procurement and non-procurement contracts (in excess of $2,500) that are subject to the SCA and its implementing regulations are subject to the Executive Order minimum wage requirement.  With the exception of concession contracts, discussed below, contracts that are exempted or excluded from SCA coverage—such as a contract for professional services performed essentially by bona fide professional employees, with the use of service employees being only a minor factor in contract performance—would likewise be excluded from the Executive Order minimum wage requirement.

Contracts for Concessions

The Final Rule defines the term concessions contract to mean a contract under which the Federal Government grants a right to use Federal property, including land or facilities, for furnishing services. The term concessions contract includes, but is not limited to, a contract whose principal purpose is to furnish food, lodging, automobile fuel, souvenirs, newspaper stands, and/or recreational equipment, regardless of whether the services are of direct benefit to the Government, its personnel, or the general public. The Executive Order covers all concession contracts with the Federal Government, including those excluded from SCA coverage by regulations, such as concession contracts with the Federal Government to operate souvenir shops or to provide food or lodging in national parks.

Contracts in Connection with Federal Property or Lands and Related to Offering Services for Federal Employees, Their Dependents, or the General Public

This category generally includes leases of Federal property, including space and facilities, and licenses to use such property entered into by the Federal Government for the purpose of offering services to the Federal Government, its personnel, or the general public. This category would include a private fast food or casual dining restaurant that rents space in a Federal building and serves food to the general public, as well as delegated leases of space in a Federal building from an agency to a contractor whereby the contractor operates a child care center, credit union, gift shop, barber shop, or fitness center in the Federal agency building to serve Federal employees and/or the general public.

Contracts Not Subject to the Executive Order Minimum Wage Requirement

Exclusions from coverage include: (1) grants; (2) contracts and agreements with and grants to Indian Tribes under Public Law 93-638, as amended; (3) any procurement contracts for construction that are not subject to the DBA (i.e., procurement contracts for construction under $2,000); and (4) any contracts for services, except for those otherwise expressly covered by the final rule, that are exempted from coverage under the SCA or its implementing regulations. In addition, the Executive Order does not apply to contracts for the manufacturing or furnishing of materials, supplies, articles, or equipment to the Federal Government, i.e., those subject to the Walsh-Healey Public Contracts Act.

Subcontracts

Covered subcontracts of covered prime contracts are subject to the requirements of the Executive Order.  In order for the requirements of the Order to apply to a subcontract, the subcontract must:  (1) qualify as a contract or contract-like instrument under the definition in the regulations; and (2) fall within one of the four specifically enumerated types of contracts.  In addition, the wages of workers under the contract must be governed by the DBA, SCA, or FLSA.  Notably, however, the dollar thresholds for coverage of the prime contract do not apply to subcontracts.

As a result, subcontracts for the manufacturing or furnishing of materials, supplies, articles, or equipment between a manufacturer or other supplier and a covered contractor for use on a covered Federal contract (e.g., a contract to supply napkins and utensils to a fast food restaurant franchise on a military base) is not a covered subcontract.

Who Is Entitled to the Executive Order Minimum Wage?

Workers performing on or in connection with covered Federal contracts whose wages are governed by the FLSA, the SCA, or the DBA are generally entitled to receive the Executive Order minimum wage for all time spent performing on or in connection with covered Federal contracts.  Workers performing “on” covered contracts are those workers directly performing the specific services or construction called for by the contract’s terms.  Workers performing “in connection with” covered contracts are those workers performing other duties necessary to the performance of the contract.

There are, however, some limited exclusions from coverage for certain workers. For example, workers who are employed in a bona fide executive, administrative, or professional capacity and exempt from the FLSA’s minimum wage and overtime requirements are not entitled to receive the Executive Order minimum wage.  Moreover, workers performing “in connection with” covered contracts are also excluded from coverage of the Executive Order if they spend less than 20% of their work hours in a particular workweek performing in connection with covered contracts.

What Requirements Apply to Tipped Employees?

The Final Rule uses the FLSA’s tipped employee standards, but does so with the higher hourly rates required by the Executive Order.  Thus, the minimum cash wage (which is $2.13 under the FLSA) is $4.90 an hour beginning on January 1, 2015.  It will increase by the lesser of $0.95 per hour or the amount necessary to raise the hourly amount of 70% of applicable Executive Order minimum wage.

What Are a Contractor’s Obligations?

As is the case with the labor standards clauses under the SCA and DBA, contractors and subcontractors must include the Executive Order contract clause in any covered lower-tiered subcontracts.  They must notify all workers performing on or in connection with a covered contract of the applicable minimum wage rate under the Executive Order.

In addition, contractors and subcontractors must pay covered workers the Executive Order minimum wage for all hours worked on or in connection with covered contracts.  In situations where contractors are not exclusively engaged in contract work covered by the Executive Order, and there are adequate records segregating the periods in which work was performed on covered contracts subject to the Order from periods in which other work was performed, the Executive Order minimum wage does not apply to hours spent on work not covered by the Order.  Thus, contractors need to keep adequate records segregating time spent on covered work from non-covered work.  This is particularly important where the contractor is attempting to exclude from coverage a worker performing “in connection with” covered contracts because she spends less than 20% of her work hours in a particular workweek performing in connection with covered contracts.

The rule requires payments to be made no later than one pay period following the end of the regular pay period in which such wages were earned or accrued.  The pay period may not be of any duration longer than semi-monthly.  State, local, and other federal (e.g., DBA) pay frequency obligations must nevertheless be met.

Finally, the final rule prohibits the taking of kickbacks from wages paid to workers on covered contracts as well as retaliation against any worker for exercising his or her rights under the Executive Order or the implementing regulations.

Other Issues

The “Federal Government” includes nonappropriated fund instrumentalities under the jurisdiction of the Armed Forces or of other Federal agencies, but does not include the District of Columbia, any Territory or possession of the United States, or any independent regulatory agency.

Where there is a covered contract not subject to the FAR, the contracting agency shall include the Executive Order minimum wage contract clause established by WHD in all covered contracts and solicitations for such contracts.  For procurement contracts subject to the FAR, contracting agencies must use the clause set forth in the FAR developed to implement this rule.

Where it is discovered or determined, whether before or subsequent to a contract award, that a contracting agency made an erroneous determination that Executive Order 13658 did not apply to a particular contract and/or failed to include the applicable contract clause, the contracting agency, on its own initiative or within 15 calendar days of notification by an authorized representative of the Department of Labor, shall incorporate the contract clause in the contract retroactive to commencement of performance under the contract through the exercise of any and all authority that may be needed (including, where necessary, its authority to negotiate or amend, its authority to pay any necessary additional costs, and its authority under any contract provision authorizing changes, cancellation and termination).

Complaints may be filed with the WHD by any person or entity that believes a violation of the Executive Order or its implementing regulations has occurred. The final rule contains a mechanism for WHD investigations and informal complaint resolution, as appropriate; it also specifies remedies and sanctions for violations of the Executive Order and its implementing regulations, including the payment of back wages and debarment. The Department’s final rule also includes an administrative process, including administrative hearings, to resolve disputes of fact or law.