I. On February 12, 2014, President Obama signed a 5 page Executive Order (EO) that, among other things, will affect the minimum wages that must be paid under a number of agreements with the federal government that have previously not been subject to special rules on minimum wages.

The Department of Labor just issued 337 pages of explanation and regulations on it.

II. Here are the important take aways…

Exactly what kinds of contracts are covered by the Executive Order?

The EO applies to contracts and contract-like instruments under which wages are already governed by the Service Contract Act (SCA), Davis Bacon Act (DBA), or the Fair Labor Standards Act (FLSA) AND that fit into categories set out in the order.

  1. The SCA applies to contracts exceeding $2,500 whose predominate purpose is to provide services.
  2. The Davis Bacon Act applies to contracts exceeding $2,000 whose predominate purpose is to perform construction.
  3. The scope of the Fair Labor Standards Act is much, much broader and applies to all "employees who are engaged in interstate commerce or in the production of goods for commerce, or who are employed by an enterprise engaged in commerce or in the production of goods for commerce.”

There are several exemptions under the FLSA:

  1. There are so-called “white collar" exemptions that are applicable to professional, administrative and executive employees.
  2. For non-exempt employees the FLSA provides a 40 hour week and guaranteed “time-and-a-half” for overtime.
  3. The EO will apply to an FLSA covered contract only if the value of the contract exceeds $3,000.

III. To be covered by the EO not only must wages on the contract be governed by one of these statutes but the agreement must also fall into one of the following categories:

  1. Procurement contracts for services or construction.
  2. Contracts for services covered by the SCA.
  3. Contracts for concessions, including any concessions contract excluded by DOL regulations at 29 C.F.R. § 4.133(b) (i.e.,concession contracts principally for the furnishing of food, lodging, automobile fuel, souvenirs, newspaper stands, and recreational equipment to the general public); e.g., all concession contracts with NPS, Forest Service and Corps of Engineers.
  4. Contracts entered into with the Government in connection with federal property or lands and related to offering services for federal employees, their dependents, or the general public.

Examples

  • Ski areas
  • Special use permits for on-site day care facilities in federal building
  • Franchisees that provide fast food on military bases

IV. When does the EO become effective?

The EO applies to “new contracts,” i.e.,

  1. Covered contracts, the solicitation for which was issued on or after January 1, 2015. (Although the EO also encourages agencies “to take all steps that are reasonable and legally permissible” to ensure that contracts being competed for between now and January 1, 2015, to require the contractor minimum wage beginning on January 1.)
  2. Covered contracts awarded outside the solicitation process on or after January 1, 2015.
  3. Bilateral long-term extensions of an existing contract, i.e.,one exceeding six months in length, entered into on or after January 1, 2015.

NPS exercise of a unilateral right to exercise an option to extend a concessions contract that contains no substantive modification is not a “new contract.”

Does NPS have such an “option?”

  1. YES - 36 C.F.C. § 51.23 provides that: “[T]he Director may award non-competitively an extension or extensions of an existing concession contract to the current concessioner for additional terms not to exceed three years in the aggregate.

V. What does the EO require when it becomes effective and how will that change in the future?

  1. The EO has different requirements for workers who are tipped and for those who aren’t.
  1. For workers who are not tipped:
    1. On “new contracts,” beginning January 1, 2015, they are to be paid at least $10.10 per hour.
    2. On January 1, 2016 and each year thereafter, the minimum wage will increase by the annual percentage increase in the Consumer Price Index.
  2. For workers who are tipped: (defined by the FLSA, as any employee engaged in an occupation in which he or she customarily and regularly receives more than $30 a month in tips)
    1. On “new contracts”, beginning January 1, 2015, they are to be paid at least $4.90 per hour. (This is 48.5% of the minimum for workers who are not tipped.)
    2. Thereafter, until the minimum wage for tipped employees equals 70% of the minimum wage for employees who are not tipped --
      1. Each January 1, the minimum wage for tipped employees will increase by the lesser of 
  • $0.95 per hour or 
  • The amount necessary for the minimum wage for tipped employees to equal 70% of the minimum wage for employees who are not tipped. 

Assuming a 2% rate of inflation here’s what all of this means…

Please click here to view table.

However, the E.O. has another little proviso:

  1. If at any time the cash wage plus tips received by an employee does not equal 70% of the amount being paid non-tipped workers, then the employer must increase the cash wage to make up the difference, i.e., in 2015 an employer is required to see that its tipped employees actually receive at least $7.07 per hour in cash wages and tips.

The regulations just issued by DOL also provide a few twists with regard to the computation of overtime pay for tipped employees.

  1. That is, the minimum amount due tipped employee is not computed based solely on the cash wage paid for regular hours.
    1. For example, if after January 1, 2015, a contractor pays a tipped employee a cash wage of $4.90 per hour, the cash overtime component is not simply $4.90 × 1.5 ($7.35).
    2. Rather, if for straight time a contractor pays a cash wage of $4.90 per hour and claims a tip credit of $3.00 per hour, *the worker is entitled to $11.85 per hour for each overtime hour ($7.90 × 1.5) and the cash wage due for each overtime hour would be $8.85 per hour ($11.85-$3.00).

*It should be noted that the tip credit is limited to the difference between the cash wage paid and the Executive Order minimum wage. In this example, $5.20 ($10.10-4.90).

A few other things to note:

  1. The EO does not trump any state or local prevailing wage law that requires the payment of a higher wage.
  2. Unlike contracts covered by the Service Contract Act or the Davis Bacon Act, there is no provision for the government to compensate the contractor for the increase in labor cost mandate by the E.O.
  • This will create problems for the offerors on NPS concession contracts because offeror A might bid on the basis of low inflation whereas offeror B might bid a lower franchise on the basis of his anticipation of higher inflation.
  • Since NPS doesn’t understand that in such circumstances inflation should be normalized, assumptions about inflation will have an increasingly large impact on competition.