On October 1, the Department of Labor (“DOL”) announced its final rule raising the minimum wage for employees working on covered federal government contracts from $7.25 an hour to $10.10 an hour.  The final rule implements Executive Order 13658, which was issued by President Obama last February.

The final rule applies to a wide range of contracts issued for solicitations on or after January 1, 2015, including (1) procurement contracts for services or construction; (2) service contracts exceeding $2,500 covered by the Service Contract Act; (3) contracts for concessions; and (4) contracts that are both (a) entered into the with the Federal Government in connection with Federal property or lands and (b) covered by the Fair Labor Standards Act, Service Contract Act, or Davis-Bacon Act.  The rule also applies to (1) individuals with disabilities who were previously paid below the minimum wage because their disability affects their productivity; and (2) tipped employees, whose minimum hourly pay will be raised from $2.13 to $4.90.

Employees Covered

Employees whose wages are subject to the Fair Labor Standards Act (“FLSA”), the DBA, or the SCA are entitled to the $10.10 per hour minimum wage requirement for all time spent working on a covered contract.  Additionally, employees who provide support work necessary for DBA- or SCA-covered contracts are entitled to the new minimum wage rate, even if those workers are not covered by the DBA or SCA.  Similarly, the minimum wage rate will apply to workers with disabilities who are otherwise eligible for a subminimum wage under 29 U.S.C. § 214(c).

Under the finale rule, the Executive Order’s minimum wage requirements will also impact tipped employees.  Beginning in January 2015, employers must pay tipped workers a minimum hourly wage of $4.90—more than double the current federal tipped employee minimum wage rate of $2.13 an hour—in addition to the amount earned in tips.  If the combination of a worker’s tips and hourly wages does not total at least $10.10 an hour, the employer must contribute the balance.  Beginning in 2016, the $4.90 an hour minimum wage for tipped workers will increase 95 cents each year until the tipped minimum wage equals 70 percent of the minimum wage for non-tipped workers under government contracts.

Impact on Employers

The final rule provides not only that federal agencies must include a minimum wage clause in all covered contracts, but also that covered contractors and subcontractors must include that clause in all lower-tier subcontracts.  The final rule also strictly limits the deductions that employers may make from the minimum wage requirements, mandates that pay periods may not be longer than semi-monthly, and requires covered contractors and subcontractors to maintain certain wage records relating to covered workers.  The DOL’s Wage and Hour Division will enforce this rule.

Next Steps

The final rule will be published in the Federal Register on October 7, 2014.  Contractors should review the final rule to determine what contracts, subcontracts and which employees will be covered under the final rule.  Contractors should also assess how the increased wages will affect future bids and whether the increased wages would be considered a cost reimbursement under their respective contracts.

Our prior coverage of the minimum wage raise can be found here and here.  DOL’s fact sheet and frequently asked questions on the final rule are available here and here.