Affirmative Action Alert

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As promised in his State of the Union address, President Obama signed an Executive Order establishing a minimum wage for certain federal contractors on Wednesday, February 12. This new $10.10 minimum wage rate will go into effect on January 1, 2015, and the Department of Labor is required to issue implementing regulations by October 1, 2014.

How will federal contractors know whether the minimum wage affects them?

Federal agencies must include a clause in all covered contracts that specifies the minimum wage to be paid to workers. Although the minimum wage of $10.10 does not go into effect until next January, it appears that federal agencies may begin including this clause in new contracts immediately so that those contractors will be obligated to pay the new rate when the rate takes effect.

What federal contracts are covered by the new minimum wage rate?

The Executive Order will apply to a new contract, contract-like instrument, and solicitation if the wages of the workers involved are governed by the Fair Labor Standards Act, the Service Contract Act, or the Davis-Bacon Act, and if:

(1) it is a procurement contract for services or construction;
(2) it is a contract or contract-like instrument for services covered by the Services Contract Act;
(3) it is a contract or contract-like instrument for concessions, including any concessions contract excluded by 29 C.F.R. § 4.133(b); or
(4) it is a contract or contract-like instrument 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.

Significantly, not all federal contractors will be subject to this new requirement. If a company is a federal contractor subject to Executive Order 11246, it does not necessarily mean that this Executive Order will also apply. Section 7 of the Executive Order limits its application to those types of contracts set forth above. As a practical matter, therefore, most "supply" contractors, or those providing goods (and not services) to the federal government should not be covered by this new Executive Order.

For contracts covered by the Service Contract Act or the Davis-Bacon Act, the Executive Order will apply only to contracts that meet the thresholds of the statutes, but employers will still need to comply with the prevailing wage requirements of those two statutes, which are typically higher than $10.10. For procurement contracts where workers' wages are governed by the FLSA, the Executive Order will apply only to contracts that exceed the micro-purchase threshold (as defined in 41 U.S.C. § 1902(a)), unless the Executive Order or regulations expressly cover such contracts.

Because of the higher prevailing wage rates under the Davis-Bacon Act and the Service Contract Act, as well as the limited application of the Executive Order itself, it is not certain what the impact of this Executive Order will actually be.

Will the minimum wage rate increase apply to lower-tier contracts?

Yes. Contractors will be required to incorporate the contract clause into lower-tier contracts.

Will this minimum wage rate increase?

You betcha! The Department of Labor is required to determine the appropriate minimum wage on an annual basis beginning January 1, 2016, and must publish any new rate at least 90 days before it takes effect. The new rate may not decrease and must be increased by the annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (or successor publication) as determined by the Bureau of Labor Statistics and rounded to the nearest 5 cents.

Are there special rules for tipped employees?

Yes. For tipped employees covered by the Executive Order, the cash wage that must be paid is at least $4.90 an hour (beginning January 1, 2015). Until the hourly cash wage equals 70 percent of the minimum wage rate for other employees, the minimum wage rate for tipped employees will increase by 95 cents each year. If tipped employees do not earn enough in tips and hourly wages combined to equal the minimum wage for other employees, the contractor must increase their wages to ensure that the minimum wage is met.

What if a contractor is covered by a state or local law with a higher minimum wage?

Of course, the higher minimum wage requirement would apply.

What will the regulations provide?

Although we do not know for certain what the regulations will say, they are likely to include such items as the required contract clause, further definitions of covered contracts, and an enforcement mechanism. Also, although the language of the Executive Order appears to limit the application of its minimum wage requirements to those employees working on the government contract or subcontract, the regulations will need to be closely monitored to ensure that there is no attempt to expand the requirements to employees who are not performing work under the government contract or subcontract.

Why did the President raise the minimum wage for federal contractors?

The Executive Order states that its purpose is "to increase the efficiency and cost savings in the work performed by parties who contract with the Federal Government." The President asserts that the measurable and direct increase in labor costs will be more than offset by the immeasurable and indirect increase in employee morale and productivity, lower turnover, and purported reduction in supervisory costs.

What is the current federal minimum wage rate?

The current federal minimum wage is $7.25. For tipped employees, the rate is $2.13.

We will issue additional bulletins when the Department of Labor issues proposed and final regulations to implement this Executive Order. If you have any questions, please contact the Constangy attorney of your choice.

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