On April 27, 2021, President Biden signed an order titled, “Executive Order on Increasing the Minimum Wage for Federal Contractors.” That order directs that any new contract; new contract-like instrument; new solicitation; extension or renewal of an existing contract or contract-like instrument; and exercise of an option on an existing contract or contract-like instrument on or after January 30, 2022 include a clause requiring the contractor to pay a minimum wage of $15. The order also directs the U.S. Department of Labor (“DOL”) to index that minimum wage to the Consumer Price Index so that the minimum wage will increase every year beginning January 1, 2023 to reflect increases in the cost of living.

This Executive Order fulfills a campaign promise made by then-candidate Biden, and it builds on Executive Order 13658, “Establishing a Minimum Wage for Contractors,” issued by President Obama. Obama’s contractor minimum wage arose out of political gridlock over a proposed increase in the federal minimum wage under the Fair Labor Standards Act (“FLSA”), which is applicable to employers generally, not just contractors. When Obama’s Executive Order was issued in February 2014, the FLSA minimum wage had been fixed at $7.25 per hour for nearly five years—since July 2009. While an act of Congress is required to increase the FLSA minimum wage, U.S. Presidents have long asserted the right to legislate labor rules for government contractors via executive orders. That is what President Obama did when he ordered a higher minimum wage for contractor employees, and it is what President Biden is continuing.

Nearly all Government contracts already require pay that is higher than the general FLSA minimum wage of $7.25. Pursuant to President Obama’s order, the contractor minimum wage currently is $10.95 per hour, and $7.65 per hour for tipped workers. In addition, the Service Contract Act (“SCA”—applicable to service contracts) and the Davis-Bacon Act (“DBA”—applicable to construction contracts) require contractors to pay specified prevailing wages and fringe benefits to their employees working on those contracts. Depending on the locality, most SCA and many DBA wage rates are already well over $15. However, even in big cities, some occupations may be earning less than that. For example, the current SCA wage rates for janitors and housekeepers in the Washington, D.C. area range from $13.85 to $14.41. In some rural areas in the South, nearly all government contract workers are making less than $15 per hour.

What Should Contractors Be Doing?

The new order does not mean that contractors are obligated to, or even should, immediately increase the minimum wage for their government contracts employees. President Biden’s order is not self-implementing and contractors are not automatically required to pay workers the $15 minimum wage. Rather, the Executive Order directs that agencies include a contract clause in contracts to implement the higher minimum wage.

As noted, the President’s deadline for implementing the $15 wage is January 30, 2022. However, the Executive Order adds that agencies are “strongly encouraged” to begin adding the requirement to solicitations and existing contracts before that deadline.

Therefore, contractors responding to solicitations should be sure to check the requirements of the solicitation and to price their proposals accordingly. Offerors that propose a $15 minimum wage when it is not required may find themselves under-bid by their competitors who did not jump the gun on raising their wages. Conversely, offerors that fail to price the $15 wage into their contracts when that wage is required may find themselves paying wages for which the Government is not reimbursing them. To oversimplify: if a bidder does not notice that the solicitation requires a $15 per hour wage, and the bidder bids a labor category at only $14 per hour, the Government will reimburse $14 per hour and the contractor may have to take an additional dollar out of its pocket to pay the worker the difference.

In contrast, contractors with existing contracts never had the chance to price the $15 minimum wage into their proposals. Thus, contractors will want to ensure that their contract price is adjusted if they are required to pay higher wages.

There are at least two ways this might play out. One possibility is that DOL will adjust all of its wage determinations (“WDs”) so that the lowest wage is $15 and a contracting officer will incorporate the adjusted WD into the contract via a unilateral contract modification. If that happens, then an SCA-covered contractor may be entitled to a price increase under Federal Acquisition Regulation (“FAR”) 52.222-43, “Fair Labor Standards Act and Service Contract Labor Standards-Price Adjustment,” or a similar contract clause. The second possibility is that the contracting officer will request a revised price proposal from the contractor and the parties will negotiate a bilateral modification. Either way, contractors should pay attention to proposed and actual contract modifications and not sign away their rights. Contractors with labor-rate contracts, especially General Services Administration (“GSA”) Schedule contractors, should pay particular attention.

Practical Tips

  • It is not always obvious whether a contract is a “government contract” and is covered by the new Executive Order and other government contracts-related labor law requirements. If there is any doubt, seek the advice of competent counsel.
  • Contractors should not rush into increasing wages until ordered to do so. The Government may not reimburse such increases and it may make contractors uncompetitive.
  • Contractors should read all contract modifications and solicitations carefully to ascertain their rights and obligations.
  • Many of the implementation details will remain unknown until DOL and the FAR Council have spoken. Stay tuned for these developments.