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Starting January 30, 2022, new federal contracts that are not procurement contracts must include a clause requiring federal contractors to pay at least $15 per hour to workers performing work on or in connection with the federal contract. That minimum wage rate will increase annually based on changes to the Consumer Price Index. The federal government predicts that this requirement may impact over half a million firms. Federal contractors with procurement contracts (i.e., those contracts governed by the federal acquisition rules) will start to see this clause included in new contracts once the Federal Acquisition and Regulatory Council issues the required FAR clause. 

This change flows from a new U.S. Department of Labor (DOL) rule implementing and enforcing Executive Order 14026, “Increasing the Minimum Wage for Federal Contractors,” signed by President Biden April 27, 2021. The new rule adds part 23 to Title 29 of the Code of Federal Regulations and amends existing rules (codified at 29 CFR part 10) to clarify that they will continue to apply to covered contracts entered into, extended, or renewed through January 29, 2022. 

Relationship to Prior Executive Orders

Executive Order 14026 and the new rule build on the foundation established by President Obama’s Executive Order 13658, “Establishing a Minimum Wage for Contractors,” which President Obama signed February 12, 2014. The 2014 Order set an initial minimum wage, to increase each year thereafter in accordance with the Consumer Price Index. By January 1, 2021, that earlier scheme set a minimum wage of $10.95 per hour for covered hourly employees and $7.65 per hour for covered tipped employees.

What Contracts does Executive Order 14026 Cover?

The new rule requires federal agencies to include a clause in covered contracts that conditions payment on compliance with the new wage requirements. Covered contracts are defined to include not only new federal contracts, but also contract-like instruments, solicitations, and extensions or renewals of existing contracts (pursuant to an exercised option or otherwise) governed by the Fair Labor Standards Act (FLSA), Service Contract Act (SCA), and Davis Bacon Act (DBA) on or after January 30, 2022. They include procurement contracts, concessionaire contracts (including those excluded by earlier regulations at 29 CFR 4.122), and service contracts connected with federal property or lands. However, procurement contracts will not be impacted by the new rule until the Federal Acquisition and Regulatory Council issues the required FAR clause.

Longtime contractors should note that this is broader than Executive Order 13658, which was not triggered by renewals or extensions pursuant to an agency’s unilateral exercise of an existing option. Under the new rule, a renewal or extension of a contract will require the agency to include the new contract clause, and therefore require the contractor to pay the new minimum wage during the renewal or extension period.

In some cases, covered contractors may be able to request an equitable adjustment for costs of a new compliance obligation, or a price adjustment under their existing contract obligations, and should review whether their relevant extant contracts include a change clause. Contractors may also argue that any such adjustment should include the differential not only to raise wages below $15 to the new minimum wage, but to increase other wages beyond that threshold to preserve existing wage levels.

The DOL’s rule does exempt certain contracts, including (a) grants, (b) contracts with Indian Tribes under the Indian Self-Determination and Education Assistance Act, (c) procurement contracts for construction that are excluded from DBA coverage, (d) contracts for services that are exempted from coverage under the SCA, and (e) employees who are exempt from minimum wage requirements of the FLSA. Where an agency solicited the contract before the rule’s effective date and executed the contract within 60 days thereof, or solicited or executed a contract between issuance of Executive Order 14026 and the new rule, the agency is encouraged but not required to include the new wage clause.

Coverage of Seasonal Recreational Contractors on Public Lands

Federal contractors offering recreational services on federal lands should pay special attention to these developments. As noted, the new rule covers contracts connected with federal property and land, and likely includes special use or guide permits with the National Forest Service, National Park Service, Bureau of Land Management, and Fish and Wildlife Service. The DOL predicts that such coverage may impact as many as 45,454 firms.

In extending such coverage, the new rule expressly revokes an earlier exemption that President Trump signed into law as Executive Order 13838, excluding recreational service providers on federal lands from coverage under President Obama’s original wage order, including river running, hunting, fishing, horseback riding, camping, mountaineering activities, recreational ski services, and youth camps. It had not included lodging or food providers.

Because Executive Order 14026 revokes Executive Order 13838, as of January 30, 2022, contracts entered into with the federal government in connection with seasonal recreational services or seasonal recreational equipment rental for the general public on federal lands will be subject to the minimum wage requirements of either Executive Order 13658 or Executive Order 14026, depending on the date that the relevant contract was entered into, renewed, or extended.

What Workers does Executive Order 14026 Cover?

Under the new rule, a worker is entitled to the new minimum wage so long as they perform work on or “in connection” with a covered contract, and those wages are governed by the FLSA, the SCA, or the DBA, regardless of the precise contractual relationship between employer and worker. Coverage extends to workers with disabilities whose rates are calculated pursuant to special certificates, as well as individuals registered in apprenticeship or training programs. A worker performs “on” a contract not only if the worker directly performs the specifically contracted services but so long as they perform work necessary to fulfill the contract.

Special Considerations for Tipped Workers

For tipped federal contractors, as of January 30, 2022, the standard hourly cash wage will be $10.50 per hour and beginning January 1, 2023, the standard hourly cash wage for tipped federal contractors will be 85% of the standard minimum wage for federal contractors. However, if a federal contractor depends on tips to meet a portion of the wage obligation but does not receive enough tips to earn the minimum wage, the employer must supplement the difference. Come January 1, 2024, employers will no longer be able to claim a tip credit and will have to pay tipped workers the same minimum wage as any other worker covered by Executive Order 14026.

Interaction with State and Local Law

Executive Order 14026 and the new rule expressly set only the floor but not the ceiling on prevailing wage requirements. Accordingly, while covered contractors must pay at least the newly required wage, they must pay more if required by applicable federal or state prevailing wage or municipal ordinance.

Enforcement

The new rule empowers the Administrator of DOL’s Wage and Hour Division (WHD) to investigate possible violations of these requirements, either on their own initiative or upon receiving a worker’s administrative complaint. If a violation is found, WHD is directed to notify the contractor to remedy the violation. If the contractor fails to fix it, the Administrator may direct that payments on the contract at issue or any other contract between the federal contractor and the government be withheld as necessary to pay unpaid wages. The Administrator can also order further relief, including reinstatement, promotion, or payment of lost wages, if they determine that a worker suffered retaliation for exercising rights under the rule.

The New Rule’s Legal Future

Throughout the DOL’s rulemaking process, many current and potential federal contractors raised concerns with its terms, leaving a record over 100 pages in the Federal Register. While many of these concerns raised particular issues with the rule as proposed, others challenged whether the Biden Administration had authority under the Federal Property and Administrative Services Act to issue Executive Order 14026 in the first place. Given recent and successful challenges to the Administration’s orders under that Act as they pertain to COVID-19 vaccination requirements, the new DOL is likely to face challenge in the courts that may lead to its revision or revocation.

This article summarizes aspects of the law and does not constitute legal advice. For legal advice for your situation, you should contact an attorney.