Proposed Rule Requiring Federal Contractors to Pay a $15 Minimum Wage Is Released 

The Labor Department announced on Wednesday it’s seeking public comment on a proposed rule directing federal contractors to pay a $15 minimum wage for their workers starting next year. 

The rule works to implement President Biden’s executive order from April, which builds on one from President Obama in February 2014 that required federal contractors to pay their workers $10.10 per hour. Currently, the minimum wage for workers on federal contracts is $10.95 per hour and the tipped minimum wage is $7.65 per hour.

Biden’s executive order says that starting on January 30, 2022, agencies have to incorporate the new minimum wage into their contract solicitations. By March 30, 2022, they have to implement the $15 minimum wage into new contracts. “Agencies must also implement the higher wage into existing contracts when the parties exercise their option to extend such contracts, which often occurs annually,” said a fact sheet from the White House. Every year after 2022, agencies must index the minimum wage to adjust for inflation. 

Other provisions of the executive order include: eliminating the tipped minimum wage for contractors by 2024, ensuring that federal contract workers with disabilities receive the $15 minimum wage, and restoring the minimum wage protections for outfitters and guides on federal lands by revoking a May 2018 executive order from President Trump.

“The Department of Labor estimates that in the first year of implementation, 327,300 contract workers could see a raise to at least $15 per hour under this proposed rule,” a Labor Department spokesperson told Government Executive, in reference to the 233-page proposed rule. “The estimated direct cost per year over 10 years, which includes regulatory familiarization and implementation, is $2.4 million per year. Transfers to workers in the form of higher wages are estimated to be $1.5 billion per year over 10 years.”

The department’s analysis for the proposed rule determined the final rule won’t have “any measurable effect on the economy.” In May, Censeo Consulting Group published an analysis projecting the executive order will have a “minor” impact on government contract spending. 

“Our proposed regulations to implement President Biden’s executive order will ensure taxpayer dollars uphold the dignity of work, and provide a living wage to workers on federal contracts, including cleaning, maintenance, nursing and food service workers whose efforts are critical to the nation’s pandemic recovery,” said Jessica Looman, Labor’s Wage and Hour Division acting administrator, in a statement on Wednesday. The order “improves the economic security of families and makes progress toward reversing decades of income inequality.” 

Bloomberg Law pointed out that the Labor Department “broadly interpreted the president’s order by defining applicable contracts to include subcontracts, lease agreements on federal property, licenses, permits, and other forms of agreements between the U.S. government and private-sector businesses.”

There are 507,200 potentially affected firms and the top four industries with the most potentially affected ones are: construction; professional, scientific and technical; manufacturing; and health care and social assistance, according to the proposed rule. 

However, just because an industry is covered by the proposed rule, does not necessarily mean it will affect it. 

For example, construction firms “would be covered by the rule, but in all but a very few exceptions it would be moot, since industry pay rates are already well above the new wage level,” Brian Turmail, vice president of public affairs and strategic initiatives for the Associated General Contractors of America, told Government Executive. “There may be a few very rural areas of the country where Davis Bacon rates are lower than the new standard, but that just means federal officials will have to pay more for construction projects in those markets.” The Davis Bacon Act is the federal prevailing wage law for construction. 

“We're happy to see that DOL has provided clarity on how agencies should implement the executive order—and expect that agencies will begin taking action soon as the [order] goes into effect in Jan[uary],” said Curt Cote, managing director of Censeo Consulting Group. “For example, the rule clarifies how workers covered by the [Davis Bacon Act, Service Contract Act or Federal Labor Standards Act] will be impacted by the executive order. Agencies can now start planning how they will implement the rule, and what the impact will be on budgets and contracting operations.”

The proposed rule also says if a contractor does not pay employees what they are owed and fails to fix the situation after being alerted, the “Wage and Hour Division may additionally direct that payments due on the contract or any other contract between the contractor and the government be withheld as necessary to pay unpaid wages.” 

Overall, “the department expects the quality of government services to improve when the minimum wage of federal contract workers is raised,” said the proposed rule. “In some cases, higher-paying contractors may be able to attract higher quality workers who are able to provide higher quality services, thereby improving the experience of citizens who engage with these government contractors.” The department also stated that officials believe the wage change will boost morale and productivity, and reduce turnover. 

Robert Burton, partner with Crowell & Moring and former deputy administrator and acting administrator of the Office of Federal Procurement Policy, pointed out the document says, “the department believes this proposed rule will not have a significant impact on small businesses;” however, he said he still has questions about how small contractors will be impacted, for those that don’t pay $15 per hour already. 

Based on conversations he’s had with some small businesses, Burton said he’s learned “they feel this is going to have a very negative impact on their profitability.” He added: “It will be interesting to see what kind of comments small businesses have in response to this proposed rule,” regarding finances as well as the possible burden of reading and interpreting the 200-plus page proposed rule. 

Matthew Moriarty, founding member of Schoonover & Moriarty LLC who specializes in federal government contracting litigation and transactional matters, told Government Executive based on his preliminary review, he has the same questions as he did when the executive order came out.

The proposed regulation will apply to new contracts issued after the effective date as well as current contracts “upon the exercise of an option,” but “an option is part of an agreed upon existing contract,” he said. 

Most contracts for services are one year with four option extension years (up to the government’s discretion), so when contractors bid they are including their prices for the upcoming year and the possible option years, he said. A possible point of confusion is what happens “when you have a contract in place where you have already agreed to do all this work…[for] up to five years based on the price that you proposed before” the minimum wage changed. 

This could lead to a “legal concern,” Moriarty said. He also acknowledged that grappling with this situation is difficult for the regulation writers. 

The proposed ruled “seems to indicate the federal government may unilaterally exercise an option or extension in an ‘old’ contract not subject to the $15 rate or even the requirements of the Obama executive order and, subject the contract to the new $15 wage requirement,” said Laura Mitchell, attorney at the ​​law firm Jackson Lewis P.C., which focuses on labor and employment issues. “If this is the case, and there is no opportunity afforded the contractor to revise the terms of the contract accordingly, the requirement could face challenge given the potential increase to the cost of the performance of the contract (e.g., labor costs) on which the contractor based its proposal to perform the contract.” 

Mitchell also pointed out another “change from the Obama era order is the geographic expansion of coverage to Puerto Rico, Virgin Islands, Guam, [and] other enumerated territories mirroring coverage under the Service Contract Act.” 

Stan Soloway, president and CEO of Celero Strategies and the former president and CEO of the trade association Professional Services Council and Defense acquisition official, said “the proposal is a faithful reflection of the executive order, which I think was a very positive step;” however, “I think it does not account for what has changed since 2014 and other challenges in the system that this is a perfect opportunity to address.” He wrote about this in Government Executive earlier this month. 

Soloway said he believes the rule “will have a measurable impact on the operations budgets” of agencies and the Labor Department “correctly stated in the rule there’s really poor data,” on figuring out who exactly will be impacted, which he acknowledges is very difficult to determine. 

Among the many other questions for consideration he has about the executive order and proposed rule is how to navigate the issue of wage compression, which is when there is a small difference in wages between employees regardless of their experiences or skills. 

The request for comment was met with immediate backlash from Rep. Virginia Foxx, R-N.C, ranking member of the House Education and Labor Committee. 

“This proposed rule solidifies Big Labor’s stranglehold over the Biden administration,” she said in a statement. “Disguised as a win for workers, this $15 minimum wage will severely disadvantage small businesses competing for federal contracts because they are poorly positioned to absorb these additional expenses.” She added: “This is yet another Democrat-created obstacle for workers and job creators eager to regain their pre-pandemic prosperity.”

Comments on the proposed rule, which will likely illuminate more on the possible impacts and implementation of the order, are due by August 23. The executive order says the final rule must be finalized by November 24. 

 The Biden administration has been working to use the power of federal contracting to advance some of its top priorities, such as improving equity and fighting climate change.