As part of the Obama Administration’s push to raise the minimum wage, the President announced during his State of the Union speech that he intends to issue an Executive Order raising the minimum wage for workers on federal contracts to $10.10 per hour. We’ll wait for the Executive Order itself before offering specific guidance on its requirements, but it’s not too early for contractors to begin thinking about how this might impact their business. Here are a few things to consider—

1.  The new minimum wage could apply to some current contracts.

The Obama Administration has asserted that the wage increase will apply only to new federal contracts—i.e., those awarded after the effective date of the Order. But the regulations implementing the prevailing wage requirements could mean that the $10.10 minimum will also apply to some current contracts.

The McNamara-O’Hara Service Contract Act requires contractors and subcontractors performing service contracts to pay their workers not less than the locally prevailing wage or the amount paid by the predecessor contractor under a collective bargaining agreement. The Department of Labor prepares wage determinations establishing the minimum wages and fringe benefits based on surveys of local prevailing wages or existing collectively bargaining agreements.

FAR provisions implementing the Service Contract Act contemplate that the prevailing wages may change during the course of a service contract. Under FAR 22.1007, the contracting officer is required to obtain and incorporate a new wage determination for modifications that extend the term of an existing contract or make a change in the scope of work “whereby labor requirements are affected significantly.” FAR 22.1007(b). A new wage determination is also required on the annual or biennial anniversary date of multi-year service contracts. FAR 22.1007(c). Depending on how the Executive Order implementing the new minimum wage is worded, the wage determination applicable to contract modifications or to multi-year service contracts could require current contractors to pay the new $10.10 minimum wage.

For construction contracts governed by the Davis-Bacon Act, it is less likely that the new minimum wage will affect existing contracts. The Davis-Bacon Act requires contractors and subcontractors on federal construction projects to pay at least the wages and fringe benefits included in a DOL wage determination. Unlike wage determinations under the Service Contract Act, the wage determination applicable at the time of contract award generally remains effective for the entire duration of a construction contract. Under FAR 22.404-12, however, a contracting officer must modify an existing construction contract to incorporate a new wage determination each time an option is exercised: (1) to “extend the term of a contract for construction;” or (2) to perform “substantial and segregable construction work.” It is therefore possible the some existing federal construction contracts will be impacted by the new minimum wage.

2.   Current government contractors impacted by the EO will be entitled to an equitable adjustment.

Under the FAR provisions implementing both the Service Contract Act and the Davis-Bacon Act, a contractor required to pay higher wages as a result of a new wage determination is entitled to an equitable adjustment. Under both FAR 52.222-43 and FAR 52.222-44, the contract price, contract unit price labor rates, or fixed hourly labor rates will be adjusted to reflect increases in wages and fringe benefits required by a new wage determination. Under FAR 22.404-12, the contracting officer is required to include one of three price adjustment clauses in construction contracts that specify a method for a contractor to include an allowance or obtain a contract price adjustment for increased wages caused by a new wage determination.

The equitable adjustment due to a contractor for a change in a wage determination should be based on actual hours and not bid hours. When negotiating an equitable adjustment, a typical government tactic is to attempt to limit the adjustment to the hours a contractor included in its original bid for the contract. The stated rationale is that it would be improper to reward a contractor for being inefficient by applying a price adjustment to actual hours incurred in excess of its bid hours. The Civilian Board of Contract Appeals directly rejected this position in W.G. Yates and Sons Constr. Co v. GSA, CBCA No. 1495, 11-1 BCA ¶ 34,638 (2010), reconsideration denied 12-1 BCA ¶ 35,038 (2011). In Yates, GSA incorporated a new wage determination into a construction contract but limited the contractor’s equitable adjustment to as-bid hours. The Board rejected GSA’s position and sustained the contractor’s claim, which sought to apply the rate adjustment to its actual hours.

3.  The impact of a $10.10 minimum wage will vary significantly by job type and by region.

Commenters and politicians opposed to the new minimum wage have asserted that it will have little impact because the vast majority of workers on federal contracts already earn more than $10.10 per hour. Indeed, DOL wage determinations for services and construction contracts show that most classifications of service and construction workers are pegged to rates above $10.10 per hour.

The reality of a higher minimum wage will be somewhat more complex. First, employees not covered by a wage determination still must be paid the minimum wage under the Fair Labor Standards Act. There will be some individuals who will receive a pay increase as a result of the new $10.10 minimum. Second, DOL wage determinations in more rural regions show wages for several lower-skilled service and construction jobs are below $10.10 per hour. Once the new minimum wage becomes effective and these lower wages are raised to $10.10 per hour, there will likely be a ripple effect through other labor classifications. This ripple effect could also spill over and apply pressure to wages in nearby regions.


Related entries—

Obama’s Executive order on the new federal contractor minimum wage (Feb. 18, 2014)