United States: Proposed Minimum Wage Rule May Require Adjustments By Both Contractors And The Government

On June 17, 2014, the U.S. Department of Labor issued proposed regulations to implement Executive Order 13658, which increased the federal minimum wage to $10.10 per hour beginning in 2015.  The proposed regulations cover a fairly broad cross-section of service and construction contracts and contract-like instruments, and their requirements are to be flowed down to subcontractors at all tiers.  The regulations also provide for the retroactive inclusion and application of minimum wage requirements inadvertently excluded from contracts covered by the Executive Order.  Although the new regulations will not take effect until next year, contractors should carefully review their current and hoped-for contracts to determine their compliance obligations. 

The proposed regulations contain an incredibly broad definition of the word "contract." But to actually be subject to the new minimum wage requirement, a contract must meet two criteria.  First, it must be one of the following types:

  • A procurement contract for construction covered by the Davis Bacon Act
  • A contract for services covered by the Service Contract Act
  • A contract for concessions, even if it is not covered by the Service Contract Act
  • A contract to provide services to federal employees, their dependents, or the general public, on federal property or lands

Second, the wages paid under the contract must be governed by the Fair Labor Standards Act, the Service Contract Act, or the Davis-Bacon Act. 

Additionally, certain types of contracts are excluded from the proposed regulations.  For example, contracts excluded or exempted from any of the aforementioned Acts, contracts with Indian tribes, and federal grants are excluded from the proposed regulations.  The new minimum wage requirements also do not apply to contracts for manufacturing or furnishing materials, supplies, articles, or equipment to the federal government (e.g., contracts subject to the Walsh-Healey Public Contracts Act). 

As do other rules concerning wages and wage hours, the proposed regulations permit contractors to segregate hours worked by employees on contracts subject to the new requirements, from hours worked on other contracts.  In order to  take advantage of these provisions, however, a contractor must keep adequate records that clearly demonstrate each employee's division of labor, or provide other "affirmative proof." 

The government intends to include the new minimum wage requirements in every contract or solicitation for covered contracts issued on or after January 1, 2015.  However, if the new minimum wage requirements are mistakenly omitted from a covered contract, they may be incorporated into the contract and given retroactive effect to the contract's start date.  This prospect may send chills down the spine of any contractor – especially since the proposed regulations note that  failure to meet the requirements may result in withheld payments and even administrative debarment.  Realistically, though, those provisions likely will be applied to contractors who flagrantly violate the requirements.  Contractors who fail to comply because they honestly and reasonably didn't know they were required to do so until the requirements were added retroactively will be able to seek refuge and relief in the equitable adjustment clauses found in contracts subject to federal wage determinations.  Thus, a contractor that suddenly finds itself required to pay federal minimum wages that are higher than what it had been paying may not necessarily have to scramble for cash, though it will have to understand and comply with its new wage requirements.

It behooves any contractor who thinks it is, or thinks it may become, subject to the new minimum wage requirements, to understand what they are and when they apply.  A contractor concerned about the new requirements may also wish to comment on the proposed rulemaking.  Comments are due by July 17, and will be available for review at regulations.gov.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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