United States: New Minimum Wage Rule Set To Increase Labor And Compliance Costs

As we covered in our May 2014 Quarterly, President Obama issued Executive Order 13658 in February 2014, which imposed a minimum wage of $10.10 per hour for workers on certain federal contracts. The U.S. Department of Labor ("DOL") and FAR Council recently issued corresponding rule changes to implement the requirements of Executive Order 13658.

On October 7, 2014, the DOL published the final rule imposing a minimum wage of $10.10 per hour for workers on certain federal contracts formed on or after January 1, 2015, including negotiated renewals and contract modifications (unilateral renewals by the Government will not be subject to the Final Rule). See 79 Fed. Reg. 60,634 (the "DOL Final Rule"). This minimum wage will be tied to the Consumer Price Index, increasing on an annual basis to account for inflation.

The DOL Final Rule raises the minimum wage for employees "performing on or in connection with" a covered contract. Covered contracts include service contracts regulated by the Service Contract Act ("SCA"), construction contracts regulated by the Davis-Bacon Act ("DBA"), concession contracts regulated by the Fair Labor Standards Act ("FLSA"), and contracts for services related to federal property that are regulated by FLSA. Consistent with the FLSA, SCA, and DBA, the definition of worker generally excludes coverage of any person employed in a bona fide executive, administrative, or professional capacity. Although the DOL Final Rule expressly exempts certain other types of contracts, such as manufacturing contracts regulated by the Walsh-Healey Public Contracts Act, the rule has come under fire for a lack of clear guidance that contractors can use to determine when an employee's work is "in connection with" a covered contract. Ambiguities aside, the "in connection with" benchmark also carries a compliance burden for contractors, particularly as relates to those employees who perform multiple job duties, where their work is allocated between covered and other (i.e., non-covered) contracts. As a means of mitigating this burden, the DOL introduced a de minimus exclusion for workers with dual jobs. Under the exclusion, employers are not required to pay the new minimum wage to workers who devote less than 20 percent of their weekly effort in connection with covered contracts.

The Final Rule also creates interpretive difficulty with respect to understanding the term "contract" as defined by the agency. The DOL Final Rule broadly defines the term "contract" to include any mutually enforceable agreement, explicitly including subcontracts. This definition will cover instruments such as blanket purchase agreements, task orders, and delivery orders that are not regarded as "contracts" under the FAR definition. Thus contractors must contend with divergent terminology and definitions on some pretty basic contracting concepts - one set of definitions to satisfy DOL's requirements and a related but different definition as used by the contracting agencies. Can it get any more complicated? Yes.

The ambiguities of the DOL Final Rule are compounded by the harsh sanctions that can be imposed in connection with rule violations. Upon a finding that a contractor failed to pay the proper wage, the DOL may order contract payments to be withheld or redirected to DOL for disbursement to workers as unpaid wages. Additionally, a finding by DOL that a company failed to comply with the prescribed minimum wage requirements can provide grounds for suspension and debarment.

On December 15, 2014, the FAR Council issued an interim rule to amend the FAR to implement Executive Order 13658. See 79 Fed. Reg. 74,544 (the "FAR Interim Rule"). Unlike the DOL Final Rule, which applies to both procurement and nonprocurement contracts and agreements, the FAR Interim Rule only applies to FAR-based (i.e., procurement) contracts, clarifying at least one area of ambiguity. Other aspects of the FAR Interim Rule include the definition of worker, exemptions, and sanctions for noncompliance, substantially the same in form and substance as in the DOL Final Rule.

The FAR Interim Rule will apply to any solicitations issued on or after February 13, 2015, as well as bilateral contract modifications of more than six months and existing indefinitedelivery, indefinite-quantity contracts, "if the remaining ordering period extends at least six months and the amount of remaining work or number of orders expected is substantial." The FAR Interim Rule also applies to subcontractors at all levels that fall under DOL's rules, as well as under the mandatory flowdown requirements recited in the FAR (prime contractors are responsible for subcontractor compliance at every tier). Where prime contractors are found to have not complied with the requirements, under the FAR Interim Rule agencies may withhold payment to cover unpaid wages at the new rate.

Although these regulations will have a delayed effect, their complexity demands immediate preparation. The Final Rule imposes several administrative obligations for contractors and subcontractors, including requiring contractors to (i) include a contract clause implementing the executive order requirements in all subcontracts of any tier on a contract with the federal government; (ii) notify all workers who are covered by the FLSA and who perform work on or in connection with covered contracts of the applicable minimum wage rate and their minimum wage rights; and (iii) maintain records reflecting each worker's occupation or classification and total wages paid. These requirements, particularly in light of the abovementioned ambiguities in the Final Rule and the corresponding enforcement mechanism, require contractors to pay close attention to this developing area of regulation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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