EO 14026 requirements
The new minimum wage increase applies to and will impact any new solicitation, and any new or renewed contract or contract-like instrument governed by the FLSA, SCA, or DBA if it is:
- A procurement contract for services or construction.
- A service contract covered by the SCA.
- A concessions contract.
- A contract with the federal government in connection with federal property or lands and related to offering services for federal employees, their dependents, or the general public.
With respect to the FLSA, the EO applies only to procurement contracts or contract-like instruments that exceed the micro-purchase threshold, as defined in 41 U.S.C. section 1902(a). The current micro-purchase threshold is $10,000. For contracts or contract-like instruments covered by the SCA or the DBA, the EO applies only to the thresholds specified in those statutes. The SCA applies to contractors and subcontractors performing services under a federal contract in excess of $2,500. The DBA applies to contractors and subcontractors performing federally funded or assisted contracts in excess of $2,000 for construction, alteration, or repair of public buildings or public works.
The minimum wage requirements imposed by the EO are separate and distinct legal obligations from the DBA and SCA prevailing wage requirements. For practical purposes, this means that if a contract is subject to the DBA or SCA and, based on the classification of work performed, the prevailing wage rate on the applicable DBA or SCA wage determination is less than the EO’s minimum wage, the contractor must pay the EO minimum wage. If the applicable DBA or SCA rate is higher than the EO rate, the contractor must pay the higher prevailing rate to the DBA- or SCA-covered employee in order to comply with the DBA or SCA. Additionally, the minimum wage requirements of the EO are separate and distinct from the wage rates under FLSA section 14(c). If the commensurate wage rate paid to that employee is less than the EO minimum wage, the contractor must pay no less than the higher EO minimum wage rate. If the commensurate wage due is higher than the EO minimum wage, however, the contractor must pay the employee the higher commensurate wage.
Significantly, the EO is inapplicable to grants, contracts, contract-like instruments, or agreements with Indian Tribes under the Indian Self-Determination and Education Assistance Act (Public Law 93-638), as amended, or any contracts or contract-like instruments expressly excluded by the regulations issued pursuant to section 4(a) of the EO.
EO 14026 enforcement
The EO expressly notes that “[t]he Secretary shall have the authority for investigating potential violations and obtaining compliance with this order.” Additionally, the EO directs that “the regulations the Secretary issues should, to the extent practicable, incorporate existing … enforcement processes under the [FLSA], the [SCA], and the [DBA].” If the implementing regulations adhere to this direction, the EO may be enforced through investigations by the DoL’s Wage and Hour Division, litigation, administrative enforcement, contract terminations, and suspension and debarment. Additionally, this may also include the FLSA’s private right of action whereby an injured party may recover unpaid minimum wage and overtime, liquidated damages, and attorneys’ fees. The EO also provides that, “as a condition of payment” contractors shall pay employees performing under a covered contract or subcontract $15.00 per hour. This language serves as a reminder that there may be False Claims Act implications associated with non-compliance.
EO 14026 ambiguities
Federal contractors and subcontractors may initially struggle to understand exactly how EO 14026 will impact them because it uses a number of undefined phrases and terms. For example, the plain language of EO 14026 does not define the phrases “in connection with a Federal Government Contract,” or “contract-like instruments,” leaving federal contractors to determine when the EO applies. While we expect clarification to be found in the regulations the Secretary of Labor will promulgate by November 24, 2021 to implement EO 14026, for now, there is some ambiguity.
Similar ambiguities existed in EO 13658’s language, and the DoL ultimately resolved them through the promulgation of regulations. For example, the DoL issued a Final Rule and Frequently Asked Questions related to EO 13658 which were, at the time, informative and instructive, and which may provide some insight into how EO 14026 will be interpreted. Under EO 13658, the definition “contract-like instrument” was extremely broad, meaning “an agreement between two or more parties creating obligations that are enforceable or otherwise recognizable at law.” The definition for “in connection with a Federal Government Contract” was also spelled out by the DoL guidance. “[I]n connection with a Federal Government Contract” under Executive Order 13658 refers to “any worker who [for over 20 percent of their time in a given workweek] is performing work activities that are necessary to the performance of a covered contract but who are not directly engaged in performing the specific services called for by the contract itself.” See 79 FR 60633 at 60661. The Secretary of Labor is required to issue regulations implementing EO 14026 by November 24, 2021, and we expect that these two phrases will be defined and interpreted similarly.
The practical impact of EO 14026
Federal contractors and subcontractors may be wondering about the practical impact of EO 14026. Notably, because of the way it has been drafted, EO 14026 will not impact all federal contractors and subcontractors in the same way. The impact of the minimum wage increase on covered contracts will be dependent upon the DoL’s prevailing wage determinations, which vary across the country. Federal contractors and subcontractors that are already required to pay service and construction employees at higher rates under such wage determinations may not be impacted, simply because the prevailing wage in their locality already exceeds $15.00 per hour or is fairly close to that amount. However, federal contractors and subcontractors in localities with prevailing wages lower than $15.00 may find this minimum wage increase to be significant. Additionally, it remains unclear whether the DoL will update its prevailing wage determinations in light of EO 14026. Accordingly, some businesses that will be drastically impacted by EO 14026 may choose to take steps to minimize the impact of the increased wages they will be required to pay. It should be noted, however, that the DoL’s promulgated rules associated with EO 13658 provided that contractors were entitled to be compensated for the increase in labor costs resulting from the annual inflation increases in the EO minimum wage beginning on January 1, 2016. Hopefully, the new rules will contain a similar provision.
Federal contractors and subcontractors should quickly consider the impacts of EO 14026 on their existing compensation models and prepare for the increases that will occur in 2022. Contractors and subcontractors should also keep a close eye on new solicitations, contract modifications, and the exercise of option periods of existing contracts before January 30, 2022, when the subject minimum wage increase becomes effective, to watch for instances of early EO 14026 implementation. Reed Smith’s Government Contracts team will be monitoring developments related to EO 14026 and will provide updates on any developments that impact federal contractors.
- EO 13658 (implemented through FAR 52.222-55) was issued by President Obama on February 12, 2014 and required federal contractors to pay employees working on federal contracts $10.10 per hour beginning January 1, 2015, subsequently indexed to inflation.
- EO 13658 also required the Secretary of Labor to use the methodology established by the EO to determine the annual inflation-based increases to the minimum wage rate, and it directed the Secretary to issue regulations to implement the EO's requirements. See 79 FR 9852. Accordingly, after engaging in notice-and-comment rulemaking, the Department published a Final Rule on October 7, 2014 to implement the EO. See 79 FR 60634. The final regulations, set forth at 29 CFR part 10, established standards and procedures for implementing and enforcing the minimum wage protections of the EO. The notice published by the DoL Wage and Hour division on August 31, 2020 was issued pursuant to these regulations.
Client Alert 2021-134