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.

Takeaways

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.

1. 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.
2. 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