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Increased Minimum Wage for Federal Contractors: Impact on Steel Erectors
By Richard Arnholt
President Biden’s Executive Order 14026 (EO 14026), executed on April 27, 2021, increased the minimum hourly wage that federal contractors must pay certain workers on federal construction projects from $10.50 to $15, an action the president explained was aimed at promoting the government’s procurement interests in economy and efficiency by contracting with sources that “adequately” compensate their workers. On November 24, 2021, the Department of Labor (DOL) published a final rule implementing EO 14026, which went into effect on January 30, 2022. Unsurprisingly, the benefit to workers will result in taxpayers paying almost 50% more for certain types of services and will increase the cost of labor for the construction companies, including steel erectors, engaged as prime or subcontractors on federal construction projects.
Contracts Covered by the EO 14026
Importantly, this new minimum wage requirement only applies to work under certain types of federal contacts, and then only to “new” contracts entered into on or after January 30, 2022. A contract is considered “new” even if it is (1) an extension of an existing contract, (2) a renewal of an existing contract, or (3) an exercised option on an existing contract. The regulations call for additional wage increases starting January 1, 2023, and annually thereafter.
Covered contracts under the EO 14026 include the following types of agreements:
• Procurement contracts for construction covered by the Davis-Bacon Act (DBA).
• Service contracts under the Service Contract Act (SCA).
• Concession contracts with the federal government.
• Contracts related to federal land and offering of services to the general public, federal employees, and their dependents.
The final rule also expressly excludes the following types of federal agreements from the application of the new minimum wage requirements:
• Contracts that result from a solicitation issued prior to January 30, 2022, that are entered into on or between January 30, 2022 and March 30, 2022.
• Grants.
• Contracts with and grants to Indian Tribes.
• Contracts for construction and services (except for those expressly covered by EO 14026) that are excluded from DBA or SCA coverage.
Contracts for the manufacturing or furnishing of materials, supplies, articles, or equipment to the federal government (i.e., furnishing steel is likely excluded from coverage; however, contracts to erect steel structures are most likely subject to the minimum wage requirement).
EO 14026 and Mixed Funded Projects
Construction projects often receive funding from multiple sources – sometimes a mix of state, federal and private dollars. With regard to the new $15 hourly minimum wage rule, it is important to note that it only applies to the specific contract types listed above. That means that only work performed on federal contracts and subcontracts where the contractual provisions are required will be subject to the new minimum wage. In short, determining whether an organization is bound by the provisions of EO 14026 is a question of contract, not funding source.
Workers Covered by the EO 14026
In addition, EO 14026 applies to any employee performing work “on or in connection with” the covered contract. DOL defines a worker performing “on” a contract as “a worker [that] directly performs the specific services called for by the contract” and the work is “in connection with” a contract when “the worker’s activities are necessary to the contract.”
This means that if a federal contract mandates that a company pay employees at the new minimum wage rate, EO 14026 generally applies to the following categories of employees working on or in connection with that covered contract:
• Employees entitled to the Fair Labor Standards Act minimum wage (but not any employee who would be considered an exempt executive, administrative or professional employee).
• Service employees entitled to prevailing wages under the SCA.
• Laborers and mechanics entitled to prevailing wages under the DBA.
It also means that the EO applies to employees working on both the prime contracts and subcontracts. There are no exemptions based on size or contract value for subcontractors.
Note that, at least for the time being, state minimum wage laws are irrelevant to the EO 14026’s implementation. Currently, no state has an effective hourly minimum wage law higher than the $15 threshold. Accordingly, for workers on covered federal construction contracts to whom the minimum wage requirement applies, the EO supplants those existing state laws and raises the wages of contractors performing on federal contracts in those states to $15 per hour.
Going Forward
Pursuant to EO 14026, the minimum wage became $15 per hour beginning on January 30, 2022 for all applicable employees working on covered contracts. Thereafter, each year beginning on January 1, 2023, the minimum wage will be adjusted by the Secretary of Labor using the annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) and rounded in increments of $0.05. For example, if the CPI-W shows an increase of 10%, which is not out of the realm of possibility in the current inflationary environment, the minimum wage would become $16.50 at the beginning of 2023.
Important Tips for Federal Contractors
Several lawsuits have already been filed challenging the EO 14026’s implementation. In one suit the Attorneys General from Arizona, Idaho and Nebraska have taken the position that the EO is improper given Congress’s previous rejection of the same wage hike in a COVID-19 relief bill. Another suit filed by Attorneys General of Louisiana, Mississippi and Texas alleges the action is arbitrary and capricious, an unconstitutional delegation of legislative power, an usurpation of congressional spending power, and misinterprets authority delegated by the Federal Property and Administrative Services Act, 40 U.S.C. § 101 et seq. (the Property Act). Both cases are pending.
In fact, earlier this year the United States District Court for the District of Colorado issued a limited injunction of the minimum wage requirement, prohibiting its application to contracts entered into for seasonal recreation services for the public on federal lands. While the injunction issued in Bradford v. U.S. Dep’t of Labor, which was filed by several outdoor recreation companies, is narrow, the decision reflects a broader trend challenging Executive authority to administer an “economical and efficient system” under the Property Act. The injunction is pending appeal.
Until these and any subsequent legal challenges are fully resolved, to avoid any potential penalties contractors must comply to the extent that they are subject to this new contractual minimum wage requirement. But because the minimum wage obligation does not automatically apply to construction projects simply because they are funded at least in part by the federal government, contractors should carefully review their prime and subcontracts to determine whether they are subject to this new minimum wage requirement. •
Richard Arnholt is a member at Bass, Berry & Sims in Washington, D.C. He advises companies on the complex rules applicable to contracting with federal and state governments. He focuses on risk mitigation through implementation and upgrades to ethics and compliance programs as well as response to government allegations of procurement fraud or misconduct. He can be reached at rarnholt@bassberry.com. even if it is (1) an extension of an existing contract, (2) a renewal of an existing contract, or (3) an exercised option on an existing contract. The regulations call for additional wage increases starting January 1, 2023, and annually thereafter.
