August 02, 2021

Part 2 on the Proposed Rule Implementing Biden's Minimum Wage Increase for Federal Contractors: The Devil Is in the Details

8 min

On July 21, 2021, the Department of Labor (DOL) issued a Notice of Proposed Rulemaking (NPRM) implementing President Biden's April 27, 2021 Executive Order 14026, "Increasing the Minimum Wage for Federal Contractors" (the "Biden EO"). The nearly 82-page NPRM consists of approximately 70 pages of preamble discussing the background and proposed mechanics of the rule, with approximately 12 pages of proposed regulations.

Venable previously provided a summary of the NPRM's proposed contract coverage; however, this follow-up elaborates on how the rule works under covered contracts (e.g., the type of worker subject to the minimum wage requirement, as well as general contractor obligations).

As previously reported, the NPRM applies the minimum wage requirements to covered contracts. Beginning on January 30, 2022, new covered contracts will be required to pay a minimum hourly wage of $15.00 to covered workers. Beginning January 1, 2023 and annually thereafter, contractors must pay any new minimum wage that becomes effective.

Covered Worker

The NPRM would revise Section 23.20 (definitions) to define a worker as "any person engaged in performing work on or in connection with a contract covered by the Executive Order, and whose wages under such contract are governed by the Fair Labor Standards Act, the Service Contract Act, or the Davis-Bacon Act." The phrase "on or in connection with" introduces a key distinction discussed further below.

The NPRM specifically notes that covered workers do not include ones engaged "in a bona fide executive, administrative, or professional capacity[.]"

On or in Connection With. A key distinction under the definition is understanding when a worker is performing work "on" a covered contract versus "in connection with" one. The NPRM states that:

  • "A worker performs 'on' a contract if the worker directly performs the specific services call for by the contract."
    • For example, the NPRM states that all service employees performing the specific services called for by an SCA-covered contract will be performing "on" a covered contract.
  • "A worker performs 'in connection with' a contract if the worker's work activities are necessary to the performance of a contract but are not the specific services called for by the contract."
    • By example, the NPRM notes that a payroll clerk who is not a DBA-covered laborer or mechanic would be performing services "in connection with" a covered contract.

The distinction is important because DOL notes that a worker "solely performing 'in connection with' a covered contract" is covered by the minimum wage requirement only "if that worker spends 20 percent or more of his or her hours worked in a given workweek performing in connection with covered contracts." This means that an employee who works "in connection with" a covered contract for 19 percent of his or her time would not receive the minimum wage requirement for that 19 percent of hours worked. However, the NPRM notes that a contractor must correctly determine the hours worked and segregate hours worked in connection with a covered contract from non-covered work.

That exclusion does not apply to workers performing "on" a covered contract whose wages are governed by the FLSA, SCA, or DBA. Furthermore, we note below that contractors who apply that exclusion should maintain adequate records demonstrating whether a worker works "in connection with" a covered contract.

Contractor Obligations

In addition to the foregoing, the NPRM imposes a number of additional obligations on the contractor, most notably the following:

  • Rate of pay (Section 23.220). The contractor must pay covered workers "no less than the applicable Executive Order minimum wage for all hours worked on or in connection with the covered contract[.]" Fringe benefits are not included in calculating the rate of pay.
  • Deductions (Section 23.230). That said, a contractor may make deductions that reduce the minimum wage only under specified circumstances. Such circumstances include deductions required by applicable law, such as income tax withholdings, payments made pursuant to a court order, payments made by assignment of the worker, or reasonable costs of furnishing board, lodging, or other facilities.
  • Overtime (Section 23.240). The NPRM notes that workers covered under the FLSA or the Contract Work Hours and Safety Standards Act must receive overtime pay "of not less than one and one-half times the regular hourly rate of pay or basic rate of pay for all hours worked over 40 hours in a workweek to covered workers."
  • Frequency of pay (Section 23.250). The NPRM requires payments to be "made no later than one pay period following the end of the regular pay period[.]" A pay period may not be for "any duration longer than semi-monthly."
  • Recordkeeping (Section 23.260). Covered contractors must "make and maintain, for three years," the following employee records:
    • Name, address, and Social Security number;
    • Occupation(s) or classification(s);
    • The rate or rates of wages paid;
    • The number of daily and weekly hours worked;
    • Any deductions made; and
    • Total wages paid.

    While not required by the NPRM, contractors should also maintain records demonstrating the 20% exception. In the absence of adequate records, the NPRM presumes all workers working on or in connection with a covered contract are subject to the minimum wage requirement.

  • Notice (Section 23.290). Contractors must notify "all workers performing work on or in connection with a covered contract of the applicable minimum wage rate[.]" The details of adequate notice requirements are further defined by the proposed rule.
  • Flowdown (Section 23.21). Contractors must abide by the terms of any applicable contract clause. Moreover, the prime contractor and its subcontractors must flow down the requirement to any covered subcontracts. The prime contractor and any high-tier subcontractor are responsible for lower-tier subcontractor compliance.

Like the various wage and hour laws – SCA, DBA, FLSA, etc. – the NPRM seeks to impose enforcement mechanisms on contractors that may not comply.

  • Complaints (Section 23.410). Workers have the ability to file a complaint with the DOL Wage and Hour Division for perceived EO violations, which may be done confidentially.
  • Antiretaliation (Section 23.440(b)). In the course of an investigation, if the DOL determines that any person has been retaliated against for any complaint or assistance provided to the DOL in its efforts to enforce the EO, the DOL may provide "any relief to the worker as may be appropriate."
  • Unpaid wages (Section 23.440(a), (d)). When the DOL determines that a worker has not been paid properly under the EO, the DOL will notify the contractor and request that the contractor remedy the violation. In the event the contractor fails to comply, the DOL may direct the government to withhold further contract payments from other contracting agencies, so that the DOL may make the appropriate disbursements. The DOL may also bring a civil action against the contractor to seek greater payments than those withheld.
  • Debarment (Section 23.440(c)). Failure to comply will result in debarment – "Whenever a contractor is found … to have disregarded its obligations under the [EO or the implementing regulations]," the contractor "shall be ineligible to be awarded any contract or subcontract subject to the Executive Order for a period of up to three years."
Price Adjustments

One notable area that the NPRM fails to discuss in detail, however, is whether contractual price adjustments (i.e., requests for equitable adjustments) will be permitted to allow contractors to recoup the costs associated with the increase in covered workers' wages. As discussed in the preamble, the DOL believes a price adjustment will differ between covered contracts, and therefore a single clause, such as that implemented under the Obama EO, was not appropriate. Rather, Section 10.44(e) of the existing DOL regulations reflects that a contractor is entitled to an adjustment when a contracting agency initially omits and then subsequently includes a contract clause in a covered contract. The NPRM's Section 23.440(e) reflects this concept by affording the DOL the ability to unilaterally add the clause implementing this EO "and all authority that may be needed (including, where necessary, its authority to negotiate or amend, its authority to pay any necessary additional costs…)." Unfortunately, this is not a definitive statement that cost increases due to the increase in minimum wages will be automatically covered by contracting agencies.

The Obama EO implemented a contract clause in the Federal Acquisition Regulation (FAR) that permitted price adjustments to account for the increased minimum wage (including the annual adjustments). As with the Obama EO, we expect but cannot guarantee that the FAR Council will amend the FAR to include such a clause. Pursuant to the Biden EO, the FAR Council is required to amend the FAR within 60 days after DOL issues its final rule.

Implementation in the FAR

Keep in mind, as noted above, that while these regulations are key to understanding how the minimum wage EO will be implemented, the FAR Council is required to amend the FAR within 60 days after DOL issues its final rule. In other words, the FAR Council will develop more specific regulatory and contract provisions that will be applicable to and included in federal contracts, which may further elaborate on these implementing regulations, once finalized. Accordingly, the FAR Council's FAR and contract provisions may further explain or define the terms and obligations summarized below.

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The NPRM is no doubt extensive and contemplates a number of different situations that may be applicable to some contractors but not others. For example, the NPRM contemplates contractors who employ apprentices, students, interns, or tipped employees. Thus we strongly encourage those with specific situations or concerns to review the NPRM. Moreover, as this rule is finalized and additional information is made public by the FAR Council, we will provide further updates and analysis.