The U.S. Department of Labor recently announced a final rule raising the minimum wage for some federal contractors to $15 an hour — and it will go into effect Jan. 30. The final rule – officially known as the “Minimum Wage Increase for Federal Contractors” – also requires annual increases to this minimum wage rate for contracts entered into on or after January 1, 2023. Contractors can recall that President Biden issued Executive Order 14026 early in his administration; this Final Rule implements that Executive Order. What do you need to know about the final rule and how can you successfully implement it? Here is what we have to share:

What does the final rule mean for federal contractors?

As of January 30, some federal contractors must have a minimum wage rate of $15 per hour. Then, beginning January 1, 2023, the wage rate will be determined annually by the Secretary of Labor. This new wage rate will be published at least 90 days before the entry into force of each new minimum wage. The amount will not be less than the amount in effect on the date of determining the salary, will be increased by the amount of the annual percentage increase in the consumer price index for urban employees and office workers (CPI- W), rounded to the nearest multiple of $0.05.

For example, if the annual percentage increase in CPI-W applied to the current minimum wage rate of $15 per hour brings it to $15.68 per hour in 2023, the Secretary of Labor would round up to $15.70 per hour. For tipped employees, the final rule also provides that employees of covered federal contractors must earn at least $10.50 per hour, effective January 1, 2023. However, covered employers will no longer be able to pay employees a tip. tipped salary after January 1, 2024.

How do we know if our contract is covered by the new rule?

Federal contractors may already know if they have “covered contracts” to get them minimum wage coverage, as the recently suspended Federal Contractors Vaccination Mandate borrowed its own definition of coverage from proposed regulation EO 14026. Covered federal contractors have contracts, subcontracts, or contract-like instruments in four broad categories:

• Dealership contracts, including those not covered by the Service Contracts Act (SCA);
• Federal government contracts related to federal property or lands and related to the provision of services to federal employees, their dependents, or the general public;
• Construction supply contracts covered by the Davis Bacon Act (DBA); and
• Contracts for services covered by the SCA, unless waived.

The final rule applies to workers performing work on or in connection with a covered contract in the 50 states, the District of Columbia, Puerto Rico, the Virgin Islands and outer continental shelf lands.

How do we know if our policy is NOT covered?

It is important to note that the following contracts are not covered by the final rule:

• Contracts for the manufacture or supply of materials, supplies, items, or equipment to the federal government, including those subject to the Walsh-Healey Public Contracts Act;
• Contracts, contract-like instruments or agreements with Indian tribes under the Indian Self-Determination and Educational Assistance Act;
• Subsidies ;
• Construction supply contracts that are excluded from DBA coverage;
• Contracts for services that are exempt from coverage under the SCA, unless expressly covered by the final rule; and
• The government solicited tenders issued before January 30, 2022 which resulted in the conclusion of contracts before March 31, 2022.

What if I’m not sure if our contract is covered or if we have contracts that include both products and services?

Where the Contractor has hybrid contracts that provide for products as well as services that support its products, such as installation or repairs, these contracts should be reviewed very carefully to determine whether the service portion(s) of the contracts can be robust enough to trigger the minimum wage coverage requirement. The contractor must review the contract documents themselves to make this decision and may want to engage legal support to do so.

How do I know which workers are covered?

Contractors must pay the required minimum wage and the minimum wage rate only applies to workers performing work “on” or “in connection” with a covered contractor and whose wages are governed by the DBA, SCA or the FLSA. For the purposes of the Rule, a worker who performs “on” a covered contract is any worker who directly performs the specific services required by the terms of the contract. A worker who performs work “in connection with” a covered contract is any worker who performs work activities which, although not specific services provided for in the terms of the contract, are necessary for the performance of these specific services. Note that workers who perform only de minimis work under a covered contract (less than 20% of their work) may be exempt from warranty.

How does the new rule affect our tipped employees?

As previously stated, after January 1, 2024, covered employees will no longer be able to tip employees. As a reminder, part-time and full-time employees are generally considered “tipped employees” when they habitually and regularly receive more than $30 per month in tips. Only tips actually retained by the worker after any tip pooling can be considered in determining whether the person is a tip employee. Under the final rule, wages paid to a tipped employee may consist of cash wages and a tip-based credit. As of January 30, 2022, the cash wage that must be paid to this worker is at least $10.50 per hour. Effective January 1, 2023, it increases to at least $12.75 per hour and the applicable federal contractor minimum wage rate effective January 1, 2024.

What else should covered contractors think about?

Notably, only covered contracts entered into on or after January 30, 2022 – in addition to any existing contracts that are renewed or extended after that date through bilateral amendment – ​​fall within the jurisdiction of the final rule. Federal contractors and subcontractors should not, however, develop tunnel vision and focus solely on raising the minimum wage. The final rule also requires: (i) compliance with payroll frequency and record keeping requirements; (ii) a compliant minimum wage contract clause is included in the covered subcontracts; and (iii) federal contractors must notify workers of the minimum wage increase, as described in the rule (and possibly as required by relevant state laws).

Take away food

Failure to comply with the Final Rule may result in severe penalties, including, but not limited to, substantial monetary arrears, liquidated damages, reasonable attorneys’ fees, and withholding of contractual payments and/or a ban on working on future federal contracts. Workers also have the right to enforce their rights under the FLSA in private action brought in federal district court against federal contractors and subcontractors.

To best prepare for the final rule, federal contractors and subcontractors should:

• Make sure he has determined whether or not he is the holder of a covered contract or subcontract. If covered contracts are held, federal contractors and subcontractors must implement the new minimum wage requirements as of the effective date of the executive order.
• Monitor salary increases to be enacted each year from 2023.
• Plan to phase out tipped wages if covered contractors and subcontractors pay employees tipped wages.

You should work with your legal advisor to determine whether you have a covered contract or a contract-like instrument.