The U.S. Department of Labor (“DOL”) recently announced its annual update to the hourly minimum wage for federal contract workers. Beginning January 1, 2025, the minimum wage for employees performing work on or in connection with covered contracts will increase from $17.20 to $17.75 per hour. The increase applies to tipped and non-tipped employees, as well as employees with disabilities.
The DOL announcement follows President Biden’s Executive Order 14026, issued in April 2021, to “promote economy and efficiency in procurement by contracting with sources that adequately compensate their workers.” We discuss the types of federal contracts and workers subject to the wage rate increase, and its implications for contractors, below.
How Is the Minimum Wage for Federal Contract Workers Determined?
Executive Order 14026 directs the Secretary of Labor to make a determination of the applicable minimum wage rate on an annual basis beginning on January 1 of the applicable year. Sections 2(a) and (b) of the Executive Order explain the methodology that the Secretary must consider for determining the applicable minimum wage, which include a rate:
- Not less than the amount in effect on the date of such a determination;
- Increased from such amount by the annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (“CPI-W”) based on all items in a U.S. city average, not seasonally adjusted, or its successor publication, as determined by the Bureau of Labor Statistics; and
- Rounded to the nearest multiple of $0.05.
Section 2(b) of the Executive order also provides that, for purposes of calculating the annual percentage increase, the Secretary should compare the CPI-W for the most recent month, quarter, or year available against the CPI-W for the same month or the preceding year, the same quarter in the preceding year, or the preceding year. Based on this guidance, DOL elected in its final rule implementing the Executive Order to compare the CPI-W for the most recent year available with the CPI-W for the preceding year.
Federal Contracts and Workers Subject to the Wage Rate Increase
The increased wage rate applies to workers performing work “on or in connection with” the following categories of federal contracts entered into on or after January 30, 2022:
- Procurement contracts for construction projects covered by the Davis-Bacon Act (“DBA”);
- Service contracts falling under the Service Contract Act (“SCA”);
- Concessions contracts, including those excluded from the SCA by DOL regulations at 29 C.F.R. 4.133(b); and,
- Contracts related to federal property or lands and connected to providing services for federal employees, their dependents, or the general public.
Employees who perform on or in connection with a covered contract are entitled to the increased wage rate if their wages under the contract are governed by the Fair Labor Standards Act (“FLSA”), SCA, or the DBA. Certain categories of employees under the FLSA, however, such as learners, apprentices, messengers, and full-time students employed under certificates are not entitled to the increased wage rate.
It is worth noting, however, that a federal district court in the Southern District of Texas has blocked enforcement of Executive Order 14026 in three states—Texas, Louisiana, and Mississippi as of September 26, 2023. DOL has noted on its website that based on the court’s order the increased minimum wage requirements are not currently being enforced as to contracts or subcontracts to which these states and their agencies are a party.
Implications for Contractors
As noted above, the increased wage rate will take effect on January 1, 2025. Executive Order 14026 empowers DOL with the authority to investigate potential violations and to ensure such compliance takes place. Impacted contractors should be aware of the wage rate increase, and to expect subsequent annual increases at the start of each calendar year, as long as the Executive Order remains in place as written.
Contractors and subcontractors should further note that they are required to include the Executive Order 14026 contract clause, FAR 52.222-55, Minimum Wages for Contractor Workers Under Executive Order 14026, in covered lower-tier subcontracts, notify employees performing on or in connection with a covered contract of the applicable minimum wage rate, and comply with pay frequency and recordkeeping requirements. Contractors in covered multi-year contracts are also subject to the minimum wage increase and should ensure that their employees are being compensated accordingly when the new rate is implemented and take steps to secure an equitable adjustment where appropriate.
Finally, in addition to paying its workers the higher rate, contractors should take note of how the increased wage rate impacts or works in parallel with fringe benefits, deductions, and other wage and hour related statutory obligations, such as the DBA, SCA, FLSA, and other state and federal requirements.
The Covington team continues to monitor similar developments at the intersection of government contracts and employment and labor law and remains available for clients who may have questions regarding compliance and other obligations.