What’s the Real Impact of the New Federal Contractor Minimum Wage Increase?

On February 12, 2014, President Obama signed an Executive Order raising the minimum wage to $10.10 per hour for federal contractors, starting January 1, 2015. Although the Administration has stated that the increase will apply only to new federal contracts, in reality it may end up applying to some existing federal contracts as well. The immediate impact of the minimum wage increase will vary depending on job and locality, but there are potential long-term implications of which companies should be aware. 

The Service Contract Act requires federal contractors performing service contracts to pay service employees no less than the wage rates set forth in Department of Labor wage determinations that are based upon local prevailing wages. The Service Contract Act recognizes that prevailing wages may change during the course of a service contract, and new wage determinations are incorporated into existing contracts when option years are exercised.

It is likely that, beginning no later than January 1, 2015, the prevailing wages set in the Department of Labor’s wage determinations will be at least $10.10, as that will be the new “prevailing wage” for the lowest-paid labor categories. If this happens, then when an option period on an existing service contract is exercised following the issuance of the new wage determination, these new minimum wages will apply. As with all increases in wage determinations, contractors will be entitled to a price adjustment to reflect any increases in wages and fringe benefits required by a new wage determination.

Because the majority of federal contractors are already being paid wages greater than $10.10 an hour, the immediate impact of the wage increase is minimal for most contractors in most areas of the country. The impact will be the greatest in the middle of the country where prevailing wages are lower, and for workers throughout the country working in lower-skilled service jobs, such as janitorial and food service positions. Raising the minimum wage of these traditionally lower-paid positions will likely cause a ripple effect eventually leading to an increase in the prevailing wages for other labor classifications and nearby regions, which will in time come to be reflected in the Department of Labor’s wage determinations.

Federal contractors should keep in mind both the immediate and long-term impact this minimum wage increase may have on their existing contracts and be aware of their right to request a price adjustment for any increases to the wages and fringe benefits required by a new wage determination.  The lawyers at Berenzweig Leonard have experience helping government contractors navigate the complexities of the Service Contract Act.

Stephanie Wilson is an attorney at Berenzweig Leonard, LLP, a business law firm in the Washington metro area. She can be reached at swilson@berenzweiglaw.com.