Yesterday, President Obama issued an Executive Order to increase the minimum wage for employees of federal contractors and subcontractors to $10.10 an hour.  President Obama announced the Order at his State of the Union address last month.  The Executive Order states that “[r]aising the pay of low-wage workers increases their morale and the productivity and quality of their work, lowers turnover and accompanying costs, and reduces supervisory costs.”

The increase will apply to contracts issued for solicitations on or after January 1, 2015.  The minimum wage will increase each year after 2015 in accordance with changes in the Consumer Price Index.  The Order encourages agencies, prior to the effective date, to “take all steps that are reasonable and legally permissible to ensure that individuals working pursuant to those contracts” are paid $10.10 an hour. 

The Order will apply to a wide range of contracts, including (1) procurement contracts for services or construction; (2) contracts covered by the Service Contract Act; (3) contracts for concessions; and (4) contracts that are both (a) entered into the with the Federal Government in connection with Federal property or lands and (b) covered by the Fair Labor Standards Act, Service Contract Act, or Davis-Bacon Act. 

The Order also applies to individuals with disabilities who, under current law, are paid below the minimum wage because their disability affects their productivity.  Tipped employees working under covered contracts must make $10.10 an hour overall.  The hourly based wage for tipped employees will increase from $2.13 to $4.90 an hour on January 1, 2015.  If tipped employees’ combined compensation does not equal $10.10 an hour, employers must make up the difference.  The Order does not apply to contracts with Indian Tribes under the Indian Self-Determination and Education Assistance Act or to contracts with independent agencies. 

The Order specifies that covered federal contracts must include a clause increasing the minimum wage.  Moreover, contractors must incorporate that clause into lower-tier subcontracts.  The Secretary of Labor must issue regulations by October 1, 2014 to implement the Executive Order.  The Secretary can provide “exclusions from the requirements set forth in this order where appropriate.” 

The breadth of the impact of the Order is unclear.  The White House’s press release accompanying the executive order estimates that there “are hundreds of thousands of people” subject to the executive order currently making less than $10.10 an hour.  One study cited in press reports prior to issuance of the executive order estimated that up to 2 million employees working on federal contracts made less than $12.00 an hour.  The Order is expected to have a larger impact on lower-skilled and entry-level jobs and jobs in rural areas, as those jobs are most likely to be under $10.10 an hour. 

Contractors should evaluate their contracts and workforce to determine (1) which contracts subject to the Order are up for renewal during the remainder of this year and after January 1, 2015 and (2) which job classifications in those contracts currently make below $10.10 an hour.  Contractors renegotiating contracts this year should be prepared to receive proposed amendments from contracting officers that increase the minimum wage immediately.  Contractors should also assess the extent to which wage increases will affect the pricing of their bids and may be considered a cost reimbursement under their respective contracts.