The minimum wage has been the focus of much political, business, and cultural discussion and debate. Under the Biden administration, that minimum wage discussion has become a priority and government contracting is one of the industries at the center of this discussion. Recently the administration rolled out new minimum wage requirements for federal contractors, including contractors working under the Davis-Bacon Act (DBA) and the Service Contract Act (SCA). This spells out new factors to contend with and the possibility for contractors to confidently offer fringe benefits to their workers, without worrying about a cash hit to their employees’ pockets.
Read on to learn more about the impact and opportunity that the new minimum wage requirements have on DBA and SCA contractors.
Increasing the Minimum Wage for DBA and SCA Contractors
Increasing the minimum wage for federal contractor employees has been a hot topic for some time. First, in 2014, President Obama signed an executive order requiring federal contractors to pay a minimum of $10.10 per hour to hourly employees working on federal contracts. Under the 2014 executive order, the minimum wage rate required for federal contractors was set to increase to $11.35 on January 1, 2022.
In April 2021, Executive Order 14026 was signed by President Biden. This executive order raised the hourly minimum wage to $15.00 ($10.50 for tipped workers). President Biden’s order was designed to increase the minimum wage annually based on inflation and became effective on January, 30 2022.
Executive Order 14026 covers all federal prime contractors and their subcontractors, meaning that DBA and SCA contracts make up a significant portion of those covered contracts subject to the increase. Those contracts that are effective, renewed or extended on or after January 30, 2022, including contracts solicited on or after January 30, 2022, or contracts for which an option is exercised to renew or extended the contract are subject to the executive order. Each year in January, the Secretary of the Department of Labor may increase the amount of the minimum wage.
Who the New Minimum Wage Requirements Apply To
As far as the workers themselves, the Order covers workers whose wages under a federal contract are governed by the Service Contract Act (SCA), or Davis-Bacon Act (DBA), among others such as concession contracts and procurement contractors. Coverage extends to workers “employed on or in connection with” a particular covered contract. As with all contractor compliance, any applicable EO contract clauses that are incorporated into prime contacts must also flow down to the subcontractors performing the work on a covered contract.
The Impact of a Higher Minimum Wage on Fringe Benefit Strategies
When it comes to the fringe rate, government contractors have the option to pay the fringe out to their employees in cash, or they can offer a bona fide fringe benefit to their workers. DBA and SCA contractors often grapple with the difficult decision of balancing worker priorities with business strategy. In a post-pandemic market, employee retention is vital and health and welfare benefits are in demand. It’s equally true that hourly workers – many of which are working at minimum wage – may value the extra cash in their pocket over a benefit offering.
When facing the realities of inflation, rising cost of living, and pandemic disruptions for working hours, to the employees cash in hand feels like a sure thing. For employers, offering fringe benefits has proven tax advantages and improves their bottom line. Yet, many contractors are hesitant to make a choice that will not be well received by employees.
EO 14026 will not impact all federal contractors and subcontractors equally. The impact of the minimum wage increase on covered contracts will be dependent upon the DOL’s prevailing wage determinations, which vary across the country, as well as the skill sets of the employees working on or in connection with the contract. Those DBA and SCA contractors and subcontractors that are already required to pay employees covered by the DBA and SCA under the applicable wage determinations may not be impacted if the prevailing wages specified in the wage determination is already higher than $15.00 per hour. However, DBA and SCA contractors and subcontractors in areas where prevailing wages with wage determinations less than $15.00 will be impacted and will need to adjust accordingly.
Simply put, the contractor will have to pay the higher of the increased minimum wage or the wages and fringe benefit allocations specified in the wage determination. All DBA and SCA contractors need to be familiar with the requirements, however, since they are also responsible for their subcontractors compliance with the new law.
How DBA and SCA Contractors Can Respond
FAR 52.222-55 provides that a contractor may request an adjustment to the contract price if its labor costs (including subcontractor labor costs) and any associated labor costs increase as a result of the annual increase to the federal minimum wage. Associated labor costs are the increases or decreases from changes in social security and unemployment taxes and workers’ compensation insurance and excludes any amount for general and administrative costs, overhead, or profit. Subcontractors similarly can request a price adjustment through the prime contractor.
Those contractors who are required to increase wages and obtain an adjustment to the contract price will essentially be able to create the best of both worlds for their employees; higher wages while still providing valuable benefits. Employee satisfaction and wellbeing takes a well-rounded approach. Financial wellness and physical wellness are both crucial to employee retention and satisfaction. With a higher minimum wage, those contractors subject to the new increase can now confidently offer a bona fide fringe benefit without the previous concerns about employee cash.
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